One of the consequences of Brexit has been the fall in the value of the Pound. The UK, now more competitive, is seen as good value and overseas customers are visiting our shores to conclude contracts. This could lead to an increase in UK businesses entertaining overseas customers, prompting the question: Can I recover VAT on business and staff entertaining?

Entertainment is broadly defined to include hospitality of any kind and therefore includes matters such as food and drink, accommodation, tickets to events and purchase of capital assets used for the purposes of entertaining.

The basic rule is that VAT on business entertainment is not recoverable and therefore VAT on entertainment of customers, or potential customers, is not possible. However recovery of the input VAT on entertainment of a customer who comes from an overseas country is permitted.

Overseas Customers

This relaxation applies to entertainment of overseas customers but not entertainment of potential customers from overseas. The customer should not have a business carried on in the UK.  If a business entertains a client based overseas then it could recover the input VAT.  However, if the customer represents an overseas company with a UK branch, they couldn’t be treated as an overseas customer.

When recovering VAT on overseas customers, additional records should be kept. You will need to show that they are an overseas customer and do not have a business in the UK. HMRC take a strict view on entertainment of overseas customers, believing that unless the entertainment is minor, necessary, and solely for business purposes, there is likely to be a private benefit provided to the recipient and the input VAT cannot be recovered. Their public notice 700/65 gives more detail.

Staff Entertainment

VAT is also recoverable for some staff entertainment. If staff entertainment is undertaken to improve morale or offer rewards for good work, then it is considered as being incurred for a business purpose and the VAT is recoverable. The input VAT associated with directors (or partners) who attend such an event is also recoverable. Should non-employees attend, input VAT cannot be recovered on their cost and it’s reasonable to apportion input VAT using headcount. Non-employees include pensioners and former employees (or former partners), job applicants or interviewees.

Recovery of VAT arising from a staff party requires staff to attend. If the attendees are solely directors of companies or partners in partnerships the input VAT cannot be recovered. This includes celebrations to improve moral or reward good work.

Subsistence

Although recovery of VAT on entertainment is subject to restriction, VAT can be recovered on subsistence. If meals are provided on a business trip  which is away from the usual place of work the VAT incurred on reasonable subsistence can be recovered. This covers subsistence incurred by staff, directors and partners. VAT receipts should be obtained when recovering tax associated with subsistence.

In conclusion, the VAT regulations generally deny recovery of VAT associated with entertainment. In the few instances where recovery is possible additional records should be kept to demonstrate that the facts meet the strict criteria required to permit the VAT to be claimed back.