Can You Claim VAT on Entertainment?
Business entertainment is a fundamental part of building and nurturing relationships in the corporate world. Whether it’s wining and dining clients or treating employees to a night out, these expenses can play a significant role in building connections and driving business growth. But when it comes to VAT, many businesses are left wondering: can I claim VAT on business entertainment expenses? In this article, Richard Haye, Director of VAT Reclaim at Ryan, runs through the various scenarios to decipher whether VAT is recoverable when your company is entertaining clients or employees.
VAT and Business Entertainment
HMRC is largely pragmatic when allowing for deduction of VAT on business-related expenses; however, one area we frequently see disputed is entertainment.
Business entertainment encompasses any activity undertaken by a company with the intention of entertaining clients, employees, suppliers, or other work-related parties and their staff. For entertainment to be business related, it must be for a work-related purpose and cannot be for purely social or personal purposes. In most jurisdictions, VAT rules dictate that businesses can only reclaim VAT on expenses that are incurred for the purpose of generating taxable income. Therefore, in many countries, there are specific limitations on what can be recovered and for whom and requirements that may need to be met.
If you are planning any kind of entertainment for your clients or employees, there are various parameters and scenarios that affect the VAT reclaim treatment, including:
- Customer/staff entertainment
- Reasonable and not excessive in nature
- Non-business attendees
- Partners/business owners
- Subsistence
- Training
Depending on the scenario, VAT on client or employee entertainment costs can be fully recoverable, apportioned (split), or nonrecoverable.
To assist, we have prepared a free downloadable workflow diagram to enable you to descend your transaction down the decision tree.
Can You Claim VAT on Client Entertainment?
Often, client entertainment is blocked for VAT reclaim by businesses. This means if you have entertained clients, for example, taking them out to dinner, paying their hotel expense, or taking them to an event (e.g., Wimbledon tickets), your business cannot claim the VAT back on these expenses.
However, under certain conditions, VAT can be apportioned and claimed, including:
Subsistence element = If an employee has travelled and is staying overnight as part of that travel and entertains a client, the cost for the employee is recoverable. This is allowed because the employee subsistence would have been claimed anyway. You are, however, unable to claim VAT for the client expenses.
Entertaining overseas clients = VAT is deductible provided the entertainment is reasonable and the customer is foreign (i.e., the entity and not their representatives). The customers and their representatives must be related to you. It follows that:
- Potential and existing businesses are treated equally.
- Group or subsidiary companies can be treated as overseas clients provided there are charges to them.
Training = The entertainment element can be deductible provided it is minimal refreshments. For example, a hot take-away delivered for the attendees as part of a day’s event. However, conversely, going to a four-star hotel for dinner afterwards would not.
Can You Claim VAT on Staff Entertainment?
For staff entertainment, as work will inevitably be discussed among colleagues, VAT is normally recoverable. However, there are exceptions where this does not hold true, and it is important to differentiate between them.
Staff entertainment encompasses a range of activities aimed at rewarding or improving morale of employees, including:
- Team-building events: Activities such as team lunches, dinners, or retreats.
- Employee parties: Celebrations for milestones, rewarding performance, or company achievements.
- Hospitality: Providing food, drinks, or tickets to events for employees.
HMRC states these types of staff entertainment would be eligible for VAT recovery under the business entertainment rules provided they are given wholly for business purposes for the benefit of employees.
It is worth noting that, throughout this, the entertainment must be “reasonable.” There is no value definition of this; however, we have seen excessive entertainment can be the breach, for example, champagne, ice sculptures, performers, etc. Also, there must be a business nature to the event, including discussion of work-related matters. This is why music concerts, sports matches, theatre visits, and such would normally be seen as not recoverable.
If entertainment is provided exclusively for business owners/directors or partners, the VAT incurred cannot be reclaimed. Similarly, if you host a staff party and partners or spouses of employees attend, you cannot recover the VAT attributable to these partners or spouses because they are not employees of the business.
Would You Like to Discuss VAT Reclaim for Business Entertainment?
VAT rules and regulations surrounding business entertainment can be a complex terrain, varying by country, but there are solutions that can help streamline processes and optimise compliance. To discuss how Ryan can support your business with claiming VAT on business entertainment expenses, please get in touch via the form below.
For UK businesses, here is your free downloadable workflow diagram to enable you to descend your transaction down the decision tree.