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When can you recover VAT on entertaining costs?

The recovery of VAT on most business entertainment is blocked but there are some instances when you can get it back. When is this the case, and how can you trigger the rules in your favour to enable recovery?

Business entertainment

The recovery of VAT on business entertainment is normally blocked by the legislation, but there are some circumstances when it is permitted. Business entertainment is considered to be the entertainment of people who are not employees of the business, for example customers or business contacts.

Tip. In most cases you can recover the VAT on staff entertainment as it is a legitimate business expense.

Entertainment or not entertainment?

If you “entertain” people who are not employees but are contractually obliged to do so, it does not count as entertainment for these purposes and input tax on related costs can be recovered.

Tip. Recovery is also allowed if a charge is made for attendance. This does not need to reflect the true cost of the event.

For example, if staff contribute to the cost of entertaining their partners, the input tax on the partners’ meals is recoverable, and output tax is due on the sums paid. The possible planning point is obvious when, for example, the annual Christmas dinner costs £70 per head and you charge the partners £10 per head to attend you get to recover all of the input tax on the £70 but only have to account for VAT on £10.

Tip. HMRC has challenged such an arrangement at the Tribunal but lost.

This trick works in other scenarios too.

Example. You invite several clients to a hospitality box you have taken at a race day. By default, you cannot recover any of the input VAT, but if you required your clients to pay a modest charge to attend you would be able to recover it all.

Tip. In order to be effective, the charge must be compulsory not optional and it cannot be, e.g., a charitable donation. It has to be an attendance charge.

Published by Indicator, FL Memo

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