Certain types of business entertaining expenses are regarded as not being strictly for business purposes. Where this is the case HM Revenue and Customs requires businesses to disallow the recovery of the value added tax (VAT) relating to these expenses, by not claiming them on the VAT return. This disallowance of VAT relating to entertaining expenses gives rise to problems for businesses as it is often difficult to identify which expenses are incurred for business entertaining. When the entertaining expenses and the related VAT have been identified the business is then required to distinguish between business entertaining performed wholly for business purposes and entertaining considered to have been incurred partly for private benefit.
Staff entertaining expenses are normally considered to be incurred for business purposes and the VAT on the expenses is recoverable in full, though the staff may be charged to income tax on the benefit received from office functions if the cost per head is above a certain amount. However in the case of an office function where outside guests are invited, 50% of the VAT on the costs is disallowed if no charge is made for attending the function. If a charge is made to the outside guests for attending the function, all the VAT on expenses can be recovered but the business would have to account for VAT on the price paid by guests.
For the past twenty years VAT has been irrecoverable on expenses in connection with entertaining outside contacts and customers whether they are from the UK or from overseas. However the situation has changed as a result of the decision of the European Court of Justice in the joined cases of Danfoss and AstraZeneca. The ECJ confirmed that where catering is provided in the course of business meetings and is provided only for the purposes of the business, the VAT incurred on the expenditure should be recoverable.
HMRC has notified businesses in Revenue and Customs Brief 44/10 that the UK VAT law is to be changed to remove the restriction on VAT recovery on expenses of entertaining overseas customers. HMRC will therefore review claims now made by businesses to recover VAT previously disallowed in connection with expenses of entertaining overseas customers.
HMRC considers that a “strict business test” and a “necessity test” should be applied in determining if VAT on business entertaining expenses is recoverable. The entertaining expenses should be incurred strictly for the purposes of the business and should be necessarily incurred in the business. These conditions would be satisfied for example where catering has been provided on the company’s premises in connection with business meetings with overseas customers and the type of catering provided is of a suitable character in relation to the business meeting. The same considerations would be applied by HMRC where catering is provided in connection with a business meeting with overseas customers at a location outside the company’s own business premises.
According to HMRC, recovery of VAT would not be possible where the overseas customers are taken to a corporate hospitality event such as golf days, trips to sporting events or evening meals. Such entertaining expenses could not be considered by HMRC to be incurred strictly for business purposes and would also not be considered as “necessarily” incurred for the purposes of the business.
UK businesses that are involved in entertaining overseas contacts and customers should be looking at entertaining expenses on which VAT was previously disallowed and considering if a claim could now be made to recover the VAT. In respect of future business entertaining expenses, systems should be put in place to separately identify entertaining relating to overseas customers and to determine if the circumstances of the business entertaining satisfy the requirements for VAT recovery.
HM Revenue and Customs www.hmrc.gov.uk
“Value Added Tax” by Andrew Needham and Steve Allen, Bloomsbury Professional, 2009