Local accountants and tax advisers, Trueman Brown, warn business about the intricate VAT rules surrounding entertainment.
One question that we are asked a lot by our clients – can the claim VAT on employee costs such as entertaining and subsistence?
There is no simple answer to this question, and explanations can get detailed. The easiest way of answering this question is by way of examples.
Subsistence
Malcolm, who owns a marketing company ABC Limited based in London, has travelled to Manchester, with his Personal Assistant, Sue, for a meeting with his client, Ray. The meeting takes place in a restaurant in Manchester which Malcolm pays for. What claim for Input VAT can ABC Limited make?
In this transaction there are three different categories of persons involved: –
1. Malcolm the business owner.
As long as the meal is classed as ‘subsistence’, there should be no problem for ABC Limited claiming Input VAT on the meal. Usually, Malcolm would claim subsistence if he is conducting business away from the main trading premises of his company, ABC Limited.
As a guide, the business meeting should take place at least five miles away from ABC Limited’s trading base in London.
2. Sue the staff member
If the meal cost is being incurred because Sue is away from her normal office on a business-related job, then the expense is classed as ‘subsistence’ and Input VAT can be claimed by ABC Limited. But what would happen if Malcolm was not at the meeting which was taking place in the vicinity of ABC Limited’s London office?
If Sue is considered to be ‘acting as a host’ to Ray, then this would be classed as business entertainment and ABC Limited could not claim the Input VAT.
3. Ray the client
The general rule is that ABC Limited cannot claim an Input VAT deduction for customer meals. Hospitality of any kind is classed as business entertainment.
Client Entertaining – Exception To General Rule
There is one exception to this rule is if the client is an ‘overseas customer’ and the expenses related to a business meeting.
To be classed as an oversea customer, the client must:-
• not be ‘ordinarily resident’ in the UK; and
• not carrying on in business in the UK or the Isle of Man; and
• must be a customer or potential customer of the business.
Even if the client is classed as an ‘overseas customer’ the amount of Input VAT being claimed could be restricted because the meals must have a ‘strict business purpose’.
Essentially, this means a working lunch where food is provided to enable a meeting to proceed without interruption. Therefore, Input VAT could not be claimed on corporate hospitality events such as visits to the theatre or sporting events.
Even if the Input VAT could be claimed, the claim would literally be cancelled out if an Output VAT has to be charged on ‘private use’. A ‘private use’ charge will occur where anything other sandwiches and soft drinks are provided during a business meeting.
So a meal in a restaurant or a couple of pints in a bar will lead to a ‘private use’ charge.
Subcontractors – Subsistence
One final area to look at is, for example, a construction business which uses a combination of employees and subcontractors to carry out various projects.
Can the construction business claim Input VAT if it agrees to pay the meal costs of subcontractors for projects away from the local area?
The answer is yes, IF the construction business treats the subcontractors as same as the employees on the same project.
STAFF ENTERTAINMENT
There seems to be no problem for employers claiming Input VAT on events paid for by employees generally. The rules can get tricky where non-employees also attend.
To consider this situation, let’s look at an example. XYZ Limited hires a 10 seater box at Twickenham for the England v New Zealand Rugby International. In attendance will be, four members of staff from XYZ Limited and six clients or suppliers of XYZ Limited.
Straightaway, we can state that 60% of the Input VAT relating to the six clients or suppliers CANNOT be claimed because of the business entertaining rules.
But what about the Input VAT on the costs relating to the staff of XYZ Limited? XYZ Limited would need to ask the question of what roles the employees would be expected to carry out at Twickenham?
If the staff members are to make sure the guests have an enjoyable time to obtain future business orders then they are effectively acting as hosts to the non-staff members and any claim for Input VAT would be blocked.
If the staff members can enjoy the game as some form of reward or incentive and without any entertaining function to the non-staff members then the Input VAT can be claimed.
Planning Tip – Non-Staff Entertaining
If a small charge is made to non-staff members attending an event then the Input VAT can be made on the costs of their hospitality because they are no longer receiving a ‘free meal’.
However, please ensure that Output VAT is accounted for payments made by attendees who are not members of staff.
If you require any further assistance then please contact us here.