There are many questions that we receive from VAT registered clients regarding the types of expenses that can be included in their VAT returns. A frequently asked question concerns entertainment expenses and whether these are reclaimable from a VAT perspective. This blog will highlight the factors which need to be considered when determining what kind of entertainment costs can be included when reclaiming VAT.
HMRC define “entertaining” as providing free or subsidised hospitality. They provide examples of entertainment which include:
- food and drink
- accommodation (e.g. hotels)
- theatre and concert tickets
- sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- payments made to third party business entertainment organisers
- free samples
- business gifts.
The first element to think about is who is benefiting from the entertainment provided. HMRC only allow tax relief and the claiming of VAT on the cost of entertaining your business’s employees (someone on the payroll who receives a salary). If you’re entertaining anyone else, this would classify as ‘business entertaining’ and you cannot reclaim VAT on these costs. If you are a sole trader, or a partner in a partnership you do not count as an employee and can’t claim VAT on the cost of entertaining yourself.
The cost of entertaining employees as a reward for hitting business targets, or to keep up morale, is staff entertaining, on which VAT can be reclaimed. But if your employees are acting as hosts to a group of customers at an event, this would count as business entertaining and there is no VAT deduction available on any of the cost of the event. For VAT to be reclaimed, the purpose of the event must be that of entertaining employees. If there’s an event with a mixed group but the purpose is to entertain everyone equally, for example a staff party where employees are allowed to bring a friend, you can claim back the VAT on the cost of entertaining your employees only.
Another area to discuss is regarding the entertainment of directors, where the issue becomes more complicated. HMRC say that the cost of providing entertainment only to directors will not qualify for a VAT deduction. However, HMRC also say that if the directors or partners are travelling “away from their normal place of work on a business trip”, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. Therefore we can conclude that if directors incur food and drink related expenses in ways that can categorise them as ‘subsistence’ (usually indicating a business purpose that is away from the main trading premises of the business) then they could be included in the VAT return. These rules also apply to employees, sole traders, partners and to subcontractors.
To conclude, when considering what entertainment related expenses can be reclaimed in your VAT return it is important to factor in who has incurred the costs and where the entertainment took place. Please contact FKGB Accounting if we can assist with your VAT related enquiries.
