Entertainment is one of those areas that can be a minefield when it comes to VAT. Many businesses will be aware that VAT can be an additional cost when providing entertainment.
- But exactly what activities do HMRC consider to be entertainment?
- Are different types of entertainment treated differently for VAT purposes?
- Does it matter who is being entertained?
There are a number of factors that determine whether VAT on entertainment costs can be recovered. It is worth checking the latest VAT rules on entertainment from time to time since this is a subject that is ripe for tribunal cases and over the years HMRC guidance has changed on a number of occasions following the outcome of litigation.
So let’s look at the specifics in a bit more detail.
HMRC defines ‘entertaining’ as providing hospitality of any kind free of charge. Examples of what count as ‘entertaining’ include:
- food and drink,
- accommodation, e.g. hotels,
- entry to sporting events and facilities,
- use of capital assets such as yachts and aircraft for the purpose of entertaining,
- provision of theatre and concert tickets, and
- entry to clubs and nightclubs.
The cost of entertaining employees as a reward for good work, or to boost office morale, is classed as staff entertaining, and you can reclaim any VAT paid on staff entertainment costs since HMRC view this entertainment as provided for wholly business purposes. Note though that former and previous employees, subcontractors, shareholders who do not work in the business, as well as job applicants and interviewees do not count as employees. Staff parties, team building events and staff outings would all qualify as staff entertainment.
Another important point to be aware of is that entertainment provided only to the directors or partners of a business is not deemed to be for a business purpose and so does not qualify for VAT recovery. However when directors or partners are travelling “away from their normal place of work on a business trip”, then any VAT incurred on the cost of travel, accommodation and meals can be reclaimed.
Entertainment of Non-Employees
Let’s now consider entertainment scenarios involving non-employees.
When your employees are acting as hosts to a group of UK customers or other business contacts at an event, then that counts as business entertaining and no VAT recovery is allowed on the cost of the event. VAT on business entertaining is specifically blocked under a special legal provision.
The situation becomes more complicated though if you hold an event with a mixed group of employees and non-employees and the purpose of the event is to entertain everyone equally. In these circumstances you can only claim back the VAT on the cost of entertaining your employees.
For example, if you have a staff party and allow your employees to bring a friend or partner, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim the VAT on that proportion of the costs back. You can’t claim the VAT on the cost of entertaining their guests.
The rules for entertaining overseas customers are even more confusing. VAT can be claimed on the cost of entertaining overseas customers but not on any other overseas business contacts e.g. suppliers, auditors, advisers etc. Also the entertainment must be for “strict business purposes” and be “reasonable in scale and character”, for example basic food and refreshments provided at a business meeting is OK.
However hospitality provided after a meeting does not meet the strict business purpose test and neither does hospitality involving the provision of alcohol. Where these conditions are not met the overseas customer is viewed by HMRC as enjoying a “private benefit” from the entertainment. Under these circumstances the business can either choose to block the VAT in full, or recover the VAT and then account for an output tax charge on the “private benefit” to the individual enjoying the entertainment which will effectively cancel out any recoverable input tax.
As you can see from these few examples there are numerous issues to consider when providing entertainment if you want to get the VAT right. No business wants to suffer a 20% VAT hit to their entire entertainment budget if in fact some of the costs relate to the type of entertainment where full or partial VAT recovery is allowed. Similarly though no business wants to be hit with large VAT fines if too much VAT is reclaimed incorrectly.
Are the people in your business responsible for coding entertainment invoices for accounting and payment purposes up to speed on the VAT rules?
VAT Knowledge Assessment – don’t let irrecoverable VAT be a cost
For a free check on current VAT knowledge in this area, suggest your staff undertake our AP VAT Knowledge Assessment. The assessment comprises questions based on the essential VAT information every AP staff member interacting with VAT should know in order for them to perform effectively with reduced VAT risk.
The VAT Knowledge Assessment takes each staff member approximately 20 minutes to complete and is submitted online. Once a ‘team’ (i.e. staff members in your business) undertake their free online VAT assessment, their responses will be reviewed by our team of international VAT consultants. Their submissions will be analysed and compiled in to a comprehensive Report that will provide feedback so that VAT knowledge gaps will be pinpointed, VAT risks factored and potential problem areas highlighted.
Both the online VAT knowledge assessment and the feedback report are free – just fill in the form and receive an email link to the online VAT Knowledge Assessment. Once you have the link, feel free to distribute the link to staff members.
If you want to get started on our VAT Knowledge Assessment, you can start the process here: