“Are you not entertained?” – Gladiator 2000 A.D
When Russel Crowe uttered these iconic words in Ridley Scott’s 2000 film ‘Gladiator’ he probably wasn’t thinking about the input tax he could claim on the lunch he just had. Nonetheless doing battle with HMRC over the VAT you’ve claimed on entertainment expenses can feel like a fight to the death.
Be sure to arm yourself properly this year and make sure, that in the heat of battle, marred by blood, sweat and sand, you are the one left standing.
Understanding everyday business lunches
As the owner or partner of your own business, you’ve decided to visit a client on site and you have taken the clients account manager (your employee) so you can adequately perform a review.
You’ve been digging into the details all morning and when lunch time rolls around you take the client and your employee into town for lunch. The lunch is a huge success, the bill arrives and you pay.
But how much did that lunch actually cost you? How much VAT can you reclaim?
1. Client entertainment expenses
No VAT can be claimed on the cost of the client’s lunch. This is classed by HMRC as ‘hospitality of any kind’ as per VAT Notice 700/65.
2. Employee entertainment expenses
Input tax can be claimed on lunch for the employee if the expense can be classed as subsistence. Expenses can be classed as such if they have a business purpose away from the main trading premises of the business and this is generally accepted to be at least five miles away. Input tax would be blocked on employee entertainment expenses if the employee’s role at lunch was to host the client. The purpose of the event and the employees attendance at the event has to be carefully considered when reclaiming VAT.
In this instance the owner's lunch would be treated in the same way for VAT purposes as the employees lunch and classed as subsistence. The Input VAT can be reclaimed.
Understanding events and parties
There are lots of rules surrounding benefit in kind tax charges for employees, and maximum spend per head but none of those are relevant for a discussion of the VAT treatment of staff entertainment expenses and so if you have those questions swirling around put them to one side for a minute and consider only HMRC’s position on the reclaimable VAT input tax.
Be it a Christmas party, a brunch, a reward or team building day there is no block on the input tax reclaimed in relation to staff entertainment where the event has a clear business purpose. That purpose can be a reward for hard work, targets met and even something as loosely defined as staff morale.
The difficulty arises when partners, spouses, suppliers and customers are invited and provided for at the expense of the business. This element is considered hospitality and the cost of entertaining non employees for free will not qualify for relief.
*Key Planning tip: If non employees were to be charged a small amount to attend the event, for example £5 per head, then the entertainment provided would no longer be free and VAT could be reclaimed on the cost of entertaining non employees provided of course that the output tax of £0.83 included in the £5 charge was accounted for.
In general the VAT incurred on employee entertainment costs and the costs of business owners can be reclaimed as input tax providing that those costs can be classified as subsistence. This means the costs have been incurred for the purposes of business away from the main trading premises. This is generally accepted to be five miles or more in distance.
There is no cap on the VAT that can be reclaimed in relation to employee entertainment expenses provided that the employees are not considered to be hosting.
A small charge to non-employees at parties or events will mean that the VAT on the cost of providing entertainment to non-employees will be reclaimable.