One of the most common expenses accrued by businesses is the cost associated with organising an entertainment event. Whether this includes providing food, drink, accommodation or access to event tickets, this is often an essential part of your business operations, and is often quite pleasurable - but it can also be expensive.

As such, business owners will often want to know whether or not VAT will be recoverable on their entertainment outlay. In some cases, this will be possible, but the conditions under which VAT recovery is allowed are quite specific, and you will need to be well-informed of the rules in order to make a successful claim.

Here, the experts at The VAT People will explain the basics of when VAT can and cannot be recovered on entertainment expenses, and how to avoid falling foul of HM Revenue & Customs rules on this.

When can your business recover VAT on entertainment expenses?

Although there are exceptions and caveats to this principle, the general rule is that input tax incurred on the provision of business entertainment expenses cannot be recovered, whereas VAT incurred on employee entertainment expenses can be recovered.

Under these definitions, business entertainment is classified as hospitality provided for free to individuals who are not employees of your business. Hospitality can include the provision of food, drink, venue entry, accommodation and tickets to events, as well as the use of capital assets such as yachts and aircraft for the purpose of entertaining.

Normally, it would be possible to recover VAT incurred on goods or services used for business purposes as input tax, but when this applies to business entertainment for UK business contacts - as well as non-UK business contacts who are not customers - this is not permitted by HMRC.

By contrast, employee entertainment is defined as entertainment provided for the benefit of your staff members - for example, to reward them for good work, or to maintain and improve their morale. This might include a Christmas party, a team-building retreat or another staff outing laid on for employees by the company, and can be classed as input tax in the normal way, without being blocked from VAT recovery under the business entertainment rules.

Common questions and exceptions

This basic principle is useful as an overall guide, but there are a number of grey areas and potential exceptions that are worth examining in greater detail.

Who is considered to be an employee?

When calculating whether the business entertainment rules on VAT claims apply to your situation or not, it is important to determine who will be considered an employee of the company by HMRC. By this definition, employees include:

• Any individuals employed by the company
• Directors or any other individuals engaged in the management of the business, including partners
• Self-employed persons whose subsistence expenses are being covered in the same way as your employees
• Helpers, stewards, and other support staff essential to running and organising sporting or similar events

By contrast, the following are not considered to employees:

• Pensioners and former employees
• Prospective job applicants and interviewees
• Shareholders who are not employed by your company

Are there exceptions where VAT cannot be reclaimed for employee entertainment?

There are two main exceptions to the general rule on employee entertainment, in which input VAT recovery will be blocked:

• Entertainment provided solely for the benefit of your company’s directors or partners cannot be claimed as having a business purpose, meaning VAT cannot be recovered
• Any entertainment provided to non-employees - such as relatives of employees, or client-suppliers - will see input VAT recovery blocked under the business entertainment rules

There are certain grey areas within this: for example, if directors and partners are attending staff parties together with other employees then VAT can still be recovered, while events used to entertain employees and non-employees together will allow you to make a partial claim for the VAT incurred on entertaining your employees only.

Are there exceptions to the rules on claims for business entertainment?

As a rule, you should largely expect the cost of VAT on entertaining clients and customers to be non-deductible, and seek other ways to make your spending on these events more tax-efficient.

However, there are a number of very specific instances in which business entertainment rules do not fully apply. HMRC provides the following examples:

• Sporting bodies providing free accommodation and meals for amateur sportspeople and officials who attend an event must do so due to the necessity, meaning this is not considered business entertainment, and recovery of input tax is allowed
• Airlines providing catering and accommodation expenses for passengers who have been delayed is also essential, meaning recovery of VAT is also permitted in these circumstances

If you believe an exemption may apply in your circumstances, it is advisable to seek expert VAT advice to find out whether this is the case.

How do business entertainment rules apply to overseas customers?

If you are dealing with an overseas customer - ie, any customer not ordinarily resident or carrying on a business in the UK - you may be able to recover VAT incurred on providing entertainment for them, provided that these costs are business-related and are reasonable in scale and character.

However, there will be an output tax charge if there is a private benefit to the individual enjoying the entertainment that goes beyond its strict business purpose, which may cancel out the recoverable input tax. If you are unclear whether this will be the case, it is best to get in touch with a VAT expert for guidance.

Find out more

To learn more about the specifics of how to account for VAT on entertainment provided by your business, take a look at the government’s official VAT notice on business entertainment.

If you are looking for specialist advice to ensure your business consistently applies the correct approach to VAT when accounting for expense, give The VAT People a call. We can provide tailored guidance to help you ensure full compliance with HMRC regulations, while identifying all available avenues for savings and cost reductions.

Call our free VAT helpline on 0161 477 6600 to speak to one of our expert VAT consultants today.