Andrew Needham looks at the recovery of VAT on business entertainment.
Business entertainment
The recovery of VAT on business entertainment is normally blocked by legislation, but there are some circumstances when VAT recovery is permitted. Business entertainment is considered to be the entertainment of people who are not employees of the business, for example, customers or business contacts. In most cases, businesses can recover the VAT on staff entertainment as it is a legitimate business expense.
When is entertainment not entertainment
If a business entertains people who are not employees but makes a charge for it or is contractually obliged to do so, it does not count as entertainment, and input tax on related costs can be recovered.
For example, if staff contribute to the cost of entertaining their partners, the input tax on the partners’ meals is recoverable, and output tax is due on the sums paid. The possible planning point is obvious when, for example, the annual Christmas dinner costs £70 per head, and you charge the partners £10 per head to attend, you get to recover all of the input tax on the £70 but only have to account for VAT on £10. HMRC challenged such an arrangement at Tribunal but lost (Ernst & Young v HMCE (LON/96/1377) No 15100).
Tip
Many businesses hire a box at sporting events to entertain clients but cannot recover the VAT on these costs. If they made a small charge to the clients who attend, all of the VAT is potentially recoverable.
If a business provides meals or accommodation as part of a contractual arrangement, it is not caught under the disallowance for entertainment and hospitality because the provision is not free.
In Celtic Football and Athletic Co Ltd ([1983] STC 470), the Court of Session held that, because Celtic was obliged to pay for its visiting opponents’ board and lodging under the UEFA rules and would receive the same courtesy when visiting their opponents, the provision was not free. It was, therefore, not entertainment and the VAT was recoverable.
Similarly, in Kilroy Television Co Ltd (LON/96/677 No 14581), food provided to participants in a television programme was held to be in return for their participation. It was part of the deal that a train ticket would be sent to them, and a buffet meal provided on arrival at the studio.
However, such an argument may get a business nowhere if HMRC then says they have provided non-monetary consideration (the accommodation etc.), in return for non-monetary consideration from the other party. Therefore, arguably, Kilroy should have accounted for output tax on the supply to the participants, the value of the supply being the cost to it of the food. If the business cannot collect the output VAT, the end result is the same as if the input tax was disallowed.
Sporting events
VAT Notice 700/65 says that helpers, stewards, and other people essential to the running of sporting or similar events can be regarded as employees. HMRC extended that concession to a recognised sporting body which provides through necessity free accommodation and meals to amateur sportspersons and officials who attend an event. The concession does not allow recovery of VAT on alcohol or tobacco, cigarettes or cigars; however, if these costs are included in a meal bill in practice, it is possible to circumvent this restriction.
Practical tip
If a business organises entertainment for people who are not employees and are either contractually obliged to do so or pay a small charge to attend, they can recover the VAT on the costs.
