Reclaim VAT on business entertainment
Reclaiming on business entertainment is like any other VAT—there are valid reasons for reclaiming and times where it’s simply not possible. But what is business entertainment, what qualifies as business entertainment, and how does it vary from employee to client scenarios?
This quick guide will take you through everything you need to know about reclaiming on this area of VAT.
What is business entertainment?
As a business, there will be times where you need to be entertaining clients over dinner or perhaps rewarding your staff with a Christmas party to show your appreciation for their good work throughout the year and build a closer-knit team.
Business entertainment is great for cementing relationships both in and outside the office, but when are you able to claim tax relief and what are the restrictions?
First up, we need to understand what’s classed as business entertainment. Well, anything that would typically involve the following:
- Food and drink
- Tickets to entertainment events
- Payments made to party organizers for business
You may also use ‘business entertainment’ as a VAT category in the form of entry to nightclubs and bars, staff away days, or perhaps a business trip to conferences or events. You can also include the use of capital as an expense, like yachts, aircrafts, or accommodations.
There are other examples, and the entire list is on the HMRC website.
Guidance on business entertainment VAT
In order for business owners to reclaim their business entertainment VAT, it's worth knowing what business expenses and taxable benefits are available to you.
With any standard VAT, 20% is charged. In the case of Brexit and the COVID-19 pandemic, it's worth being aware that VAT charges change, either permanently or temporarily, depending on the category. With that being said, it's a good idea to monitor VAT charges, should they ever change. Business entertainment VAT changes have largely stayed the same in recent years.
There are certain conditions you need to meet to define something as ‘business entertainment.’
- The individual/s being entertained are not employees of the business.
- The entertainment is provided free of charge.
Some types of employees can be included in business entertainment reclaims, and some can’t. It largely depends on if your workforce is full-time, part-time, contractors, and in which country they’re working.
Plus, your business must be VAT-registered. Otherwise, your business won’t be able to reclaim any VAT whatsoever. To be VAT-registered, you need a taxable VAT turnover of over £85,000 in the UK.
What about overseas customers?
When it comes to overseas customers, there is an opportunity for a VAT deduction whereby it's for business purposes only and is ‘reasonable’ in its scale. With any claim though for overseas customers, you’ll need the following:
- Details of the overseas customers
- Type of expenditure—meals, etc.
- Evidence of incurred VAT
What’s deemed reasonable is likely slightly different from one business to the next, depending on your niche. It might be worth contacting HMRC to get clarification on this.
Claiming VAT on staff entertainment
With staff entertainment, some reclaims are allowed, and some aren’t. For example, a staff party like a New Year’s Eve party is allowed for corporation tax—providing it doesn't exceed £150 per head.
In the case of giving employees rewards in the form of business entertainment, you may be able to reclaim tax if the event’s purpose was to boost morale or reward staff. These types of events can include tickets to shows, concerts, and general things us humans enjoy.
If an employee is hosting for clients at an event, then this is an example of a tax charge that won’t be possible to reclaim.
When employees are traveling for business entertainment, that isn't their usual place of work; it also falls under the umbrella of employee expenses for business entertainment. This is a good one to know, especially if you’ve got a workforce that travels a lot to meet clients.
What about self-employed, subcontractors, and non-employees?
Self-employed: For the self-employed, as long as they are treated the same way in payment as your permanent employees are, then VAT can be reclaimed.
Subcontractors: Subcontractors are exempt from VAT tax and shouldn’t be concerned about when reclaiming tax.
Non-employees: For non-employees, like former staff members, then business entertainment expenses are not something that can be deductible. This is also the case for shareholders that you invite to your business event.
What about entertaining for partners or directors?
If the entertainment is only for partners or directors, then this VAT cannot be reclaimed. The reason for this is the same for client entertainment mentioned further down this guide—it's not considered to be used for a business purpose.
However, if there are events where a partner or director is attending a staff event with fellow employees, then you can reclaim VAT on the entire event.
For sole traders or those in a partnership or LLP, you can’t count them as an employee. In essence, there's no difference when it comes to you and the business. So from a legal standpoint, it won't give you eligibility to claim tax relief or VAT.
Understanding what constitutes as an employee in your business is definitely something to know due to penalties being given if you've provided misinformation on any VAT returns.
Claiming VAT on client entertainment
For any business, having the opportunity to bring in potential customers or clients with entertainment can certainly help to improve revenue for the company. However, this is where there’s a grey area in what can be deductible and what can't.
Is it necessary?
Some businesses may wish to offer their customers various forms of entertainment such as golf days or sporting events. They may wish to offer hospitality events to say thank you for their custom.
However, when it comes to these types of business entertainment, output tax will be due. This is because the business purpose isn't necessary. It’s a thank you, not an acquisition tactic.
There are often occasions where meetings will take place, perhaps in the office, with food and drink. Private use charges will not apply in this case. Again though, if you're providing hospitality and then taking your client out for dinner or further entertainment, it's likely going to be a private use charge.
The type of treatment and how it’s used
There are some tricky areas to navigate when it comes to entertaining clients in specific scenarios. For example, many use corporate boxes at sporting events as a way of entertaining clients and potential customers.
It all depends on the treatment in regards to who uses it and how it's used. When it comes to a client, it cannot be recovered as it falls into that bracket of entertaining in business for private purposes. For employees, it can be seen as a form of employee entertainment and rewards and so VAT can be reclaimed in this scenario.
Entertaining overseas customers
There has to be a reasonable scale for entertaining overseas customers, as stated by HMRC. A person is defined as an overseas customer if they're not a resident of the country or carrying out business in the country. It's also worth knowing that if it's necessary for employees or business to entertain these customers, then you can reclaim the VAT incurred.
The area in which you can't reclaim for overseas customers are corporate hospitality events. So things like trips away, evening meals, sporting events, etc. It's worth thinking of alternative ways to entertain these clients and align these methods so you can reclaim VAT if possible.
How to claim VAT on business entertainment
In order to reclaim VAT on business entertainment, good accounting is needed first and foremost. Many businesses should have this in place, but for smaller businesses just starting up it can be a big ask.
- The first thing to do is to collect all entertainment expenses with the right information associated. Most organizations, whether it be a restaurant to a bar, will be able to provide VAT receipts for tax purposes.
- With VAT on entertainment, it's worth keeping every receipt until you come to doing your VAT return. Psst. Digitize these receipts to make this process easier!
- The problem with all of this though, is that it can be difficult to manage, especially if you lack the in-house resources. With that being said, it's worth seeking VAT recovery services—ahem, we’re right here.
Use a solution to maximize your potential VAT reclaims on business entertainment, but also for business travel expenses too.
As a rule, when it comes to VAT reclaims and tax returns in general, you should keep around four years' worth of receipts and expenses. This is important because at any point, the governing body (in the case of the UK, HMRC) can ask for evidence against a VAT return you've submitted.
It's not something that happens regularly but it could happen. It’s something to be wary of when it comes to storing your receipts away safely and securely.
Seek guidance for VAT reclaim on business entertainment
In summary, there are some grey areas like so many taxes, that are worth combing through and understanding fully before you start reclaiming business entertainment VAT. Remember that you need to be VAT-registered in order to reclaim at all and that VAT needs to be added on correctly so that you don't lose money or receive penalties.
It's also worth seeking professional advice if reclaiming VAT in the case of business entertainment or any other form.
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*The estimates and rates shown on this page are indicative only, and based on the rates published by the EU on the date mentioned at the top of the page. Countries may change rates at any time or offer discounted rates for a short period of time. Recovering VAT is subject to local regulations.