Recovery of input tax on business entertainment expenses was never allowed ever since the introduction of VAT in the UK. However, such input tax on entertaining an overseas business customer was allowed until1988 when the law was amended to block recovery of input tax on all business entertainment expenses including that provided to overseas customers.
HMRC has now concluded that this position is inconsistent with EU law, particularly after the recent judgment on Danfoss and Astra Zeneca cases by ECJ. As a result input tax on expenses incurred on entertainment provided to an overseas customer could be recovered.
HMRC sets out three scenarios to help businesses to ascertain if the input tax on entertainment costs is claimable:
1) Meetings in the office: HMRC considers that when an overseas customer is entertained in a staff canteen or similar place to facilitate a business meeting, the input tax on such entertaining will be recoverable. HMRC takes the view that any private benefit derived by the overseas customer is accessory to the needs of the business
2) External meetings or events: where meetings cannot be held in house due to lack of space or facilities, the same general principle will apply as for meetings in the office, and the input tax will be recoverable. This will apply only to the basic provision of refreshments and food. If the expenditure goes beyond that, there should be a private use charge, or, alternatively, no claiming of the input tax
3) Corporate hospitality events: businesses sometimes offer customers or potential customers general hospitality, such as golf days and the like. HMRC will not allow deduction of the input tax, as such events are unlikely to have a strict business purpose.
Claims in respect of input tax on the costs of entertaining overseas business customers could be made subject to the normal four year cap and supported by the following evidence:
- Details of the overseas customers
- The type of expenditure, for example, meals to support business meetings, etc
- The amount of VAT claimed
- Evidence that VAT has been incurred and not previously been deducted
