VAT and business entertainment
Merlin Scientific LLP v HMRC (FTT - TC04441, 04 June 2015)
This appeal by Merlin Scientific LLP (“MSL”), the appellant, basically, comprised two separate appeals against a) a VAT assessment raised by HMRC arguing that some of the input VAT claimed on corporate meeting costs was irrecoverable being in the nature of business entertainment, and b) as a consequence the expense was not deductible too as a business expense for income tax purposes. MSL provided consultancy services to its associated company Merlin Biosciences Limited (“MBL”). At the request of MBL the appellant company got meeting facilities organised at Glebe House where the consultancy services were provided. Glebe Corporate operated the facilities at Glebe House. MSL paid Glebe Corporate for the meeting facilities used and then made an onward supply of those services to MBL, as an ancillary supply to its consultancy services. In other words, MSL provided a composite supply of services to MBL consisting of a predominant supply of consultancy services and an ancillary supply of corporate meeting facilities, which included a minimal amount of business entertaining. Input VAT claim on these services at the standard rate was disputed by HMRC arguing that the meeting facilities were basically entertainment.
The law
An input VAT claim (s.26 VATA 1994) that a taxable person is entitled to credit at the end of any period is as allowable by or under regulations as being attributable to supplies made or to be made by the taxable person in the course or furtherance of his business. Further, article 5 of the Value Added Tax (Input Tax) Order 1992 provides that tax charged on any goods or services supplied to a taxable person, or on any goods acquired by a taxable person, or on any goods imported by a taxable person, is to be excluded from any credit under section 25 of the Act, where the goods or services in question are used or to be used by the taxable person for the purposes of business entertainment unless the entertainment is provided for an overseas customer of the taxable person and is of a kind and on a scale which is reasonable, having regard to all the circumstances. For the purposes of this article, “business entertainment” included hospitality of any kind provided by a taxable person in connection with a business carried on by him, but does not include the provision of any such entertainment for either or both (a) employees of the taxable person and (b) if the taxable person is a body corporate, its directors or persons otherwise engaged in its management, unless the provision of entertainment for persons such as are mentioned in sub-paragraph (a) and (b) above is incidental to its provision for others.
Decision
Drawing on various decided cases and the law, the tribunal had to consider if a) there was a supply of business entertainment, b) if so, who provided it, and c) if it was provided free of charge. On scrutiny of the evidence submitted the tribunal found that a) there was a supply of business entertainment, but of a minimal amount, b) MSL provided that business entertainment to MBL as part of the onward supply of the facilities made available to MSL by Glebe Corporate and c) MBL paid for that business entertainment by settling MSL’s invoices which included sums in respect of the onward supply of the meeting facilities and accordingly it was not provided by MSL free of charge. The appeal, therefore, was allowed and as a consequence the input VAT claim and the consequential claim for deduction as a business expense was allowed.
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