When it comes to business entertainment expenses, understanding the treatment of Value Added Tax (VAT) is crucial for businesses operating in the UK. While VAT can generally be reclaimed on goods and services used for business purposes, there are specific rules governing the recovery of VAT on entertainment expenses. In this blog post, we will explore the conditions under which businesses can claim back UK business entertainment VAT, distinguish between business and employee entertainment, and provide insights on VAT recovery in different scenarios.
What is VAT Recovery and When Can Businesses Reclaim Input VAT?
Value Added Tax (VAT) is a consumption tax charged on most goods and services in the UK. Businesses are typically eligible to recover, or reclaim, the VAT they pay on goods and services used for business purposes. This allows them to offset the VAT paid against the VAT they charge on their own taxable supplies. However, there are some specific exceptions when it comes to business entertainment expenses.
Defining Business Entertainment VAT
Business entertainment refers to the provision of hospitality to individuals who are not employees of the business, without charge. It encompasses a range of activities such as providing food and drink, accommodation, tickets to events, and more. It is essential to note that employee entertainment is distinct from business entertainment and is treated differently for VAT recovery purposes.
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Can you recover business entertainment VAT?
In general, businesses cannot reclaim input tax incurred on the provision of business entertainment expenses. This means that the VAT paid on business entertainment activities cannot be offset against the VAT the business charges on its supplies. However, there are certain exceptions for business entertainment provided to overseas customers.
VAT on entertainment expenses for Overseas Customers
If business entertainment is provided to customers who are not ordinarily resident or carrying on a business in the UK, including the Isle of Man, there may be a possibility to reclaim the VAT incurred. However, if there is a ‘private benefit’ to the individual enjoying the entertainment, an output tax charge may be applied, negating the recoverable input tax.
Can you reclaim VAT on entertainment expenses for employees?
Employee entertainment refers to the provision of entertainment for the benefit of employees, such as staff parties, team-building exercises, and staff outings. In most cases, VAT incurred on employee entertainment is considered input tax and is not blocked from recovery under the business entertainment rules.
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Can you reclaim VAT on entertainment expenses for directors and partners?
VAT incurred on entertainment provided solely for directors or partners of a business is not considered input tax, as it is not used for a business purpose. Consequently, the VAT cannot be reclaimed. However, if directors or partners attend staff parties alongside other employees, the VAT incurred is eligible for recovery.
Can you reclaim VAT on entertainment expenses when employees host clients?
When employees act as hosts to non-employees, the VAT incurred on entertainment costs is considered input tax. However, this input tax is blocked under the business entertainment rules, thus making it non-recoverable.
Business Entertainment VAT events including Employees and Non-Employees
If an event is organised to entertain both employees and non-employees, businesses can only reclaim the VAT incurred on entertaining their employees. The portion of input tax related to entertaining non-employees is blocked from recovery under the business entertainment rules. Proper apportionment of VAT should be undertaken, considering the rules on partial exemption.
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