Whilst preparing VAT Returns for our clients, we know that understanding the rules around VAT is important for those running VAT registered businesses in the UK. It can be challenging as there are many guidelines to operate within. I have provided some guidance on the topic of entertainment and subsistence as this is often a difficult area for businesses. I will explain what “entertainment” is and the difference between entertainment and subsistence, as well as where VAT can and cannot be claimed on these expenses.

Entertainment is defined as any kind of hospitality, such as food & drink, accommodation (hotels), any events (sporting or arts), entries to any clubs, and the use of capital assets for entertaining, such as providing trips on personal yacht or aircraft.

Entertainment is split into two categories: staff entertainment, which is providing entertainment services to anyone who works for you; and business entertainment, which is providing entertainment services to anyone who you have business relationships with, including suppliers and customers.

Entertaining – Staff

• VAT incurred on staff entertainment is recoverable where the entertainment is provided to employees.
• If entertainment is provided only for directors or partners the VAT cannot be claimed as the goods or services are not used for a business purpose.
• If directors and partners of the business attend staff entertainment events together with employees, VAT is recoverable.
• In a case where you are entertaining both employees and non-employees, VAT can only be reclaimed on the expenses relating to employees.

Subsistence is another category that can cause uncertainty. Subsistence is any expenditure relating to the maintenance of oneself at a minimal level for business purposes.

Examples are as follows:

• Reimbursing an employee for the costs of travel, accommodation and meals away from the normal place of business, i.e. a business trip. In this case VAT is claimable for an employee, sole proprietor, partner or director, however it must only relate to expenditure on trips for business purposes only.
• The business cannot claim input VAT on a flat rate of subsistence expenses, VAT can only be claimed on actual subsistence expenses.
• If a business provides canteen facilities to staff the VAT can be reclaimable on associated costs.
• If the business pays a proportion of a cost then only that fraction of the VAT can be claimed, e.g. if a total cost of hotel accommodation is £200 for staff on a business trip, but the business only pays half, the business can then only claim half of the VAT amount.
• The general rule is you can’t recover the VAT on expenses which aren’t for business purposes.

Entertaining – Business

• VAT cannot be claimed where your employee acts as a host to entertain a non-employee.
• VAT incurred on the entertainment of overseas customers (not an ordinary resident or operating business in UK including Isle of Man) may be recoverable when incurred for business purposes, without any private benefit, and is reasonable in scale and character.
• If normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, the VAT is claimable.
• If there is no other alternative than to hold a meeting outside the office, only the VAT on basic provisions would be recoverable. Input VAT incurred on hospitality provided following a meeting and involving the provision of alcohol is not reclaimable. Taking a customer to a restaurant is not reclaimable and very likely to lead to a private use charge to output tax.
• There are two example scenario where VAT can be reclaimable. This is when an airline provides catering and accommodation for delayed passengers, or when a recognised sporting body provides, through necessity, free accommodation and meals to amateur sports persons and officials who attend an event.

If you do have any doubts or queries in this area, please contact a Barnes Roffe Partner today and let us help you.

Blog author: Sannah Khan