VAT is a tax on the value added to goods and services in the UK. In general, VAT is charged on most goods and services provided by VAT-registered businesses in the UK and where goods and services are purchased for business purposes, the VAT can be reclaimed from HMRC.
However, the VAT treatment of client and staff entertainment can be quite complex and will depend on the specific circumstances of the entertainment.
It is always a good idea to seek professional advice from a VAT expert if you're unsure about the VAT treatment of entertainment expenses, whether for staff or clients.
VAT and business entertainment
"Business Entertainment" refers to the provision of hospitality or entertainment, such as food, drink, or accommodation, that is provided by a business to anyone who is not an employee of the business.
Businesses cannot claim the VAT back on most business entertainment expenses. This entertainment includes events like client dinners, free hotel accommodation, and tickets to sporting or cultural events.
These expenses are not considered wholly and exclusively for business purposes and therefore cannot be claimed as input tax on the business's VAT return.
There are some exceptions to the business entertainment rules. For example, businesses can claim the VAT back on hospitality provided to overseas customers if the costs incurred are reasonable in scale and character and the hospitality has a business purpose, for example, food and drink provided in a meeting.
VAT and client entertainment
One of the most common business entertainment expenses, on which you cannot claim back VAT is client entertainment costs. This includes the cost of entertaining clients, suppliers, or customers, such as the free provision of meals, drinks, or tickets to events.
The reason the VAT cannot be reclaimed is that such expenses are unlikely to have a strict business purpose or be necessary for the business to make its supplies.
HMRC does allow a proportion of the VAT to be reclaimed where goods or services are used for both business entertainment and an identifiable business use.
For example, services connected with the sponsorship of an event where the event is partly to entertain customers and partly to advertise to a wider audience attending or viewing the event, and capital goods such as a yacht used for both charter and business entertainment.
VAT and staff entertainment
Employee/staff entertainment is treated differently from business entertainment with regards to VAT. While VAT cannot normally be claimed back on most business entertainment expenses, businesses can claim back VAT on staff entertainment expenses.
Staff entertainment refers to expenses incurred by a business in providing entertainment or hospitality to its employees, such as staff parties or social events.
In order for the business to be able to claim VAT back on these expenses, the following conditions must be met:
- The entertainment must be provided to employees for a business purpose such as to reward them for good work or maintain/improve staff morale.
- The entertainment must not be provided solely to directors, partners, or sole proprietors.
- Employees must not be acting as hosts to non-employees.
If these conditions are met, the business can claim VAT back on the cost of providing employee entertainment as input tax on their VAT return. However, if any of the conditions are not met, the business cannot claim VAT back on the expense.
Things to remember when claiming VAT on staff entertainment
According to VAT Notice 700/65, you may be able to claim back VAT on the cost of providing entertainment to your employees, such as staff parties or other similar events.
However, to do so, you must be able to provide evidence that the entertainment was provided primarily for the benefit of your employees:
- Check eligibility: Check that the type of entertainment expense you are claiming for is eligible for VAT recovery at all
- Determine the business case for the entertainment: Ensure that the entertainment expenses were incurred for business purposes and not for personal reasons. The entertainment should be related to your business and for the benefit of your employees.
- Keep records: Make sure you keep records of all staff entertainment expenses that you are planning to claim VAT on. This includes receipts, invoices, and other relevant documentation.
It's important to note that the rules and regulations regarding VAT can vary by country, so non-UK businesses should check with their local tax authority or a qualified VAT professional to ensure that they are following the correct procedures.