VAT on business, client & staff entertainment

VAT is a tax on the value added to goods and services in the UK. In general, it's 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, subject to the normal input tax rules.

However, the VAT treatment of client and staff entertainment can be quite complex and will depend on the type of entertainment being provided.

It is always a good idea to seek professional advice from an 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 hospitality or entertainment, such as food, drink, or accommodation, provided by a business to anyone who is not an employee of the business.

Businesses are unable to claim back the VAT on most business entertainment expenses, including 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.

When can a business claim VAT back on hospitality?

There are some exceptions to the business entertainment rules. For example, businesses can claim 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, such as food and drink provided in a meeting.

VAT and client entertainment

One of the most common business expenses on which you cannot claim back VAT is client entertainment costs. This includes the cost of entertaining clients, suppliers, or customers, such as providing free meals, drinks, or event tickets.

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.

VAT legislation specifically prevents VAT being reclaimed on costs incurred entertaining clients.

What about goods or services with mixed use?

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, sponsoring an event to entertain customers and advertise to a wider audience, as well as using capital goods, such as a yacht, for both charter and business entertainment.

VAT and staff entertainment

Employee/staff entertainment is treated differently from business entertainment with regard to VAT. While VAT cannot normally be claimed back on business entertainment expenses, businesses can ofter reclaim VAT on costs incurred providing entertainment or hospitality to employees such as a party or social event.

How to reclaim VAT on staff entertainment

In order for the business to be able to claim VAT back on staff entertainment expenses, the following conditions must be met:

• 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.

What guidance does the UK government provide on this?

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. 

Provide evidence that entertainment was for the benefit of employees

To reclaim VAT on staff entertainment, 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
• 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 reclaim 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.