VAT on Subsistence Costs - Full breakdown and definitions

In the UK, businesses can often claim back the VAT (Value Added Tax) they have paid on goods and services purchased for use in their business. However, when it comes to staff subsistence (food, drink, accommodation), the rules can be complex.

Can you claim VAT for subsistence costs?

You can claim VAT on subsistence costs paid to employees, but only when certain criteria are met based on the employee’s location, or how these costs are treated in your business.

How VAT works for subsistence costs

In a business context, subsistence expenses are expenses incurred by an employee for food, drink, and accommodation away from the normal place of work. VAT can be reclaimed on subsistence expenses if the business pays the actual cost of the expense.

When a business pays a fixed allowance to an employee, they cannot reclaim VAT even if they have tax invoices. This is because the supply hasn't been made to the business.

However, there are cases where a business can reclaim VAT on subsistence costs for someone other than an employee, or for accommodation near the normal place of work. For instance, HMRC provides an example of hotel accommodation near the workplace given to a business director when a rail strike would prevent the director from getting to work.

Accommodation

When an employee incurs costs for overnight accommodation as part of a business trip, the VAT incurred on these costs is reclaimable if the business covers the cost of the stay. This is because the accommodation is necessary for the employee to carry out their business duties and is, therefore, considered a business expense.

VAT is also reclaimable on overnight accommodation away from the normal place of work when the cost is incurred by a director. partner or sole trader.,

Meals

VAT can be reclaimed on meals for employees which are paid for by the business. This includes meals provided in a staff canteen. VAT incurred on meals taken away from the normal place of work by directors, partners or sole traders can be reclaimed provided the meals are for a business purpose.

Can you claim VAT on lunches?

If the expense is related to a business trip, you can. However if you pay employees a flat rate for expenses, then you cannot claim VAT on lunches.

What is the difference between subsistence and entertainment?

There is often confusion around the difference between subsistence and staff entertainment, as both can involve the provision of food, drink, and sometimes accommodation. The key to VAT treatment is the purpose of these provisions.

Subsistence

Subsistence refers to food, drinks, and overnight accommodation provided to employees and paid for by the business when the costs are incurred for a business purpose.

For instance, if an employee is required to travel for work and incurs costs for meals and accommodation, these expenses fall under subsistence. Such costs are directly linked to the employee's ability to perform their duties.

Entertainment

The VAT treatment of entertainment expenses in the UK varies depending on whether the entertainment is provided to clients or staff. Generally, businesses cannot reclaim VAT on client entertainment costs, such as meals, drinks, or event tickets offered to clients, suppliers, or customers. These expenses are considered not to have a strict business purpose and are therefore blocked from VAT recovery under HMRC guidelines.

However, the VAT treatment differs for staff entertainment. Businesses can reclaim VAT on expenses incurred for providing entertainment or hospitality to employees, such as staff parties, team-building activities, or meals during business trips. To qualify for VAT recovery, the entertainment must serve a business purpose, such as rewarding employees for good work or maintaining/improving staff morale. Additionally, the entertainment should not be provided solely to directors, partners, or sole proprietors, and employees should not be acting as hosts to non-employees.

It's important to note that VAT recovery on mixed-use goods or services, such as sponsoring an event to entertain customers and advertise to a wider audience or using capital goods like a yacht for charter and business entertainment, is possible. In such cases, HMRC allows a proportion of the VAT to be reclaimed based on the identifiable business use of the goods or services.