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.

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.

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

Staff entertainment, on the other hand, involves providing food, drink, and entertainment where there is no direct business purpose, although in practice, this scenario might be less common.

Examples of staff entertainment include company parties, social events, or team-building activities where the primary aim is to foster goodwill, improve morale, or reward employees, rather than to facilitate immediate business operations. 

Understanding these distinctions is crucial for ensuring compliance with VAT regulations and making informed decisions about reclaiming VAT on various types of expenses.