Client entertainment is an essential part of doing business, often helping to foster relationships and close deals. However, when it comes to VAT (Value Added Tax) recovery on entertainment expenses, the rules can be quite strict. Many businesses assume they can reclaim VAT on entertainment costs, only to later find that HMRC has disallowed their claims. In this blog post, we’ll break down the key considerations around claiming VAT on client entertainment and provide clarity on what is and isn’t eligible.
What is Considered “Business Entertainment”?
According to HMRC, business entertainment includes any hospitality provided to non-employees such as clients, potential clients, suppliers, or other business contacts. Business entertainment can cover a range of expenses, including:
- Meals and drinks
- Hotel stays and accommodation
- Tickets for leisure events, such as theatre, concerts, or sports events
- Business gifts exceeding £50 in value
- Hospitality at conferences or events
- Use of capital assets (like yachts or aircraft) for entertaining purposes
While these are all considered business-related expenses, VAT can typically not be reclaimed on client entertainment costs, as they are seen as discretionary rather than necessary for the business. However, there are certain exceptions, particularly when employees are involved.
When Employees Are Included in Business Entertainment
Unlike client entertainment, expenses incurred for entertaining employees may be eligible for VAT recovery, as long as the entertainment serves a legitimate business purpose. Some examples where VAT recovery is allowed include:
- Annual staff parties (Christmas, summer, etc.)
- Team-building activities
- Meals during business training sessions
For VAT to be reclaimed, the entertainment must be offered to all employees—it cannot be limited to just a few individuals. Additionally, if non-employees, like clients or contractors, are present, VAT can only be claimed on the portion attributable to employees.
Who Counts as an Employee for Entertainment Purposes?
HMRC considers the following individuals as employees for VAT purposes:
- Individuals employed by the business
- Directors or anyone involved in managing the company, including partners
- Self-employed individuals working for the company (for subsistence expenses)
- Essential personnel managing events, such as stewards or helpers at sports activities
It’s important to note that businesses can claim VAT on entertainment expenses for employees, like staff parties, provided that the entertainment is available to all employees.
Who Does Not Qualify as an Employee for VAT Recovery?
There are some exclusions when it comes to VAT recovery on employee entertainment. These include:
- Directors and partners (unless they are attending an event open to all employees)
- Freelancers, contractors, or consultants (as they are not considered employees)
- Employees whose primary role is to entertain clients, such as sales staff
If your business provides entertainment for these groups, VAT cannot be reclaimed.
Common Questions About VAT and Client Entertainment
1. Can VAT be reclaimed on meals during business meetings?
If the meal is provided solely for employees during a meeting, VAT can be reclaimed. However, if clients are present, VAT on their portion of the meal is not recoverable.
2. Can VAT be claimed if business entertainment is crucial for securing a deal?
Even if entertaining clients is essential to winning a contract, HMRC does not allow VAT recovery on the entertainment costs.
3. Can VAT be claimed for networking events or conferences?
VAT can be reclaimed for attending a business conference, but any entertainment portion (like meals or drinks) is not recoverable.
4. Are promotional events considered business entertainment?
If the event is strictly for promotional purposes, such as a product launch, VAT may be reclaimable. However, any hospitality beyond basic refreshments could be classified as entertainment and disallowed.
5. What records are needed to claim VAT on business entertainment?
To reclaim VAT, businesses need to maintain proper VAT invoices. Ensure you have clear records, receipts, and justifications for any business entertainment expenses.
Claiming VAT on Entertainment for Overseas Clients
If you entertain an overseas client, VAT may be recoverable—provided the entertainment is considered “reasonable.” The expense must be deemed necessary to secure business from international clients. However, HMRC may challenge claims if they consider the expense excessive, so keeping detailed records to justify the expense is crucial.
Examples of VAT Treatment on Business Entertainment
To clarify what is and isn’t eligible for VAT recovery, here are some examples:
Eligible for VAT Recovery:
- A hotel stay and meal for an employee on a business trip
- A staff Christmas party open to all employees
- A working lunch during an employee training session
Not Eligible for VAT Recovery:
- Taking clients to a sporting event
- Dinner with a potential client
- Corporate hospitality for suppliers
Meetings and VAT Claims
HMRC has specific rules for meetings regarding VAT eligibility:
Allowable VAT Claims:
Basic refreshments like sandwiches or soft drinks provided during meetings are typically eligible for VAT recovery.
Non-Allowable VAT Claims:
Hospitality after meetings, especially if alcohol is involved, is usually not eligible for VAT recovery. Holding meetings in restaurants or providing significant hospitality could also trigger private use charges, making VAT non-recoverable.
Corporate Hospitality Events and VAT
Corporate hospitality expenses, such as golf days, sporting event tickets, or evening meals with entertainment, typically fail the “strict business purpose” test and are therefore ineligible for VAT recovery. If VAT is mistakenly reclaimed on these expenses, businesses may face an output tax charge or be required to treat the VAT as non-deductible.
Mixed-Use Goods and Services: Apportioning VAT
When purchasing mixed-use goods or services (e.g., hotel stays or corporate events involving both staff and clients), businesses need to apportion VAT between business and non-business uses. For example, VAT can be reclaimed on the portion of the event that is for employee training but not for client entertainment.
Conclusion: Navigating VAT on Business Entertainment
Claiming VAT on client entertainment can be complex, but understanding HMRC guidelines helps businesses avoid costly mistakes. While VAT on client entertainment is generally non-recoverable, VAT on entertainment for employees can often be claimed, provided the conditions are met. Keeping detailed records, following the rules for mixed-use purchases, and working with VAT experts can help ensure compliance and protect your business from penalties.
