Can I claim VAT on business entertainment expenses?
For businesses and their staff, the way in which VAT and taxes apply to personal expenses and business overheads isn’t often clear. Business entertainment costs can cause a good deal of confusion and lead to overpayments or unexpected bills.
What are business entertainment expenses?
HMRC accepts that sharing time, food and drink somewhere away from your office environment can be essential for building solid working relationships.
Typically, business entertainment may involve meeting clients out of the office and the associated costs of travel and accommodation. The ‘client’ in this context may be a current or prospective partner, supplier or business customer, or they can be a former or prospective employee. Entertaining your existing employees is a very different matter, unless they’re present specifically to help host the event or close a deal.
HMRC says that entertainment costs should be “reasonable”. They include food, drinks, professional event organisation, hotel accommodation, theatre tickets, business gifts, and even the running costs of aeroplanes and yachts.
Whilst some of this may seem lavish, HMRC has some fairly precise guidelines as to exactly what can or can’t be considered a “reasonable” cost for the ordinary business.
The many pitfalls
The rules are different for overseas versus British guests, employees, and other categories of person. This means that you often have to apportion expenses separately for different people at a restaurant table, for example; yourself, your assistant, a sub-contractor, your main business guest and their partner.
Although it’s sensible to put all costs through your books, only some are eligible for VAT exemption or allowable against profits. In some cases, declaring items as business costs can imply that they are “benefits in kind” – making them taxable for your guests or employees. If you pay for business entertainment out of pocket, HMRC may take the view that those costs were part of your salary and therefore liable to personal income tax.
Money aside, business entertainment can easily become an administrative headache. There are three things that you can do to simplify matters; involve your accountant in expenditure planning, stay current with HMRC rules (and interpretations), and compartmentalise your costs. In practice, the most difficult of these is often the last.
Even if you can remember every HMRC guideline, remembering exactly what you spent on what and whom is a challenge. Are you going to sit and take notes? Will you remember who got a drink each round or who ate what?
In many scenarios, letting payment cards do the record-keeping is a very good strategy. You will soon get used to using particular cards for particular purposes. The same goes for many situations when you are not personally present – you can authorise physical or virtual cards for employees and assign appropriate budgets.
Some cards are designed expressly for these kinds of situation and integrate directly into accounting software (such as Soldo prepaid company cards). That way, you don’t have to grapple with what is happening during an important event, nor when you are back in the office or filing tax declarations.
Some general rules
If you host a varied event such as the one described above, you can usually reclaim VAT on your employee’s bills but not on items or services consumed by the business guest, unless they are from overseas.
Costs should always be “reasonable” although what that means is widely debated. For the vast majority of businesses, a £1000 per head lunch would be “excessive”. In some documentation, HMRC actually suggests “sandwiches and soft drinks” (HMRC Notice 700/65 paragraph 2.6), but you don’t have to go to that extreme either. We suggest limiting yourself to what is appropriate in the circumstances, but expect to pay tax on any excess.
When you are sponsoring an event, for example, a concert, festival or sports fixture, the event has both an entertainment purpose and a marketing purpose. VAT should be recoverable on the marketing element even when it is not available on the entertainment. To claim VAT, you need to find a way to convincingly itemise the two elements. If you can’t separate them, HMRC will disallow all of it.
If you organise an event that is chargeable to those attending, for example, an admission fee, then technically you become eligible for full VAT relief on the event. Beware, however, that whilst this is obviously reasonable for a conference, a token charge for a restaurant meal will be difficult to pass off as an organised conference.
If your business is mobile to begin with, such as a circus, fair or travelling sole trader, then meals and accommodation can be claimed for on a routine basis anyway. For other types of business, your dining and entertainment activities cannot be routine: it must be for an exceptional business purpose.
While the possible permutations are endless in theory, most businesses can identify and optimise a business entertainment formula that works and stick with it. Honesty and reasonable behaviour is the key.