Entertainment is broadly defined to include hospitality of any kind and therefore includes matters such as food and drink, accommodation, tickets to events and purchase of capital assets used for the purposes of entertaining.
The basic rule is that VAT on business entertainment is not recoverable and therefore VAT on entertainment of customers, or potential customers, is not possible. However recovery of the input VAT on entertainment of a customer who comes from an overseas country is permitted.
Overseas Customers
This relaxation applies to entertainment of overseas customers but not entertainment of potential customers from overseas. The customer should not have a business carried on in the UK. If a business entertains a client based overseas then it could recover the input VAT. However if, for example, the customer is a representative of an overseas company with a UK branch then that individual would not be treated as an overseas customer.
When recovering VAT on overseas customers additional records should be kept to confirm that they are an overseas customer and the logic for assuming that they do not have a business in the UK. HMRC take a very strict view on entertainment of overseas customers and believe that unless the entertainment is minor, absolutely necessary, and solely for business purposes, there is likely to be a private benefit provided to the recipient and the input VAT cannot be recovered. Their public notice 700/65 gives more detail.
Staff Entertainment
VAT is also recoverable for some staff entertainment. If staff entertainment is undertaken to improve morale or offer rewards for good work, then it is considered as being incurred for a business purpose and the VAT is recoverable. The input VAT associated with directors (or partners if the business is a partnership) who attend such an event is also recoverable. Should non-employees attend the function then then input VAT cannot be recovered on the cost of entertaining non-employees and it is generally reasonable to apportion the input VAT using head count. Non-employees include pensioners and former employees (or former partners), job applicants or interviewees.
Recovery of VAT arising from a staff party requires staff to attend. If the attendees are solely directors of companies or partners in partnerships the input VAT cannot be recovered, even if the celebration is to improve their moral or reward their good work.
Subsistence
Although recovery of VAT on entertainment is subject to restriction, VAT can be recovered on subsistence. If meals are provided on a business trip which is away from the usual place of work the VAT incurred on reasonable subsistence can be recovered. This covers subsistence incurred by staff, directors and partners. VAT receipts should be obtained when recovering tax associated with subsistence.
Source Ashok Parmar
