Understanding VAT on Client Entertaining
Entertaining clients is often essential for building relationships, securing deals, and fostering loyalty. However, regarding VAT recovery, client entertaining expenses have strict rules and limitations. Many businesses assume they can claim VAT on such costs, only to find out later that HMRC has disallowed their claims.
So, can you claim VAT on client entertaining? The answer depends on the type of entertainment, who is involved, and whether any exceptions apply. This guide will help you navigate the complexities of VAT on client entertainment and ensure compliance with HMRC regulations.
What counts as ‘Business Entertainment’?
HMRC defines business entertainment as hospitality provided by a business to non-employees, such as clients, potential clients, suppliers, and other business contacts.
Under HMRC guidelines, business entertainment encompasses discretionary expenses such as:
- Food and drink
- Accommodation, like hotel stays
- Leisure activities, including tickets to theatres, concerts, or sports events
- Business gifts above £50
- Hospitality at events or conferences
- Use of capital assets, such as yachts or aircraft, for entertainment purposes.
Since these are discretionary expenses rather than business necessities, VAT cannot typically be reclaimed. However, there are exceptions where VAT can be claimed, mainly when employees are involved.
If you’re registering for VAT as a limited company, it’s essential to understand that HMRC’s rules on business entertainment apply from the outset, mistakes here can result in disallowed claims.
When employees are included in business entertainment
Unlike client entertainment, VAT on expenses incurred when entertaining employees may be recoverable, provided the costs are for business purposes. Examples include:
- Annual staff parties such as Christmas or summer events
- Team-building activities
- Meals during business training events
However, for the VAT to be recoverable, the entertainment must be offered to all employees, not just a select few. If non-employees, such as clients or contractors, attend the event, only the portion of VAT attributable to employees can be reclaimed.
Understanding these rules is not just key for VAT recovery, it also intersects with wider payroll compliance, especially where benefits in kind or staff incentives are concerned.
Who qualifies as an employee for business entertainment?
For VAT purposes, employees include:
- Individuals employed by your business.
- Directors or anyone involved in managing the business, including partners.
- Self-employed individuals are treated the same as employees, but only for subsistence expenses.
- Helpers, stewards, or other essential personnel involved in managing events, such as sporting activities.
According to VAT Notice 700/65, businesses may be able to claim back VAT on the cost of providing entertainment to their employees, such as staff parties or similar events. Whether handling compliance in-house or through outsourced payroll services, maintaining accurate records is crucial. Ensuring compliance with these rules is essential for reclaiming VAT correctly and avoiding potential penalties
Who does not qualify as an employee for business entertainment?
Some employees do not qualify for VAT recovery on entertainment expenses. The key exclusions include:
- Directors and partners (unless they are attending an event available to all employees)
- Freelancers, contractors, or consultants (since they are not considered employees)
- Employees primarily there to entertain clients (such as sales staff taking clients out for dinner)
If a company provides entertainment for these categories of employees, VAT cannot be reclaimed.
Frequently Asked Questions (FAQ)
1. Can I reclaim VAT on meals provided during business meetings?
If the meal is provided exclusively for employees during a meeting, VAT may be reclaimable. However, if clients are present, the VAT on their portion of the cost is not recoverable.
2. What if the business entertaining is mandatory for securing a deal?
Even if entertaining a client is essential to winning a contract, HMRC does not allow VAT recovery on the entertainment costs.
3. Can I claim VAT on networking events or conferences?
VAT can be reclaimed on the cost of attending a business conference. However, VAT on that portion is not recoverable if the event includes entertainment, such as a dinner or drinks reception.
4. Are promotional events considered business entertainment?
If the event is solely for promotional purposes (e.g., product launch), VAT may be reclaimable. However, any hospitality beyond light refreshments could be considered entertainment and disallowed.
5. What records do I need to keep for VAT claims on business expenses?
HMRC requires proper VAT invoices for any reclaimed expenses. Ensure you retain detailed records, including receipts and justifications for business expenses.
Need help with VAT record keeping?
Our expert accounting and bookkeeping services take the hassle out of documentation while spotting opportunities to maximise your legitimate VAT claims.
Claiming VAT on business entertainment for overseas customers
If you entertain a client from outside the UK, you may be able to reclaim VAT—provided the entertainment is deemed “reasonable.” This is because the expense is necessary to secure business from international clients.
However, be mindful that “reasonable” is subjective, and HMRC may challenge claims they consider excessive. It’s always advisable to keep detailed records to justify the expense in case of an audit.
Examples of business entertainment VAT treatment
Here are some examples to clarify what is eligible for VAT recovery:
VAT can be claimed on:
- A hotel stay and meal for an employee on a business trip
- A staff Christmas party open to all employees
- A working lunch during a training session for employees
VAT cannot be claimed on:
- Taking clients to a sporting event
- Dinner and drinks with a potential client
- A corporate hospitality package for suppliers
Meetings
HMRC applies specific rules to meetings when determining VAT eligibility:
- Allowable VAT claims: Basic refreshments, such as sandwiches and soft drinks, provided during office meetings are allowable, enabling the meeting to proceed without interruptions.
- Non-allowable VAT claims: Hospitality after meetings, especially if alcohol is involved, does not qualify. Holding meetings in restaurants or providing extensive hospitality is likely to trigger a private use charge, making VAT non-recoverable.
Corporate hospitality events
Corporate hospitality expenses are generally ineligible for VAT recovery as they often fail the “strict business purpose” test. Common examples include:
- Golf days and track days
- Trips to sporting events or nightclubs
- Evening meals with entertainment
If you recover VAT on these expenses, you may be required to pay an output tax charge. Alternatively, you can treat the VAT as non-deductible.
Input tax deductions for mixed use goods and services
When claiming VAT on mixed-use goods and services, businesses often face the challenge of apportioning VAT between business and non-business uses. This applies when an expense serves both purposes, such as a hotel stay for employee training, or a corporate event attended by clients and staff.
To ensure VAT compliance, businesses must carefully apportion VAT between the business and entertainment portions. For example, VAT can be claimed for the employee part of the training or event but not for the client’s entertainment.
Apportioning VAT for mixed-use purchases
From 1 January 2011, HMRC allowed businesses to choose between a business or non-business method of apportionment for VAT, except where the business was partially exempt. HMRC permits a single method for partially exempt businesses that covers business and non-business use, simplifying the process and ensuring fair VAT recovery. This approach saves time and resources, ensuring the business can recover VAT efficiently.
Recovering Input Tax
When it comes to VAT recovery, there are several important points for businesses to keep in mind:
- Taxable supplies: You can recover VAT on purchases that directly relate to taxable supplies, including those made outside the UK that would be taxable if made in the UK.
- Exempt supplies: Input tax on purchases related to exempt supplies is generally non-recoverable unless specified by Treasury Orders.
- Blocked input Tax: Certain expenses, such as business entertainment for non-employees or company cars, are considered “blocked” input tax, meaning they cannot be recovered.
- Apportionment: You must apportion VAT between business and non-business uses for mixed-use purchases, ensuring you only claim VAT on the portion used for business activities.
- Direct attribution: VAT can be directly attributed to purchases exclusively used for taxable business activities, simplifying recovery.
- Annual adjustment: At the end of the accounting period, businesses must adjust to ensure the VAT recovery is accurate based on actual use.
- Record keeping: Proper records are essential to substantiate your VAT claims. Businesses must maintain records that enable them to calculate and support their recoverable input tax.
Calculating your VAT recovery
To calculate how much input tax you can recover, follow these key steps:
- Direct attribution of input Tax: Assign VAT to specific purchases directly related to taxable supplies.
- Apportionment of residual input Tax: Apportion the VAT between business and non-business uses for mixed-use purchases.
- Annual adjustment: Adjust your VAT recovery at the end of each financial period to ensure its accuracy.
By following these steps and consulting VAT experts, your business can confidently navigate the complexities of VAT claims for mixed-use expenses, including client entertainment.
How can we help you navigate VAT on business entertainment
Navigating VAT on business entertainment can be tricky, with complexities that may result in disallowed claims or HMRC scrutiny, but you don’t have to face it alone.
Here’s how we can help:
- Expert guidance: We clarify VAT rules for business entertainment, helping you understand what you can and cannot claim.
- Accurate apportionment: We help you apportion VAT correctly between business and non-business use for mixed-use expenses.
- Overseas entertainment: Our team assists with VAT claims for entertaining overseas clients, navigating any applicable exceptions.
- Compliance assurance: We ensure your VAT processes fully comply with HMRC regulations, reducing the risk of penalties.
So, can you claim VAT on client entertaining? In most cases, the answer is no. HMRC typically disallows VAT recovery on entertainment expenses for clients or non-employees. However, VAT can be recovered on certain employee-related expenses, business travel, and specific exceptions, such as entertaining overseas clients.
At Rise Accounting, we specialise in simplifying VAT compliance for businesses. Whether mixed-use expenses, overseas client entertainment, or employee-related costs, our team maximises your VAT recovery while fully complying with HMRC guidelines.
If you need expert guidance, we are here to support you.
