Entertaining costs – getting the VAT back

HMRC doesn’t allow VAT to be reclaimed on the cost of entertaining customers, suppliers etc. However this is not a strictly black and white rule. Below are some situations where you are allowed to reclaim VAT:-

As you probably know, HMRC’s rules block businesses from obtaining tax relief for most types of entertaining costs. This block covers income and corporation tax plus VAT. However the rules for these three taxes differ. In the case of income and corporation tax expenses are only allowable if they relate “wholly and exclusively” to the business. VAT on the other hand can be apportioned between allowable and non-allowable.

So for example if an employee takes a customer for lunch, you’re entitled to reclaim the VAT on the part of the cost which relates to your employee’s meal. But this can only be claimed if it is deemed to be a working lunch and not entertainment.

A different rule applies where the expense relates solely to your employees. If you pay for entertainment for one or more as a perk, for example a reward for work, this counts as an expense of employment and so VAT can be reclaimed on the related costs.

For more information or to discuss the rules further please contact either Graham Beeley or Ray Callingham at our Mansfield office 01623 645705