The next step

http www hmrc gov uk news ent claim input tax htm

[]

Reclaiming VAT on entertainment costs

Background

In the UK and other EU countries there’s a block on claiming VAT on your business entertaining costs. But there are exceptions. So what are they, and how can you get the most out of them?

Overseas customers

The ECJ recently gave a decision in the joint case argued by two companies, Danfoss and AstraZeneca. It said that the law in Denmark, which stopped VAT being claimed on entertaining costs for foreign customers, was overridden by a more recent European Directive. The Taxman in the UK is still considering whether this affects a similar rule here. A full statement is expected soon.

Tip. We suggest that until the Taxman makes his mind up, you should claim VAT you incur on entertaining foreign customers. You can go back to April 1 2006 (see The next step).

Trap. If it’s decided that the ECJ ruling doesn’t affect the UK, the VAT you claim may have to be repaid. We’ll keep you informed of developments.

UK customers and employees

The block on VAT paid on entertaining costs for UK customers is not affected by the ECJ ruling and still applies. But you are allowed to reclaim VAT on entertaining expenses for your staff. Be careful though, there’s an easy trap to fall into.

Trap. If you ask staff to attend a function just to help with the hospitality for your customers, you’re not allowed to claim back the VAT on any of the costs, even those relating to your employees.

Example. ABC Ltd decide to take ten customers out for a day at the races, along with five members of staff to look after the guests. The cost per person is £100 + £15 VAT. None of the VAT charged (£225 (£15 x 15 people)) can be claimed because it relates to business entertaining.

Guests - a tax break

It’s not unusual to invite spouses or friends of employees along to the firm’s “do”. Unfortunately, you can’t recover the VAT on the entertainment costs relating to them, which can make the event even more expensive. But because the definition of entertainment assumes hospitality is provided free of charge, this provides a tax break.

Tip. Make a modest charge to the employees’ guests. Although you will have to pay VAT on the money, it will mean that you can recover the VAT on the costs relating to them as well as your employees.

Charging guests could look a little mean to say the least. So how about suggesting that a small charge will be made but that the company will make an equal donation to charity. You’ll now be able to recover the VAT on all the costs. Not only that, your charitable donation will get you income tax, or your company Corporation Tax (CT), relief.

Example. The VAT payable on the cost of a party at £50 (incl. VAT) a head for your 20 staff, and an equal number of guests, would be £261 (£50 x 40 / 23 x 3). If you charge £5 for each guest, you’ll have to pay over £13.04 VAT (£100 / 23 x 3). But you can recover the £261 VAT you paid. And you can claim income tax or CT relief on the £100 you pass on to charity.

For the Taxman’s guidance on claiming entertainment costs, visit http://tax.indicator.co.uk (TX 09.14.02).