VAT - INPUT TAX - 12.04.2010

Can you now claim VAT on entertainment expenses?

Not the final decision on entertaining

The recent decision by the EU Advocate General (AG) regarding VAT paid on entertaining costs is hot news in the world of tax. It might mean that the current block on UK businesses reclaiming VAT on entertaining costs will be removed. It would also open the door for retrospective VAT claims going back several years. But before you get too excited, the AG’s decision is yet to be confirmed by the European Court, although in practice it rarely disagrees.

What did the AG say?

The AG thought that the laws of some countries in the EU regarding the block on reclaiming VAT on entertaining costs was too vague. He said that under EU law the rules must clearly say exactly what type of goods and services are blocked. For example, a rule saying that you can’t claim back VAT on entertaining costs for providing food, drink, accommodation or transport would be sufficiently clear. On the other hand, just saying that reclaiming VAT isn’t allowed for business gifts or entertainment isn’t sufficient, as the type of goods or services involved aren’t specifically named.

A rule for all

Although the AG’s decision related to two Dutch companies, it will equally apply to all VAT-registered businesses in the UK, as the EU rules affect all countries in the community.

False start for making claims

Some accountants have been telling their clients they should make retrospective claims for VAT on all entertaining costs now. However, our view of this is that a claim can’t be made until the AG’s decision becomes law. That won’t be until the European Court makes its judgment. We’ll let you know when it does. In the meantime, hold off making a claim.

What’s entertainment?

Not all entertaining costs will be affected if the European Court decision agrees with that of the AG. The rules are tricky, but in essence gifts of goods or services with no direct business link will still be subject to the VAT block, although there’s an exception for gifts in certain circumstances (yr.10, iss.6, pg.6, see The next step). The type of entertainment costs on which VAT will be reclaimable are those where there’s a business motive.

Example. If you’ve always put on a summer party for your customers to promote your business, and it costs £3,525 to host, you’ll be able to reclaim VAT of £525. You’ll be able to make a retrospective claim but it will be limited to the last four years. Nonetheless, in this example that’s still £2,050.

Tip 1. If the VAT unclaimed is less than ÂŁ10,000 you can, when the time comes, simply reclaim it by including it in Box 4 of your next VAT return.

Tip 2. If you’ve paid VAT on business entertaining costs in the last four years, compile the details now so that you can make a claim as early as possible. Don’t wait for the Taxman to issue his advice on the issue, that’s likely to take an age!

For a previous article on VAT and entertaining costs, visit http://tax.indicator.co.uk (TX 10.13.07).