Claiming input tax on subcontractors’ expenses

Entertaining non-employees

Food, drink and hospitality that you provide to non-employees free of charge is usually input tax blocked under the rules for business entertainment. There are exceptions, e.g. you can claim input tax on the cost of entertaining overseas customers as long as the entertainment is reasonable in scale and character. You can also claim VAT on the cost of food and drink provided to stewards at a sporting event.

There is no problem claiming input tax on the cost of entertaining staff for the office Christmas party. However, subcontractors are not employees, so the starting point is that input tax cannot be claimed on the cost of hospitality you provide to them, i.e. food, drink and accommodation.

Subsistence

However, there is an opportunity to claim input tax on food, drink and accommodation you provide for your subcontractors if supplies are made on the same terms as for your employees. This is clearly the case in the situation described by our subscriber, which is good news.

Example. ABC Flooring Ltd is based in Manchester and has won a big contract in Birmingham. The directors have agreed that all employees and subcontractors working on the job can stay in a local hotel in Birmingham from Monday to Friday and the company will pay for the costs of accommodation, breakfast and an evening meal. The hotel will raise an invoice for all costs at the end of each week. Input tax can be fully claimed on the hotel invoice, i.e. for both employee and subcontractor costs, because the arrangements are the same for both categories of worker.

Tip 1. If possible, list the names of your employees and subcontractors being provided with food, drink and accommodation on the hotel invoice(s) and their relevant status. This might be useful if HMRC reviews your input tax claim and is concerned that the expenditure might relate to spouses of employees or friends of the directors.

Tip 2. If you give employees and subcontractors the opportunity to receive extras from the hotel without charge, e.g. drinks in the bar, which you then charge them later by making a salary deduction, then you can claim input tax on the extra items as long as you account for output tax on the salary deductions.

Restricted

The above concession only applies to subsistence expenses paid to your subcontractors, i.e. food, drink and accommodation. If a subcontractor gives you a petrol receipt for fuel and you have agreed to pay this cost, then you cannot claim input tax. The supply of fuel is between the garage and the subcontractor.

The concession effectively treats the non-employees as employees for the purposes of subsistence only. However, input tax cannot be reclaimed for the following:

• pensioners and former employees
• job applicants and interviewees
• shareholders, unless they are also employees, e.g. as directors.