At this festive time of year it is tempting to carry out a bit of entertaining to warm the commercial hearts of others towards our wares. If one's own wares are entertainment, then the spend ranks, arguably, as both entertainment and sampling of the product itself.
For VAT purposes (and excepting some narrow cases concerning entertainment of overseas customers) it is not possible to reclaim VAT on entertaining. It is, however, possible to reclaim VAT on the cost of samples, and, following the decision in the case of EMI there is no technical limit on the number of genuine samples of a product that can be issued and on which VAT can be claimed. So, where does that leave the entertainment industry, such as hotels, clubs, pleasure aircraft, pleasure ships and so on? If the entertainment in question is focussed on potential users of the entertainment, or people who can encourage others to use the product, can it then be regarded as a sample, and thus VAT recoverable, or must it nonetheless be entertainment, and non-recoverable?
That appeared to be the crux of the debate in C I Cruises (TC1598). A company specialising in providing recreational cruises decided to "launch" a vessel with a party. It invited people who could act as ambassadors for the product or who might actually purchase it. They included travel agents, journalists,"celebs" and even "royalty". It can be seen from this mix that the bash went just a little further perhaps than being a service sampling event, but that is the function it seems realistically to have been expected to have fulfilled.
Unfortunately for the taxpayer the tribunal nonetheless held that the costs were in the nature of business entertainment and that this blocked VAT recovery despite the intention being to offer a sample of its wares. It is tricky to see an argument against this decision in legal terms. It was caught by a catch-all aspect to this legislation. The legislation is therefore unfair to the entertainment sector. A case perhaps for some lobbying to change the scope of the legislation. However, with fairness tends to come complexity, which is a reason why it is unlikely to be changed.
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