business entertainment for overseas customers

An ECJ decision has forced HMRC to reconsider its position on business entertainment. Prior to the decision, their view was that the recovery of VAT on entertaining clients, contacts and suppliers was precluded across the board.

Because of provisions surrounding the UK’s adoption of VAT, the ECJ has now held this in unlawful where the entertainment is supplied to an overseas customer. As a result, businesses can submit claims to HRMRC going back a maximum of four years to recover VAT which was previously unclaimed.

As a minimum any claim should be supported by:

• details of the overseas customer
• the type of expenditure e.g. meals to support business meetings
• the amount of VAT claimed
• evidence that VAT was incurred and not claimed previously

However, HMRC takes the view that unless the expenditure is strictly for business purposes, there may be a matching output VAT charge which could cancel out the input tax, and make a claim not worthwhile. What HMRC would view as being “strictly” for a business purpose is a moot point. But it gives some examples.

A meeting in a staff canteen to facilitate a business meeting is acceptable. The same applies if there is no canteen and external caterers provide food for a working breakfast or lunch. Similarly, where meetings are being held at external venues because of a number of attendees, or a lack of internal facilities, this should be accepted.

However, the inference is that if high end caterers were used at an evening meeting just to catch up with a client who happened to be in the UK, where there was no strict business agenda, it seems unlikely HMRC would accept the claim. HMRC specifically states that general entertainment for overseas customers such as evening meals, trips to sporting events, golf days and visits to night clubs are likely to be challenged on the basis there is no strict business purpose, thus giving rise to an output tax charge to cancel out the input tax claim.

Businesses should then consider whether it is worthwhile submitting a retrospective claim, and also setting up procedures to ensure that VAT incurred in the future is identified and considered for recovery.

If you wish to discuss whether the type of expenditure you incur might qualify then please contact Phil Salmon on 0207 969 5611.