Assuming your business is VAT registered and not partly exempt, input tax can be claimed on your expenditures.
However, entertainment expenses are subject to a specific tax block and the scenario below demonstrates this concept clearly.
While working on client site, John, an audit partner in an accountancy firm often visits restaurants for lunch. During this time, he is usually accompanied by two or more directors of the company being audited (client) and a member of his audit team (employee).
We consider the treatment of each category of people involved in this case below:
Can input tax be claimed for the client?
As the expense here is classified as ‘hospitality of any kind’ and is business entertainment expense within the VAT regulations, no input tax can be claimed on the ‘client’ meals.
However, if the client was an ‘overseas customer’ and the expense related to a ‘business meeting’, then input tax could have been claimed on the meal cost.
Also, there would be no output tax liability against the partnership.
Can input tax be claimed for the employee?
Provided the meal cost for the employee is incurred as he is away from the office on a business-related job (audit), input tax can be claimed as the expense will be considered ‘subsistence’ rather than ‘entertainment’.
Similarly, in case the employer paid for the hotel accommodation for the employee, then again input tax can be claimed.
However, if the employee ‘acts as host’ to the client, then the input tax will be blocked on the cost of his lunch through the business entertaining rules.
Can input tax be claimed for the business owners?
Generally, a claim is allowable in case the business meeting/audit work is at least five miles away from the main trading base.
In the above scenario, input tax can be claimed on lunches for the business partner. if the expense in considered to be ‘subsistence’.
This generally indicates a business purpose away from the main trading premises of the business,
How should input tax for the staff Christmas party be treated?
As this expense is for a clear business purpose and is seen as a reward for hard work and to motivate, there is no problem for input tax purposes.
Such expenses include an employer paying for employee meals and other staff entertaining costs.
For instance, a theatre trip to celebrate a trading anniversary, the cost of an office Christmas party or a meal out at a local restaurant following a good trading month are all expenses for which input tax can be claimed.
However, input tax on entertaining non-employees and employee costs where they are acting as hosts are blocked.
Where entertainment is available to staff generally within the firm, then again there will be no problem in claiming input tax on the cost of the meals for business owners.
But, if the directors or partners entered local restaurant meals into the business records and claimed input tax, there would be a problem.
One point, however, that must be noted is that as far input tax claim on the staff meals is concerned, there is no maximum limit as it is not restricted to, let’s say, a value of £150 per head.
What is the input tax treatment for guest meals?
An input tax block would apply to the cost of the meals provided the directors decide to pay not only for the staff meals at the annual Christmas party but also for the cost of guest meals including relatives, spouses, suppliers and customers.
This is because free hospitality cannot be provided to non-employees.
However, if the guests are required to pay a small charge, then the meal will not be deemed to be provided free of charge. And, as a result, there would no business entertainment situation.
Therefore, as long as output tax is accounted for on each meal sold to a guest, input tax can be claimed on the cost of the guest meals.
Can the input tax be claimed if the staff acts as hosts?
In situations where a company hires a 12-seater box at a top football match which is to be enjoyed by six employees and six non-employees, around 50% of the input tax on the cost of the box will be blocked by the business entertaining rules for the non-employees.
Afterwards, the role carried out by the employees on the day of the match will determine whether the input tax can be claimed.
For instance, provided the primary function of the employees is to ensure that the guest have an enjoyable time and place additional business orders with the company, input tax on the employee expenses will be blocked.
This is because they would have been acting as hosts to the non-staff.
On the contrary, if the employees are just enjoying the game without any entertaining function, then input tax can be claimed on their part of the cost.
What is the court rule on determining whether a UK business can claim input tax on entertaining overseas customers?
The European Court of Justice rules that:
- Input tax can be claimed on entertaining of overseas customers. However, if the entertainment is not business related and is not deemed to be necessary to the making of taxable supplies, a ‘private-use‘ output tax charge will apply (also known as ‘strict business purpose test’ or ‘necessity test’).
- Limited hospitality provided at a business meeting to discuss business related matters with overseas customers will not present any issue. However, if the gathering is not specifically linked to business, for instance, a trip to a comedy show or tickets to formula one race, an output tax charge will apply.
At the same time, HMRC expects a business to only recover input tax (with no output tax for private use) if the entertainment is clearly used for the making of taxable supplies while being being reasonable in scale and character.
However, the definition of what comprises ‘reasonable in scale and character’ is somewhat controversial.
As a general rule, though, HMRC refers to an expense being allowable if the meal in question is ‘normal basic food and refreshments such as sandwiches and soft drinks’.
Please also note that there is no use making a claim in relation to overseas suppliers or other business contacts based outside the UK.
Interestingly, HMRC lists ‘corporate hospitality events’ such as evening meals, track days, golf days, trips to night clubs and sporting events as events where an output tax will be needed as the entertaining is not necessary for making taxable supplies
What is the input tax position in relation to the subcontractor expenses?
Consider an example where the owner owns a building business and uses a combination of employed builders and subcontractors to carry out a job.
The owner agrees to pay the petrol bills of the sub-contractors who use their own vehicles (provided they present a petrol receipt) along with their meal and hotel costs for jobs that are away from the local area.
As far as same treatment is given to sub-contractors in terms of expenses as employees on the same job, input tax can be claimed on the ‘subsistence’ costs relevant to the sub-contractors.
However, no claim can be made on any of their travel expenses i.e. the road fuel.
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