Claiming VAT on entertainment and subsistence: the dos and don’ts

Claiming VAT on entertainment and subsistence: the dos and don’ts

Claiming back VAT on your purchases is common practice for VAT-registered businesses. But if you’re claiming for the VAT paid on entertainment and subsistence, things can get complicated.

There are clear rules around what is (and what isn’t) claimable for entertainment and subsistence purposes, but applying those rules correctly can be confusing. That can lead to incorrect claims, misleading advice for employees and somewhat exaggerated expense claims. And when we say exaggerated, we’re not joking.

In our many years of helping clients with their VAT, we’ve seen a husband and wife-owned business try to claim Fleetwood Mac tickets from an anniversary night out, a client claiming the cost of his daughter's Bat Mitzvah, and a company trying to claim VAT on the food bill of a wake for a deceased director...yes, really. So to help you get your VAT return right, let’s take a look at the main areas where you can make a claim – as well as some of the expenses that definitely don’t qualify!  

 

What are the rules for entertainment claims?

The basic guidance for business entertainment, is that you can’t claim back the VAT you’ve incurred. But for staff entertaining, where money is spent on employees, you can make a claim. So, in essence, it comes down to whether the money is being spent on an employee in the company, or on a client/third party outside of the business. Any entertaining you carry out with clients is not classed for business purposes, meaning it’s not eligible for claiming back VAT.  

 

Why do many businesses get it wrong?

The VAT rules are pretty clear, and should be easy to apply. The reason that many business get it wrong comes down to what businesses tend to class as ‘business entertaining’. If a business owner takes a client around the corner for a meal, the assumption is that the business can claim VAT on that. But the reality is that you can’t – that kind of wining and dining of clients is actually classed as ‘hospitality’, rather than ‘business entertainment’. And hospitality is not something you can claim the input VAT back on.

What’s important to grasp here is the definition of client entertaining, and how that kind of entertainment doesn’t have a business purpose according to HMRC’s guidance. Let’s take a look at the two contrasting viewpoints re entertainment:

• The business owner’s view – Business owners see taking their customers out as a means of promoting or advertising their business. It’s perceived as a way to entertain clients, make more sales and bring in higher revenues. So this kind of ‘schmoozing’ is seen as vital to the long-term success of the business.
• HMRC’s view – HMRC sees entertaining clients as hospitality. So HMRC’s viewpoint is that the business is making money from this interaction – bringing in sales and profit – which then goes into the owner’s pocket. So it’s fairly evident why the rules say no to these kinds of claim.

There’s a perfectly reasonable argument for entertainment having a business purpose. But the reality of the situation, and the guidance from HMRC, is that entertainment can’t be claimed – and there’s absolutely no way of getting around that.  

 

What are the rules for subsistence claims?

Subsistence is another area where VAT is commonly claimed incorrectly – where ‘subsistence’ is classified as reimbursing employees for food and drink expenses while carrying out their role.

If you’re a sole trader who has a favourite pub for lunch, or a coffee shop you go to regularly for coffee and food, many people will see that as falling under ‘subsistence’. But, in fact, it’s only classed as subsistence when you’re away from your normal business premises.

Conversely, if you’re an employee who’s been sent away on a stay-over training day, where you’ve stayed overnight in a hotel and have bought your dinner there, this expense would be classed as subsistence. So, you can only claim VAT on subsistence when your employees are working away from their usual place of work – not for every food and drink expenses they incur.  

 

What CAN'T you claim VAT on?

The problems we see regarding entertainment and subsistence claims generally come down to the common misconception that you can always claim VAT. It’s these popular misconceptions, and how they’re spread by word of mouth, that stop people following HMRC’s guidance. So let’s take a look at a few examples of thing you definitely CAN’T claim VAT on:

• Taking clients to a fancy restaurant to encourage them to sign a contract
• Drinks parties for clients where employees are not included
• Entertaining clients at a sporting or music event as a thank you for their business
• Buying lunch every day at the sandwich shop next to your office

In short, if you’re claiming for entertainment of non-employees, or claiming for local subsistence costs, then HMRC will very quickly explain that these claims are invalid.  

 

What CAN you claim VAT on?

What are the main areas where you can claim VAT on entertainment and subsistence? Some key areas where you CAN make that VAT claim include:

• Team drinks for your employees at month-end
• A staff away-day as part of a team-building exercise
• Your annual office Christmas party (as long as it’s only for staff)
• The cost of lunch for employees working off-site at a client

Talk to us about VAT

I hope we’ve removed the mystery and misconceptions around VAT claims for you. By applying HMRC’s guidance in the right way, entertainment and subsistence needn’t be complex.

If you think you might be getting your claims in a muddle, why not come and talk to one of our VAT experts and we’ll help you get the best possible understanding of when you can (and when you can’t) claim back that all important VAT.

 

Contact us to arrange a meeting with one of our VAT specialists