You’re using contractors to carry out maintenance work and as well as their day rate you’re paying their accommodation expenses. Are you entitled to reclaim the VAT on these?
Input tax
Usually, you can deduct 100% of the VAT you pay on purchases which you use directly in making VATable supplies. Or, where you make a mix of exempt and VATable supplies you can reclaim a proportion of the VAT. However, you’re blocked from deducting VAT paid on certain types of purchase. The blocks are generally well known but sometimes are less obvious.
Third party workers
Say, you own three print firms. Day-to-day upkeep and maintenance of its machines is down to the employees who operate them, but repairs and servicing is carried out by the German company they are leased from. The service costs are built into the lease payments but the living cost of the engineers while in the UK aren’t. To keep these costs down you arrange and pays for the engineers’ accommodation directly.
Trap. Paying for accommodation for anyone other than an employee counts as business entertainment and the VAT on it is blocked meaning you aren’t entitled to deduct it. Subject to one minor exception, the position is the same whether the persons being “entertained” are from the UK or abroad.
Are you entertained?
Apart from the obvious, business entertainment covers hospitality of any kind you provide to anyone who isn’t an employee. It includes:
- providing accommodation
- meals and drinks
- expenses incurred when staff act as hosts.
There are exceptions to the block on claiming VAT paid on business entertainment but none apply to your situation.
Are they employees?
If the engineers count as your employees the VAT block would not apply. For this purpose HMRC uses a very broad definition of who you can treat as an employee. It includes
- a director of your company
- anyone engaged in the management of the company – even if not directly employed
- people hired casually or temporarily to work for you at an event; and
- self-employed individuals working solely under your direction, using your business’s tools, etc.
- where the amount you pay them is not linked to the profitability of your business.
As none of the above fit the German engineers their accommodation is business entertainment.
Tip. You can unblock the VAT by negotiating with the lease company so that it pays for the accommodation and adds the cost to its charges for repair and maintenance of the machines. It would cease to be entertainment and become part of the bill for its services.
Avoid the block
Keep in mind the VAT block whenever you incur business entertainment costs for anyone other than employees. Consider if one of the exceptions applies or, if not, whether an there’s alternative way to meet the expense so that the block is legitimately avoided.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.