After a difficult trading period you’re planning an event to encourage existing and potential customers to take a fresh look at your products. You’ll be laying on free food and drink at a local hotel. Will you be entitled to reclaim the VAT element?
Business purpose
As a rule, the VAT you pay on goods or services used for business purposes can normally be recovered as input tax. The trouble is HMRC’s view of what counts as a business motive can be somewhat narrow. Unless there’s a “direct and immediate link” between an expense and a VATable supply, VAT can’t be reclaimed. Not only is this a short-sighted view, it’s wrong.
Indirect but clear
The UK and EU courts (these can still be relevant despite Brexit) have ruled a number of times that the direct and immediate link requirement is wider than HMRC likes to think. It doesn’t mean that there must be a specific sale or supply linked to an expense, but that there must be a direct and immediate link to your business as a whole. A good example of this is the Folkestone Harbour case where the court said that the cost of an ornamental structure was intended to create an ambience that would encourage visitors to the retail site to spend money there.
Tip. If HMRC challenges a claim for VAT on the cost of putting on a promotional event, refer it to the rulings in Folkestone Harbour and similar cases.
Another hurdle
With persuasion HMRC ought to concede that a free-of-charge promotional event is sufficiently linked to your business to justify reclaiming VAT on its cost. However, a picky HMRC officer might look at specific costs within the overall expense of putting on a promotional event to see if there are any elements on which they can refuse a claim.
Are you being hospitable?
VAT paid on the cost of providing business entertainment can’t usually be recovered. HMRC’s definition of entertainment includes any form of “hospitality”. This rule applies even if the reason for incurring an expense can be shown to be linked to your business.
Trap. It doesn’t matter if an expense has a business motive or not, if it falls into HMRC’s definition of entertainment you can’t reclaim the VAT. For example, except where you’re “entertaining” a person from overseas for business purposes, any food and drink provided in the course of a business event counts as entertaining and any VAT paid on it can’t be reclaimed.
Zero tolerance
HMRC takes a strict line on disallowing VAT on the cost of meals for business entertainment. There’s no de minimis limit which it applies to allow VAT to be reclaimed on the cost of modest meals. However, it won’t usually object to you reclaiming VAT on light refreshments, e.g. tea, soft drinks, biscuits and maybe even a sandwich if an event or meeting is long and goes over lunchtime or into the evening. But this only applies where it is impractical to suspend the event for the attendees to go elsewhere for refreshment.
Tip. If you buy in fresh food, say sandwiches, cold meats, salads, from a shop (not a caterer), they are zero-rated, so you won’t pay VAT.
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.