Your sales and customer service teams travel extensively to visit existing and prospective customers, wining and dining them on occasions. How much, if any, of the VAT paid on those expenses can you reclaim?
Employee expenses
Just because an expense is incurred by an employee while doing their job it doesn’t follow that the VAT relating to it can be reclaimed. To qualify, the expense must be for business. For example, if an employee or director uses company money to pay for a personal expense, such as a meal out, the VAT included in the bill can’t be reclaimed. Even where an expense is business related the VAT might not be reclaimable.
Business entertaining
Generally, VAT on expenditure for business entertaining is blocked by a specific rule and so, with one exception relating to customers etc. from overseas, it can’t be reclaimed in any circumstances. This includes providing “hospitality of any kind”, such as paying for food and drink, hotel accommodation for staff and customers where business entertainment is the reason for the expense.
Tip. VAT incurred on staff entertainment (as opposed to business entertainment) can be reclaimed.
Expenses incurred by employees
HMRC says that VAT on the cost of entertainment and the related subsistence of employees can’t be reclaimed “unless the provision of entertainment is incidental to its provision for others”. The following example illustrates how this works.
Example – part 1. Jason is the sales manager of Acom. He travels 170 miles to meet a new client. He decides to travel the evening before the meeting and stays overnight in a hotel. He could have made the trip in a single day but it was more convenient for him to stay over. The meeting goes well and Jason invites the customer to join him for lunch. While HMRC might argue that Jason’s choice to stay overnight wasn’t absolutely necessary, this is irrelevant for VAT purposes. The purpose of the trip was for Acom’s business and the overnight stopover was directly related to it and not the entertainment of a customer. It’s therefore a subsistence expense and Acom can recover the VAT paid on the cost of the room and meals. However, the VAT position for the cost of lunch with the customer is more tricky.
Example – part 2. The meal taken with the customer is clearly business entertainment and so the VAT is normally blocked. However, it can be argued that since Jason would be eating lunch anyway his share of the bill is a subsistence expense and so the VAT on that part, but not that relating to the customer, is reclaimable.
Tip. Even if the meal was not subsistence for Jason, the expense would be incidental to the provision of entertainment to the customer and so reclaimable under that rule. Therefore, out of the expenses incurred on the business trip the only VAT not reclaimable is that relating to the customer’s share of the lunch bill.
VAT incurred on an employee’s expenses on a business trip, e.g. hotel costs, can be reclaimed where they aren’t directly linked to business entertainment. What’s more, VAT can also be reclaimed in respect of the proportion of costs for an employee linked to business entertainment if they are incidental to the entertainment.
The Next Step
HMRC’s guidance on the meaning of incidental expenses
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.