Input tax claims on sponsorship and entertaining costs are more likely to be closely checked by HMRC than for many other expenses. What issues should your clients consider, particularly for sponsorships, before making a claim on a VAT return?

Entertaining block

Generally, input tax cannot be claimed on the costs of business entertainment unless it directly relates to staff or overseas customers. The definition of entertaining is that it relates to “free hospitality” provided to a person or group of persons, e.g. food and drink, a trip to a sporting or cultural event or overnight accommodation. If hospitality is not given freely then it falls outside of the input tax block.

Pro advice. Be aware that input tax is also blocked on entertaining costs relevant to staff if the employee’s function at an event is to act as a host for non-employees. If there is a combination of employees and non-employees at an event, with no hosting function for the employees, then input tax should be apportioned.

Staff entertainment

There is no problem with your clients claiming input tax on the costs of a staff event, such as a social event to celebrate a successful trading year. HMRC accepts that rewarding staff for hard work is important in the business world. The good news is that there is no monetary limit on the amount that can be spent on a “per head” basis, unlike the £150 limit that applies for benefit in kind purposes. However, input tax cannot be claimed on the costs of entertaining spouses, ex-employees, retired employees (including those receiving a company pension) or any other person not on the payroll.

Pro advice. Your clients could consider making a small charge to non-employees. Output tax will be due on the money received but input tax can then be claimed on related costs because free hospitality is no longer being provided, i.e. the input tax block is removed. The input tax claim will hopefully exceed the output tax due on the payments received, therefore producing a useful VAT saving.

Overseas customers

There is no problem claiming input tax on the costs of entertaining overseas customers. However, if the expenditure does not relate to business meetings, and the entertainment provided is not “reasonable in scale and character”, then a private use output tax charge will apply, i.e. cancelling the input tax gain.

Pro advice. HMRC’s guidance on entertaining overseas customers can appear ambiguous. The reality is that there is no problem with your clients claiming input tax on a light lunch and tea or coffee provided at a business meeting. However, an output tax charge would apply if the entertaining was provided at a non-business function, e.g. a trip to the theatre, or if the food and drink were very lavish, e.g. champagne and caviar rather than sandwiches and coffee.

Subsistence expenses

There is a useful opportunity to claim input tax on the subsistence expenses your clients pay to their subcontractors, e.g. food, drink and overnight accommodation. However, any payments must be made on the same terms that apply to subsistence expenses for employees.

Pro advice. Input tax cannot be claimed on the travel expenses for the subcontractors, e.g. the fuel they use in their vans.

Example. ABC Flooring in Luton has a big contract in Liverpool which requires its workers to stay overnight in the city during the week. ABC has agreed to pay for breakfast, evening meal and hotel accommodation costs for both employees and subcontractors. Input tax can be claimed on all costs in this situation, i.e. including those expenses that are relevant to the subcontractors.


Input tax can only be claimed on an expense if it is incurred for the “purpose” of a business. This condition also applies to expenditure on sponsorship activities. This is a different test to an expense being incurred for the “benefit” of a business, and the latter is not sufficient. To give an example, if you have a builder client who plays golf, he might argue that he can claim input tax on his golf club membership fee because he wins a lot of business in the clubhouse or during matches. However, the purpose of the expense is that he enjoys playing golf and therefore input tax cannot be claimed.

Pro advice. Somewhat surprisingly, in D Scott v HMRC [2019] TC07228 the First-tier Tribunal accepted that 10% of a sole trader’s golf club membership had a business purpose and input tax could be claimed on this percentage of the expense. Input tax apportionment is therefore valid if there is partly a business purpose.

Business motive

The challenge for your clients is to be able to justify the business purpose of a sponsorship arrangement. The exposure in sponsoring, say, a 10k race in the town or city where the business is established (with the business name included in the event title) would almost certainly be accepted by HMRC as a genuine sponsorship deal. It accepts that a business must promote and advertise its activities in order to increase sales and profits. However, there is a potential problem if there is a close link between a sponsorship opportunity and the personal hobbies of a business owner, director or relative.

Pro advice 1. To understand the approach taken by HMRC officers when they check input tax claims on sponsorship expenses, see HMRC’s manual VIT44300. This guidance lists specific questions that officers will ask about the purchase of a racing vehicle or any other asset that your clients claim will promote their business.

Pro advice 2. A useful approach is to stand back and consider how the expense looks in the eyes of an HMRC officer reviewing an arrangement. For example, a building business in Luton would not really be able to justify claiming input tax on the costs of a racing car that participates in events held in Scotland.

Record keeping

If your clients feel that an input tax claim on a sponsorship expense is justified, advise them to keep a written record that will show HMRC how the advertising and exposure will identify their business name, the products that they sell and how customers can make contact, e.g. via a website, email or telephone link. For example, it would be very difficult to justify an input tax claim if the only sponsorship benefit was the company name being printed on the side of a racing vehicle, with no other information about what products or services are sold by the business.

Donation or sponsorship?

In some situations your clients might make a payment to a charity or not-for-profit organisation. They derive some advertising benefits, but the reality is that part of the payment is a donation to support a worthwhile cause. In such cases, your clients should ensure that VAT is only charged on the sponsorship element of the payment because donations are outside the scope of VAT. HMRC recently updated its guidance at VAT Notice 701/41 (see Follow up ) to recognise this mixed payment situation.

Remote link

In Lai’s Ltd v HMRC [2014] TC03352 the appeal concerned HMRC’s decision to disallow input tax of £31,219 claimed by the company on the purchase of a power boat. The director claimed that the purpose of the expense was to help the company win major catering contracts at international boat races, but the reality was that the expenditure was motivated by the director’s personal interest in racing. The Tribunal decided that a prudent business person would not spend £156,095 plus VAT on an asset that only gave a remote link to its trading activities in the catering world. The appeal was dismissed.

The biggest hurdle for sponsorship costs will be to show a conclusive business purpose, not merely a benefit, in incurring the expense. Ensure that your clients can show this link by getting them to document the precise likely benefits to the business prior to incurring the expense.

The next step

VAT Notice 701/41
HMRC guidance – VIT44300

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