“Private benefit” charges will affect business entertainment VAT claims

HMRC’s revised Business Entertainment Notice 700/65 issued on 29 February 2012 states that a “private benefit”, triggering an output tax charge, will arise in almost all cases where business entertainment is provided and the VAT is reclaimed on entertaining overseas customers.

This interpretation by HMRC has not been widely publicised, in what appears to be HMRC effectively trying to close the door on reclaiming VAT on the cost of foreign business entertainment.

HMRC say that to avoid the output tax charge, the business can decide to reclaim no VAT on entertainment and treat the input tax as non deductible.

HMRC consider that hospitality provided because it would be polite, because it is expected, or because it would improve relationships is not for strict business purposes and would incur an output tax charge if the VAT on expenditure was reclaimed.

Examples of HMRC’s VAT treatment of business entertainment taken from the new notice are set out below:

Meetings:

If normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, then a private use charge will not apply.

If there is no other alternative than to hold a meeting outside the office, only similar basic provisions would be allowable. Hospitality provided following a meeting will not meet the strict business purpose test and neither will hospitality involving the provision of alcohol. Taking a customer to a restaurant is very likely to lead to a private use charge.

Corporate hospitality events:

Many businesses offer their customers or potential customers’ general entertainment and hospitality.

Examples include:

                        – golf days

                        – track days

                        – trips to sporting events

                        – evening meals

                        – trips to nightclubs

Where the related expenditure is incurred for the purpose of the business, and recovered, an output tax charge will be due. This is because such events are unlikely to have a strict business purpose or are necessary for the business to make its supplies.

 If the entertainment provided triggers a private use charge the business can treat the VAT incurred as non-deductible rather than deducting the input tax and offsetting with an output tax charge.

Businesses should consider the particular facts of each claim and whether the claim for input tax is incurred necessarily for the taxable person to provide goods or services.

HMRC apply the private benefit charge on a “strict business purpose test” basis which can often be challenged.

We would be happy to discuss any issues surrounding VAT claims.  For further information please call TaxDesk on 0845 4900 509 and ask for Vaughn Chown.