Split the bill to save VAT

The rules say that you can’t reclaim VAT on the cost of entertaining your customers etc. But in some situations a claim is allowed for associated costs. When does this apply?

Can’t claim?

General rule. The reclaiming of VAT on the costs of entertaining business guests is specifically excluded by legislation. This covers the provision of hospitality of any kind, including the provision of food and drink, hotel accommodation, etc.

Exception to the rule. However, the VAT on the entertainment and subsistence of employees can be recovered if “the provision of entertainment is incidental to its provision for others”. If this happens just once a month even over a three-year period, this could amount to a substantial figure. But what exactly does this mean?

Can claim!

Example. Brummy Ltd, based in Birmingham, sends a sales executive to an important meeting with a new client, Geordie Ltd, based in Newcastle. Brummy Ltd sends him up the day before the meeting and he stays in an hotel for the night so that he is fresh for his meeting in the morning. The meeting goes well and the sales executive invites Geordie Ltd’s Finance Director and Buying Manager to join him for lunch. How much VAT can Brummy Ltd recover?

Obvious subsistence. Brummy Ltd can recover the VAT on staff subsistence expenses, so they will have no problems with the VAT on the sales executive’s hotel room.

Not so obvious. Brummy Ltd can also recover a third of the VAT on the meal being their salesman’s share of the meal.

Why? In our example, the purpose of the trip was to finalise a sales contract, any business entertainment was secondary to the main purpose of the trip. The sales executive was 300 miles from his normal place of work and would have had to buy lunch for himself anyway.

Tip. HMRC will allow you to reclaim a proportion of the total VAT on the bill. It will not insist that you identify who had what starter and main course.

Won’t claim

This concession does not affect situations where employees are acting as “hosts”. If your business organises a business entertainment function where employees attend to host the function none of the VAT on the costs of the event can be reclaimed.

How far back ?

Records. Chances are you keep a tight control on expenses anyway, so probably have sufficient records to make a claim.

The four-year rule. If your business has not recovered the VAT on these costs in the past you can go back over the last four years’ records and recover any previously unclaimed VAT.

How to claim. Do your sums and if the unclaimed VAT comes to less than £10,000 just put it through on your next VAT return. To claim back more than this write to the HMRC separately.

Other taxes

The rules for deducting expenses for income tax and Corporation Tax are different to the VAT rules. So some of the subsistence costs themselves may not be tax-deductible, although the VAT is still recoverable.

Split the bill to save VAT

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