Following a case in the European Court of Justice, HMRC has changed its position relating to recovery of input tax on entertainment expenses.

Historically input tax has never been claimable since VAT was first introduced in the UK but following the Danfoss and Astra Zeneca case, HMRC have concluded that the block on recovering input tax on overseas customers is inconsistent with EU law.

Going forward businesses can now claim the input tax incurred when entertaining overseas customers and subject to a four year rule HMRC will also allow claims for previously restricted input tax on the entertainment of overseas customers.

The VAT notice 700/65 was amended in November to reflect this change.

HMRC Brief 44/10 details this and also sets out three scenarios to help businesses to ascertain whether the input tax on entertainment costs is claimable:

1) Meetings in the office: HMRC considers that when an overseas customer is entertained in a staff canteen or similar to facilitate a business meeting, the input tax on such entertaining will be recoverable. HMRC takes the view that any private benefit derived by the overseas customer is accessory to the needs of the business

2) External meetings or events: where meetings cannot be held in house due to lack of space or facilities, the same general principle will apply as for meetings in the office, and the input tax will be recoverable. This will apply only to the basic provision of refreshments and food. If the expenditure goes beyond that, there should be a private use charge, or, alternatively, no claiming of the input tax

3) Corporate hospitality events: businesses sometimes offer customers or potential customers general hospitality, such as golf days and the like. HMRC will not allow the input tax deduction as such events are unlikely to have a strict business purpose.

Courtley West

Accountants in Leeds