There is almost a £1.5 billion expenditure annually on various events and corporate hospitality, according to Business Visits and Events Partnership (BVEP) Research. Around 35% of the UK economy covers solely the event industry as per their report.
Point being made is; entertainment is a significant part of overall business finances. Ignorance in this regard can be highly costly. It’s certainly wise for a business to understand business entertainment and the effects it may have on its tax position.
You might be offering entertainment to businesses, clients, employees, and stakeholders. We bring you a simple guide on how VAT works and how to navigate it under all these different dynamics.
What Counts as Entertainment?
Entertainment serves more than simply recreation needs. In fact, the right entertainment can aid in growing and extending your company. HMRC defines what falls under the category of entertainment according to certain rules.
- If you gave consumers or workers free food and beverages
- Providing the recipient with free lodging
- If you purchase admission to a cultural event for your international clients like concert tickets, theatre admission etc.
- Free admittance to clubs and other similar establishments
- If you purchase tickets for a sporting event for your clients.
- Any expenses while you employ outside organisers to plan the business event.
- Free coupons, samples, and promotional items
Entertainment In the Corporate World
In the business world, entertainment is not too different from its real meaning. It is an act of hospitality. A business organisation provides it to customers, stakeholders, or workers for enjoyment or as goodwill gesture. Business entertainment can take the form of a social activity, an invitation to a meal or a sporting event. By planning such events, companies strengthen their brand vision and image while giving their visitors an enjoyable experience to remember.
UK businesses are often not aware of possible tax refunds on entertaining their clients. They don’t even have a general idea of tax rules and regulations for such activities.
After a certain practice, they may say they’re getting of it. But then come certain complications. Making it difficult for firms to really claim the corporation tax exemption on business entertainment.
It may show on your company’s expense report that your customers or clients have received “benefits in kind,” making them responsible for the taxes associated with those benefits. Depending on the type of business entertainment you intend to offer, involving your business accountants would help you avoid mistakes.
Different Categories of Business Entertainment
There are various sorts of entertainment you may use to welcome both employees and non-employees and open new business pathways. The most typical corporate practices involve entertaining clients and staff at corporate events and meals. A nice spot with delicious food and some ice breaking sessions generally does the trick.
The provision of capital assets, such as boats and jets for transportation or luxury suites for overnight stay, might also be business entertainment. It could involve reserving a seat for your customers at events like concerts or festivals. If your clients are sports fans, reserving corporate seats at the stadium will aid in creating a remarkable first impression.
In the UK, value-added tax, or VAT, is levied on products and services. Most goods and services offered by VAT-registered businesses in the UK are generally subject to VA. Given that these goods and services are bought for commercial purposes, VAT can be claimed from HMRC.
The VAT handling of customer and employee entertainment, however, can be complicated and will rely on the entertainment’s particular conditions.
If you’re uncertain about the VAT handling of entertainment expenses, whether for personnel or clients, it’s always a good idea to obtain professional assistance from a VAT expert.
The guide below will educate you to a reasonable degree if you feel lost around the many factors to consider.
For Business Entertainment
The term “business entertainment” refers to any hospitality or entertainment that is supplied by a business to a person who is not an employee of the firm. The entertainment may be food, drink, or lodging.
Most business entertainment costs are not eligible for a VAT reimbursement. This entertainment consists of things like client dinners, complimentary hotel stays, and passes to cultural or sporting events.
These costs are not regarded as being entirely and exclusively for business reasons. Hence, they cannot be deducted as input taxes on the company’s VAT return.
The guidelines for business entertainment have various exceptions. For instance, if the costs incurred are fair in scope and nature and the hospitality has a commercial function, such as food and drink offered in a meeting. Firms can then claim the VAT back on hospitality provided to foreign clients.
VAT and Client Entertainment
It is one of the most common business entertainment expenses on which you cannot claim back VAT. This covers the price of providing complementary meals, drinks, or event tickets to amuse clients, suppliers, or consumers.
Because these costs are unlikely to have a clear commercial purpose or have a requirement for the company to make its deliveries, we cannot claim the VAT on them.
HMRC permits a portion of the VAT to be recovered when you employ products or services for both, business use and business entertainment.
Examples include capital goods like a yacht that is usable for both charter and business entertainment. As well as services related to the sponsorship of an event. Given that the event serves both as a means of customer amusement and advertising to a larger audience.
Entertaining Overseas Clients
Any customer who is not typically living in the UK or conducting business there is an overseas customer.
If the cost of hosting a client from outside the country is “of a kind and on a scale, which is reasonable,” as defined by HMRC, you may be eligible to recoup the VAT.
According to HMRC, entertainment that is not reasonable serves the recipient’s recreation as a secondary purpose. Giving a perk is a VAT-able supply, hence the company is required to charge output VAT on this sum. This invalidates all or a portion of the VAT that was claimed.
HMRC will not permit a claim if the entertaining is part of a corporate event, such as a golf day, day at the races or trip to some other type of event.
VAT and Staff Entertainment
In terms of VAT, employee /staff entertainment works differently than company entertainment. While firms often cannot claim back VAT on most company entertainment costs, they can for staff entertainment costs.
The term “staff entertainment” describes the costs spent by a company to amuse or host its employees, such as at social events or office parties.
You must satisfy the following prerequisites for the firm to be eligible to claim VAT back on these costs:
- Employee entertainment must serve a company need, such as maintaining or boosting employee morale or rewarding them for their hard work.
- Directors, partners, or sole proprietors may not be the only people who receive the entertainment.
- Workers may not host non-employee guests.
If you completed these requirements, the company may deduct the cost of entertaining employees from VAT as an input tax on their VAT return. However, the company cannot claim VAT reimbursement on the cost if one does not complete any of the requirements.
Things to Remember
According to VAT Notice 700/65, you might be eligible to get VAT refunded on the price you paid to amuse your personnel at events like staff parties or other similar gatherings.
To do so, though, you’ll need to show that the entertainment was primarily for the benefit of your staff:
Determine eligibility: Verify whether the category of entertainment expense you are claiming for qualifies for VAT recovery.
Establish the entertainment’s business case. Verify that you paid the entertainment costs for work-related, not private, reasons. The entertainment needs to be useful to your workers and relevant to your industry.
Maintain records: Keep track of all staff entertainment costs for which you want to submit a VAT claim. Receipts, bills, and other pertinent records fall under this category.
Can you claim VAT on gifts given to clients?
Gifts of merchandise manufactured for non-commercial objectives include those given for personal use, such as a gift to a friend or relative. If you did not buy the products for commercial use, they are not business assets in books, therefore you cannot claim any VAT paid on them as input tax.
Is entertainment in the UK tax deductible?
Even though HMRC does not view client entertainment as an admissible expense, it is nevertheless prudent to pay for entertainment (such as a meal with a possible client) using your company’s business bank account.
How do you keep track of entertainment costs?
Include the following in your entertainment expense records:
- The entertainment dates.
- The people’s names.
- your professional connection to the people you entertained.
- the location of the entertainment.
- The purpose of the entertainment for profit.
- The topic or activity of the business conversation.