In Revenue & Customs Brief 44/10, HMRC announced that it had reviewed its policy on the treatment of business entertainment provided to overseas customers in light of the ECJ decision in Danfoss and AstraZeneca (C-371/07). Following the review, HMRC hasconcluded that the UK’s input tax block on the business entertainment of overseas clients is inconsistent with EU law, and that UK law will be amended shortly.
The UK has blocked the recovery of input tax on business entertainment since the inception of VAT. Initially, the one exception to the block was where the business entertainment was provided to an overseas customer, but in 1988, the law was amended to block recovery of those costs as well.
HMRC will now accept claims for VAT previously restricted on the entertainment of overseas customers, subject to the normal four-year cap. The Brief reiterates that the block on entertainment provided to anyone other than an ‘overseas customer’ remains effective. When making a claim, the Brief says that the following supporting evidence will be needed as a minimum:
- details of the overseas customers;
- type of expenditure, eg meals to support business meetingsamount of VAT claimed;
- evidence that VAT has been incurred and not previously been deducted;
- for historical claims, evidence of the type of entertainment the business normally restricts by reference to recently rendered tax periods.
HMRC states that, in some circumstances, an output tax charge to reflect private use might arise which cancels out any deductible input tax. In such cases, there is no benefit in making a claim, so the issue of a private use charge needs to be considered when deciding whether to make a claim. The private use charge ensures that a taxable person gains no advantageover private individuals simply because it is VAT registered and can recover the VAT incurred.
The ECJ has considered when an individual can benefit from a business expense without a private use charge arising, and from the decisions in two particular cases, Julius Fillibeck Sohne (C-258/95) and Danfoss and AstraZeneca (C-371/07), it should be very narrowly defined. The two cases introduced separate tests to be applied to private use of business expenditure. As no advantage arises where the VAT is not recovered by the taxable person, there is no need to consider the private use charge unless you intend to recover the VAT paid. The Fillibeck Sohne case, which concerned free transport for construction site staff, introduced a ‘necessity test’. This considers whether it is necessary for the taxable person to provide goods or services that are privately enjoyed in order for him to make his taxable supplies. The Danfoss and AstraZeneca case, which concerned free meals to employees and business contacts, introduced a ‘strict business purpose test’. This dictates that no charge arises where the costs are incurred for a strict business purpose.
HMRC says that if the conclusion after applying the tests results is that a private use charge applies, the input tax should be simply treated as non-deductible rather than deducting it and then offsetting with an output tax charge. The Brief closes with three scenarios to assist in determining the correct treatment of the entertaining costs. The three scenarios are:
1.Meetings in your office
HMRC considers that where you entertain overseas customers in your staff canteen or similar, and the entertainment is provided to facilitate a business meeting, the VAT on such expenditure will be recoverable, and no charge to reflect the private use will arise
2. External meetings/events
Where a meeting cannot be hosted in the office (eg there is a large number of attendees or you have no in-house facilities), the principles set out above can still be used to determine if input tax is recoverable or a private use charge should be applied. For example, basic refreshments provided at a training event or meeting will be treated as if it were supplied by your own inhouse canteen. However, where it goes beyond merely providing basic food and refreshment to facilitate the smooth running of the event, do not recover any input tax or, failing that, account for output tax under the private use charge.
3. Corporate hospitality events
Many businesses offer customers or potential customers general entertainment and hospitality (eg golf days, trips to sporting events, evening meals, trips to night clubs). HMRC will generally deny deduction of VAT in respect of these events, or else will require an output tax charge, as the cost is unlikely to have a strict business purpose, or be necessary for the
business to make its supplies.