What Is VAT on Customer Entertainment?

Value-added tax (VAT) on customer entertainment is the tax applied to costs associated with providing entertainment for clients, customers, or other third parties. According to HMRC, any event that offers food, drink, hospitality, or recreation is considered entertainment in the UK. Due to complicated regulations, businesses typically cannot reclaim VAT on entertaining customers.

For instance, the VAT paid on the meal cannot be recouped if a business takes a customer to a restaurant. Tickets for sporting events, concerts, and other entertainment costs are subject to the same regulation. However, as will be covered later, the UK has different regulations regarding VAT on staff entertainment.

Is it possible to claim VAT on client entertainment in the UK?

There is no simple answer, you cannot claim VAT on client entertainment in the UK. HMRC Customer considers entertainment as a non-business expenditure, which means VAT is not recovered on food, drink, event tickets, or hospitality provided to customers. This also applies when entertainment is to secure the new business or maintain customer relations. However, there are exceptions, such as VAT recovery on entertainment for foreign customers such as it is directly related to business activities and is not purely social.

For employee entertainment, the rules are different. If the cost of entertainment is only for employees, such as the company party, VAT can be rectified, provided that the cost is appropriate and not part of the customer-related hospitality. However, if employees and customers participate in the same event, then the share of VAT belonging to customers remains non-perfect. Businesses should document careful expenses and check HMRC guidelines to avoid VAT reclaim errors.

Is VAT on Business Entertainment Exempt or Zero-Rated?

Whether business entertainment VAT is zero-rated or exempt is a frequently asked question. The response is neither. Businesses must pay the VAT but are unable to claim it back because the VAT on entertaining clients and customers is blocked.

Exempt supplies, like some financial services and education, are completely exempt from VAT.
Because zero-rated supplies are exempt from taxes, companies can claim VAT on associated costs.

Business entertainment is a non-deductible business expense since it is neither exempt nor zero-rated for VAT purposes.

What Is VAT Notice 700/65, and How Does It Impact Business Entertainment?

VAT notice 700/65 is an HMRC guideline that explains the VAT treatment of business entertainment. This makes it clear when VAT can be rectified and when it cannot. The notice confirms that VAT on customer entertainment is not recovering unless there is any specific commercial reason, such as:

Providing food or drinks during a chargeable training session.
Entertaining non-UK customers when it is legally necessary to do so for a business contract.

For normal hospitality, such as taking a customer for dinner, VAT notice 700/65 states that VAT is not reassessed. This applies to VAT to recreational customers, whether it is food, tickets, or events.

Is It Possible to Claim VAT in the UK for Staff Entertainment?

Claiming VAT on Staff Entertainment in the UK depends on the nature of expenses and which benefits from it. Generally, if this phenomenon is only for employees and fulfills business objectives such as team-building activities or staff parties, VAT is retrieved over employees. However, if non-employees, such as customers, participate in the event, VAT cannot be recalled on its share of the cost. HMRC Customer considers hospitality as a non-business expenditure, which means that the customer does not recover VAT on entertainment. Businesses must have a clear record to differentiate between employee and customer expenses to avoid rejection of VAT recall.

When determining VAT eligibility, it is important to assess whether entertainment is really for employees rather than a preacher or networking event. If the entertainment is extraordinary or mainly benefits directors or owners, HMRC can restrict the VAT claim. Additionally, expenses related to entertaining both employees and customers in the same event should be implemented correctly, ensuring that only the entertainment of the employees is claimed. To remain obedient, businesses should regularly review the HMRC guidelines and maintain invoices by expanding the nature of entertainment and the people present in it.

Does VAT Apply to Staff Entertainment Alcohol?

VAT on Staff Entertainment, including alcohol, depends on whether expenses have been classified as business entertainment or staff welfare. If a business provides entertainment, such as food or drinks, especially for employees, it is usually considered an employee welfare expenditure, and VAT can be recalled. However, if the incident involves non-employees, such as customers or suppliers, it comes under business entertainment, and VAT recovery is not allowed. HMRC treats alcohol similar to the entertainment expenses of other employees of alcohol, which means VAT is only recovered when the event is strict for employees.

Businesses must carefully document the cost of entertainment of employees to differentiate between fine and non-secular VATs.For example, VAT can be served on alcohol at a staff Christmas party or team-bonding event limited to employees. However, if customers or business partners are present, VAT cannot be claimed on alcohol and other entertainment costs. HMRC can check such claims, so businesses must ensure that proper challan and records are maintained to justify VAT recovery.

What are some examples of VAT on customer entertainment?

Businesses can prevent costly errors by comprehending VAT on customer entertainment examples. Whether VAT is worth reconciling is shown in the table below:

Entertainment Type	Reclaim VAT	Notes
Business meeting with coffee/tea	Yes	If part of a work meeting.
Client dinner at a restaurant	No	Treated as non-deductible hospitality.
Golf day for clients	No	Considered entertainment.
Annual staff Christmas party	Yes	VAT reclaimable if for employees.
Event with both clients and staff	Partially	VAT is recoverable only on the staff portion.
Training event with provided lunch	Yes	If part of a chargeable service.
Drinks in a bar with a client	No	Considered entertainment.

Can You Claim VAT on Entertaining Clients and Staff Together?

Claiming VAT on entertaining clients and staff together can be complex, as UK VAT rules distinguish between business entertainment and employee entertainment. Generally, VAT on client entertainment is not reclaimable, as it is considered a business expense rather than a necessity for operations. If you take clients out for meals, events, or hospitality, HMRC sees this as non-essential, meaning VAT cannot be reclaimed. This rule applies even if employees attend the event alongside clients, as the primary purpose remains entertaining non-staff members.

However, VAT on staff entertainment is usually reclaimable if the expense is for employees only and relates to business purposes, such as staff parties or team-building events. If an event includes both employees and clients, HMRC considers the cost partially for client entertainment, which makes the VAT non-reclaimable. In cases where it is difficult to separate costs, businesses should be cautious when attempting to reclaim VAT, ensuring compliance with VAT regulations to avoid disputes with HMRC.

How Can Businesses Manage VAT on Entertainment More Effectively?

Managing VAT on entertainment requires clear policies and accurate records. Here are some ways that can handle VAT more efficiently on business entertainment:

Classes expenses correctly – the difference between customer and staff entertainment to determine VAT eligibility.
Keep a detailed challan – always get the VAT challan for staff entertainment to support VAT recovery claims.
The expenses of separate customers and employees – where possible, pay separate customer entertainment to avoid VAT complications.
Use tax-free options. Consider hosting professional meetings instead of entertainment to avoid damage.

Applying these strategies can help businesses to follow HMRC rules and reduce VAT loss.

Conclusion

For UK businesses, VAT on customer entertainment is a challenging topic. VAT on client entertainment is typically not deductible, but VAT on staff entertainment is frequently refundable. Guidance is provided by VAT Notice 700/65, which makes it apparent that absent certain exceptions, entertainment is typically prohibited.

Businesses can make informed financial plans by knowing the VAT on entertaining customers and employees. When possible, proper classification and documentation can help recover VAT and prevent unforeseen tax obligations.

FAQs on VAT on Customer Entertainment

1. Can you claim VAT on client entertainment in the UK?

No, you cannot claim VAT on client entertainment in the UK. HMRC treats client entertainment as a non-deductible business expense, meaning VAT cannot be reclaimed on meals, tickets, or other hospitality provided to clients.

2. Is business entertainment VAT exempt or zero-rated?

Business entertainment is neither VAT-exempt nor zero-rated. It is classified as a blocked expense, meaning VAT must be paid but cannot be recovered. However, certain types of business-related entertainment, such as training sessions that include meals, may allow VAT recovery.

3. Can you claim VAT on staff entertainment?

Yes, claiming VAT on staff entertainment is allowed if the entertainment is for employees only. Examples include annual staff parties, team-building events, and staff meals. However, if non-employees attend, such as clients or suppliers, VAT cannot be reclaimed on their portion of the cost.

4. Can you claim VAT on client entertaining and staff entertaining together?

VAT can be reclaimed only on the staff portion of the expense. If an event includes both clients and staff, the business must separate costs and claim VAT only on the part that applies to staff entertainment. If the event is mainly for clients, VAT is not recoverable.

5. What does VAT Notice 700/65 say about claiming VAT on customer entertainment?

VAT Notice 700/65 states that VAT on entertaining customers is not reclaimable, except in limited cases, such as when entertaining non-UK clients as part of a contractual requirement. The notice also confirms that VAT is recoverable for staff entertainment, provided the costs are reasonable and apply to all employees.

About the Author: Ahmad Raza

Ahmad Raza, is a devoted entrepreneur with an unrivalled love for UK taxation, and he amassed a large and diverse clientele over the course of his career. He's not just interested in numbers; He also believe in the value of human connection through his writing's. He had a pleasure of working with a variety of business organizations, and been a trusted advisor to 7-figure sellers in the e-commerce market, with a unique specialty in Tax Consultancy. It gives him enormous delight to translate the complex world of tax calculations into easy, practical insights for clients at Xact+.

VAT on Customer Entertainment: VAT Rules & Exemptions in UK