Entertainment is one of the most misunderstood areas of VAT and expenses. The short answer to "can you claim VAT on client entertainment?" is usually no, but staff entertainment is different. Here is how the rules actually work.
VAT on client (business) entertainment
VAT on business entertainment, hospitality provided to clients, prospects and other non-employees, is specifically blocked. You cannot reclaim the input VAT on meals, drinks, events or hospitality for customers, even if there is a clear business purpose.
The one exception is entertaining overseas customers, where VAT may be recoverable in limited circumstances, though an output tax charge can apply if there is a private benefit.
VAT on staff entertainment
VAT incurred on entertaining your own employees, staff parties, team meals, away days, is generally recoverable, because it is treated as a cost of rewarding staff rather than business entertainment. However:
- If an event is mainly for directors or partners (not staff generally), HMRC may challenge the claim.
- Where employees can bring guests, the VAT relating to the guests' share is not recoverable.
The £150 annual function exemption
Separate from VAT, there is an income tax and NIC exemption for annual staff functions (such as a Christmas party) costing up to £150 per head per year. Stay within £150 and there is no taxable benefit; go even £1 over and the whole amount becomes taxable, so the limit must be watched carefully.
What about the Corporation Tax deduction?
Client entertainment is not deductible for Corporation Tax either. Staff entertainment generally is deductible as a cost of employment.
How PushDigits can help
We make sure you reclaim every pound of VAT you are entitled to, and don't claim VAT you aren't, which is where penalties arise. See our VAT service or ask us a question.