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.