HMRC Reviewing VAT Treatment Of Business Entertainment Costs

by Robin Pilgrim, LawAndTax-News.com, London

18 March 2009

HM Revenue and Customs (HMRC) is currently reviewing the input tax treatment of business entertainment provided to overseas clients in the light of a recent European Court of Justice (ECJ) value-added tax judgment.

The joined case of Danfoss and AstraZeneca concerned a Danish law provision which excluded certain types of expenditure from the right to deduct VAT, and whether it was still effective. The provision in question had been introduced before the European Union Sixth Directive came into force and had not been applied in practice.

In an announcement on March 17, HMRC advised businesses to consider the relevant time limits applying to potential claims and to submit claims, together with supporting evidence, in order to "protect their position" pending a Revenue statement of its position. However, HMRC cautioned businesses that any claim would be confined to entertainment, which is "of a kind and on a scale that is reasonable."

The department stated that any claims submitted should, as a minimum, include: details of the overseas clients; (although overseas suppliers are not covered); the type of expenditure; the amount of VAT claimed; and evidence to support the fact that VAT had not previously been deducted.

HMRC stated that this decision does not have any implications for the input tax 'block' on expenditure on entertaining UK business clients.

"Nor does it have any impact on input tax that can be claimed on expenditure on meals and other entertainment provided to employees - business can continue to claim this input tax subject to the normal rules," HMRC explained.

The ECJ judgment in the Danfoss/Astra Zeneca case has confirmed that working lunches provided to directors in the course of a business meeting (and provided no other employees are present) may have a business purpose and therefore costs involved in providing such meals are VAT deductible.

Current VAT law in the UK restricts the recovery of VAT on business entertainment, including in-house lunches that are provided free of charge to clients during business meetings. But the Danfoss/Astra Zeneca case and previous European case law may entitle many firms to recover VAT paid on the provision of working lunches back to 1973, although claims must be submitted before March 31, 2009.

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