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Steve Allen of VAT Advisers Ltd highlights an important recent announcement by HM Revenue & Customs (HMRC) on the VAT treatment of business entertainment provided to business customers.

Introduction

On 2 November 2010, HMRC released Revenue & Customs Brief 44/10 announcing an important policy change on the treatment of business entertainment provided to overseas customers. Back in March 2009, in the run up to the Fleming deadline, HMRC had said that it was reviewing its policy on business entertainment to overseas customers following the ECJ’s 11 December 2008 decision in the joined Danfoss/Astra Zeneca case.

Overseas Business Customers

The issue concerns the UK’s input tax block on business entertainment of overseas customers. At the start of VAT, input tax was blocked on business entertainment with the exception of that incurred on entertaining overseas customers. However, in 1988, the UK extended its block to cover overseas customers as well. The Brief merely states HMRC has now concluded that this block was inconsistent with EU law, the principle of which is that, under the standstill provisions, Member States cannot widen the exclusions applied to input tax. There was some doubt as to whether this would apply to business entertainment, but this doubt seems to have been resolved in the taxpayer’s favour, given that the Brief invites refund claims (subject to the four year time limit), and advises that changes to the UK legislation will be made shortly.

Private Use

The Brief goes on to describe a private use charge, referring to the cases of Astra Zeneca (C-371/07) and Julius Fillibeck Söhne (C-258/95). It says that, following these cases, the ECJ has set out two tests (the ‘necessity test’ and ‘strict business purpose test’) to determine when a private use charge is required. For example, providing basic food for the smooth running of a business meeting meets the ‘necessity test', so a private charge is not needed. However, unless there is a need to provide business entertainment, or there is a strict business purpose behind it, it will be appropriate to apply a private use charge to entertaining overseas customers. The Brief then adds the following:

“If you conclude the entertainment you provide should trigger such a private use charge, HMRC suggests you treat the VAT incurred as non deductible instead, rather than claiming a deduction and offsetting this with an output tax charge. This approach is consistent with the view that VAT incurred on the entertainment of overseas customers should only be recovered where it is clearly used for the making of taxable supplies as well as being reasonable in scale and character.”

The Brief closes with three example scenarios entitled ‘Meetings in Your Office’, ‘External Meetings’ and ‘Corporate Hospitality and Events’ aimed at helping provide guidance on the correct VAT treatment.

A strong business case has to be made to justify the cost of a corporate event, with the experience being very different to a similar event held with friends or family. The host will be looking for a positive return on his outlay at some point, so even if there was some private use, is it really correct to say, as HMRC imply, that the output tax on the private use would cancel out the entire input tax credit? Answers on a postcard to…!