HMRC has issued a statement acknowledging that, by preventing UK businesses from reclaiming VAT on entertaining costs, it contravened European legislation.

It has been challenged twice in recent times by the European Court regarding its block on reclaiming VAT on entertainment costs. The first, reported nearly 2 years ago, was relevant only where UK companies entertain foreign customers, and the European Court will give its judgement soon, having heard the HMRC view on its treatment. The more recent case concerned entertainment costs in general, and HMRC is due to put its own case shortly.

Entertaining foreign customers

HMRC has confirmed earlier advice that you can claim back VAT you’ve paid on expenses incurred on entertaining foreign customers, and that you can go back up to four years. You can also reclaim the VAT on the costs incurred in respect of yourself, or your employees, in the course of entertaining foreign customers. For example, where, as the host of a business meeting held at a local restaurant, your meal was paid for by your company. HMRC stipulates that a claim will only be valid where the expenditure meets two conditions, the expense must be “necessary” and for the “smooth running of the business”.

For example, the directors of a French customer are in the UK to discuss selling some of your product in France. The meeting lasts all day and so it’s necessary to eat at some point. The VAT on the cost of food eaten on the premises or in a restaurant can be reclaimed. However, if at the end of the day you adjourn to the local pub for a meal, the VAT on these costs wouldn’t be reclaimable as it fails both tests, it’s neither “necessary” nor is it for the “smooth running” of the business.

The official good news is that as long as the expense is incurred for a business purpose, you can reclaim the VAT on the costs of entertaining foreign customers. This includes staff costs where they act as host.