VAT rules for entertaining expenses: Staff Entertainment

What is staff business entertainment? 

For VAT purposes, “entertainment” is described as the provision of hospitality of any kind. The costs regarded as entertainment or the provision of hospitality come in different forms like: 

• Giving away food and drink 
• Giving away accommodation, for example in hotels 
• Giving away theatre and concert tickets 
• Giving free entry to sporting events and facilities 
• Giving free entrance to clubs, nightclubs  
• Using yachts and aircraft to entertain 

These can be the cost of entertaining staff as: 

• A reward for good work or to maintain and improve staff morale 
• Staff parties 
• Team building exercises 
• Staff outings and similar events 

VAT treatment of employee entertainment 

VAT is recoverable for some staff entertainment when an employer provides entertainment for the benefit of employees: 

• Wholly for business purposes 
• Within reasonable scale and character.  

When these conditions are met, the VAT incurred on entertainment for employees is input tax and is recoverable under the business entertainment rules. 

Nonetheless, there are two exceptions to the general rule where: 

• Entertainment is only given to directors, partners, or sole proprietors of the business. 
• Employees act as hosts to non-employees. 

It is important to remember that employee and director’s subsistence does not count as employee entertainment. 

Restriction of VAT claims  

VAT claim on staff business entertainment can be restricted if: 

VAT incurred on entertaining directors or partners of a business

If the entertainment is provided only for directors or partners of a business, the VAT incurred is not input tax. Hence, the VAT cannot, therefore, be recovered. 

The restriction on the recovery of input tax is not changed if some of the employees of the business are also entertained.  

Where an employee hosts a non-employee

Where the costs are incurred for the sole purpose of entertaining a non-employee, the tax is input tax but is blocked under the client entertainment rules. 

None of the input tax can also be claimed when employees act as hosts to non-employees and help entertain the non-employee. 

VAT incurred on an event used to entertain both employees and non-employees

You can only recover as input tax the VAT you incur on entertaining your employees. The portion of the input tax incurred in entertaining others is blocked under the business entertainment rules. 

Who is an employee for VAT purposes? 

An employee is: 

• Someone currently employed by the business. 
• Directors or anyone engaged in management (including business partners). 
• Self-employed people (subsistence expenses only) are treated by the business in the same way for subsistence purposes as an employee. 
• Helpers, stewards, and other people are essential to the running of sporting or similar events. 
• Temporary or casual staff. 

However, these people are not employees: 

• Pensioners 
• Former employees 
• Job applicants 
• Interviewees 
• A shareholder who is not also an employee 
• A partner, relative or friend of an employee. 

If the employee is working away from their usual place of business and incurs food and travel expenses, the input tax on their meal can be dealt with as subsistence. However, input tax cannot be claimed if the business trip is made solely for business entertainment. It can only be claimed on the employee's meal if the business entertainment is secondary to the business carried out. 

Need help with claiming staff entertainment VAT expenses? 

If you are unsure whether you can claim tax relief or reclaim VAT on a particular cost, you should seek professional advice from an accountant.