VAT and Entertaining Overseas Customers: What You Need to Know

What is Business Entertainment?

HMRC defines business entertainment as the provision of hospitality to customers or other business contacts. It does not include staff entertainment, which has different VAT recovery rules. Some common examples of business entertainment expenses include:

• Food and drink provided to clients,
• Free accommodation (such as hotel stays),
• Theatre and concert tickets,
• Sporting event tickets,
• Club or nightclub visits,
• The use of yachts and aircraft for hospitality.

Understanding the VAT Exception for Overseas Customers

Historically, VAT on business entertainment has not been reclaimable. However, an important exception applies when entertaining overseas customers. This exception was initially removed in 1988 but was reinstated in 2010 following key European Court of Justice rulings (Julius Fillibeck Sohne (C-258/95) and Danfoss and AstraZeneca (C-371/07)).

For VAT purposes, an overseas customer is any customer who is not ordinarily resident in the UK or does not conduct business in the UK, including the Isle of Man. Importantly, this exception only applies to actual customers — not overseas business contacts or potential customers.

When Can VAT Be Claimed on Entertainment?

Businesses may reclaim VAT on entertainment expenses for overseas customers, but only if the expenditure is reasonable in scale and character and is strictly necessary for business purposes. If hospitality is provided simply because it is expected, polite, or aimed at improving relationships, it does not meet the strict business purpose test.

Examples of Allowable vs. Non-Allowable Entertainment

To better understand the rules, let's look at some examples:

Allowable VAT Reclaims (No Output Tax Charge):

• Providing basic refreshments (such as sandwiches, tea, or coffee) at a business meeting held on company premises.
• Holding a meeting at a client’s hotel where only simple, non-alcoholic refreshments are provided.
• Offering light snacks and drinks at a conference where overseas clients are in attendance.

Non-Allowable or Subject to a Private Use Charge:

• Taking an overseas customer to a restaurant for lunch or dinner.
• Providing alcohol at a business event.
• Hosting a day out at the races, a golf day, or a trip to a sports event.
• Offering a luxury dinner as a thank-you to an overseas client.

Understanding the Private Use Charge

If VAT is reclaimed on entertainment that does not meet HMRC’s strict business criteria, the business must apply a private use charge. This means the business effectively charges itself output VAT equal to the input VAT claimed, cancelling out any benefit.

For example, if a company spends £1,000 (including £200 VAT) on a hospitality event for an overseas customer and reclaims the £200 VAT, HMRC requires the business to charge itself £200 in output VAT. In effect, the reclaim provides no net benefit.

Simplifying VAT Accounting: A Practical Tip

Rather than reclaiming VAT and later applying a private use charge, many businesses choose to simplify their VAT accounting by not reclaiming input tax on non-allowable entertainment expenses in the first place. This avoids the hassle of making adjustments and ensures compliance with HMRC rules.

Conclusion

While VAT recovery on business entertainment is highly restricted, exceptions exist for entertaining overseas customers — provided the expenses are modest and strictly business-related. By understanding the distinction between allowable and non-allowable costs, businesses can maximize VAT recovery while staying compliant with HMRC regulations.

If your company frequently entertains overseas clients, it’s essential to have a clear VAT policy in place. When in doubt, keep hospitality simple, avoid alcohol, and focus on business necessity to stay on the right side of VAT rules.

Need expert advice on VAT compliance? Contact Cannon Accountants today for professional guidance.