Q&A: reclaiming VAT on corporate hospitality drinks

Croner VIP Tax Team

In this week’s Q&A, Alex Jones, tax adviser at Croner VIP Tax Team, explains the unusually complex rules on whether input tax can be reclaimed on alcohol provided at a corporate entertainment event.

Q. My client provides complimentary alcohol for ‘free’ as part of their supply, can they recover input tax on the alcohol?

A. At first glance, the answer appears straightforward. The hospitality is seemingly provided for free – meeting the definition of business entertainment, thus the input tax would be blocked.

Business entertainment comprises of three elements as set out in HMRC VAT Notice 700/65 at 19-175 and s2.2 Business entertainment. These include:

• hospitality of any kind;

• provided for free; and

• not provided to an employee.

As is so often the case with VAT, the true answer can begin with ‘it depends’. The key question is whether the recipient has ‘paid’ for their entertainment. Payment for entertainment may take the form of monetary consideration, non-monetary consideration, a contractual obligation or a reciprocal relationship.

Identifying whether the recipient has ‘paid’ for their entertainment requires examination of the specific facts of the scenario. It is usually the case that hospitality is not deemed to be provided for free if:

• the business provides the hospitality as part of an onward taxable supply, ie, a ‘free’ beer at a brewery tour is usually deemed to be part of the price of tour; or

• the business is contractually obliged to provide hospitality, ie, airlines are required to provide food, drink and (occasionally) accommodation to delayed passengers;

• sports clubs may accommodate and entertain visiting teams because their team receives accommodation and entertainment in return.

HMRC guidance at VIT43400 lists several examples where input tax can be recovered on what initially appear to be entertainment costs:

• free drinks given to customers paying for meals at a restaurant or similar establishment - amounts paid by customers are considered to be inclusive of any drinks given freely;

• free wine or beer tasting events for trade customers or journalists which allow sampling but not drinking; and

• sports clubs often provide free hospitality to visiting teams because the visitors will do the same when they host the return fixture. For VAT purposes the agreement to provide hospitality in return amounts to a supply and no output tax is due. Input tax may be deducted by the team that provides the entertainment.

Free ‘entertainment’ may include:

• occasional complimentary drinks offered to clients by a hair or beauty salon; and

• occasional free drinks offered to people waiting at a dress shop or jewellery store.

This issue can be a contentious area, balanced by potential amounts at risk as shown by the amount of case law regarding the topic.