You are probably aware that, notwithstanding that you may be a registered vendor for VAT purposes and you obtain valid VAT tax invoices for everything you buy for your business, you are generally not allowed to claim the VAT charged to you for the purposes of ‘entertainment’ as an input tax deduction on your VAT return. If you do claim such VAT the penalties can be costly
But the key to understanding what this means is understanding what ‘entertainment’ is for VAT purpose. The VAT ‘entertainment’ net is far wider than you might imagine as it specifically includes the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind.
Thus, although it might be obvious that the VAT can’t be claimed if you take a client or supplier out to coffee, lunch, supper or a show (are any of these even ethically acceptable to do in today’s business environment?), do you realise that if your client visits you in your offices and you offer him or her a cup of tea or coffee, or you provide such refreshments to your employees during their tea or lunch breaks, the VAT charged to you when you buy the tea, the coffee, the cake and also the kettle, cups, saucers and spoons etc will not be claimable as an input tax deduction on your VAT return.
Similarly, if you‘ve bought a rugby, soccer or cricket box or a bunch of tickets for a game and will take clients and/or staff, any VAT charged to you as part of the cost will also not be claimable.
Equally so, if you buy a bottle of wine for a client or supplier as a gift at holiday time, the VAT charged to you will not be claimable. If, bizarre as it may seem, you buy your client or supplier a diary or pen or calendar the VAT charged to you on the VAT invoice would be claimable.
Specifically highlighted is the prohibition for the claim of the VAT on any fees or subscriptions you may pay for membership of any club, association or society of a sporting, social or recreational nature.
In today’s environment the ethical question around the provision of such ‘gifts’ or entertainment is being debated – where does one draw the line between what is and isn’t acceptable? Perhaps the VAT treatment could be used as a trigger to make sure you ask the question- should the business even be incurring these costs?
There are, nevertheless, a number of specific ‘entertainment’ scenarios where you can claim the VAT charged to you on the purchase:
- The first instance, logically, relates to the situation where you are in an ongoing business of ‘entertainment’- for example, you run a restaurant or theatre or hotel and charge users an open market amount, sufficient to cover your costs. That’s not to say you have to charge for every single thing – exceptions are made for occasional promotional events and also providing left-over food and drink to employees and/ or welfare organisations.
- Similarly, if you have a staff canteen and charge sufficient to cover the cost of the food and drink etc the VAT may be claimed.
- In the same vein, if you are running a seminar or similar event, and you have charged a fee for attendance at the seminar which is sufficient to also cover the cost of food and beverages provided immediately before, during or after the seminar, you may claim the VAT charged to you. Conversely, if you have not made such an adequate charge then you may not claim the VAT.
- You may also claim the VAT on invoices made out to you on the costs of food and accommodation provided to yourself or an employee whilst required to spend time away from your/their normal place of residence or work, specifically for business purposes. However, if you or your employee entertain e.g.a customer whilst away, the VAT on the customer’s food and drink etc should not be claimed!
In addition, there are some other very specific situations, not common to everyday businesses but worth mentioning, where the VAT can be claimed on the entertainment goods or services (remember how wide a range of things this covers). These are where the ‘entertainment’ is purchased:
- by a municipality for the purpose of providing sporting or recreational facilities or public amenities to the public;
- by a welfare organization, for the purpose of making supplies in the furtherance of its welfare (charitable) aims and objects; or
- by a VAT registered person for an employee, that are incidental to the admission into a medical care facility;
- by an operator of any conveyance (e.g. bus, train, plane or ship/vessel) to a passenger or crew member, in such conveyance during a journey, where such entertainment is supplied as part of or in conjunction with the transport service supplied by the VAT registered operator and the supply of the transport service is a VATable supply;
- by the VAT registered person or for the purpose of awarding it as a prize in terms of any betting/gambling transaction;
Although there appear to be a long list of exceptions to the prohibition on the claiming of VAT on ‘entertainment’ they are quite specific and, in reality, somewhat limited. It is thus clear that if, in your business, you spend money that could fall within the VAT definition of ‘entertainment’, you need to apply careful consideration before you claim the VAT as a deduction on your VAT return. Getting it wrong could be costly