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Steve Allen of VAT Advisers Ltd provides some useful VAT pointers for reclaiming input VAT on certain expenses. 

Introduction

The rules for recovering VAT on business and travel expenses can be something of a minefield.  Apart from not knowing whether the VAT is recoverable or not, another common problem is not knowing whether the costs have VAT on them to begin with.

1. Entertainment costs

VAT cannot be recovered on the cost of providing ‘business entertainment’ (i.e., hospitality to non-employees), as it is specifically blocked by the VAT (Input Tax) Order 1992. Business entertainment covers all forms of hospitality, such as food and drink, hotel accommodation, theatre tickets, and entry to sporting events. However, VAT on ‘staff entertainment’ costs can be recovered, unless it is being provided just to the sole proprietor, partners or directors (owners/directors with staff is OK), or to an employee whilst providing entertainment to a non-employee. VAT can also be deducted where a reasonable charge is being made to any non-employees present.

[ For details of recent developments as regards being able to reclaim VAT on entertaining overseas business costs, see Steve's article Let Me...Entertain You - (With No VAT Cost) - Ed. ]

2. Subsistence Costs

The VAT on travel and subsistence is deductible if incurred for business purposes, and covers things like drinks, meals, and overnight accommodation. Unlike for staff entertainment, the costs are still deductible where incurred solely by business owners or directors.

Problem Areas

Sometimes a business trip might include costs which have elements of business entertainment and subsistence. For example, Sellco in Warrington sends a sales executive to an important meeting in London with a new client, Buyco. Sellco sends him the day before the meeting, to eat and stay in a local hotel overnight so that he is fresh for his meeting in the morning. The meeting goes well, and the sales executive invites two of the client’s senior staff to join him for lunch. Given the differing rules for entertainment and subsistence, how much of the total VAT incurred can Sellco recover?

Under the subsistence rules, the VAT on the employee’s hotel bill is recoverable, but the lunch with the client has an element of entertainment about it. On the face of it, none of the lunch cost is recoverable as the sales executive is hosting non-employees. However, as the purpose of the trip was to secure a sales contract, any business entertainment can be treated as ancillary to the main purpose of the trip, so the element of VAT relating to the sales executive can be recovered as subsistence.

3. Travel Costs

These typically involve costs for the use of cars and taxis, and public transport such as train, bus, and plane tickets.

Car Fuel

The VAT on car fuel can be recovered in several ways. It can be recovered in full (including private mileage) after paying VAT on a fuel scale charge, recovered only on business journeys if no scale charge is paid, or through a set mileage rate paid to employees. The stipulation in each case is that business must hold VAT invoices for the fuel purchases.

[ For a more detailed review of VAT and Motoring Expenses, see Andrew Needham's article Claiming VAT Back on Motoring Expenses - Ed. ]

Public Transport

Where a vehicle, ship, or plane provides passenger transport with a capacity to carry 10 or more people (including driver/pilot), the journey is zero-rated. As such, there is usually no VAT to reclaim on train, bus and flight tickets. However, it is a common error for businesses to deduct VAT on these costs, with the matter only coming to light during a VAT visit, and the VAT Officer will be only too glad to assess you for all such deductions in the previous 4 years!

Taxis

The supply of taxi services is standard-rated, but a lot of taxi drivers are self-employed and not VAT-registered. The best thing to do is ask the taxi driver if he has charged VAT, and if so, ask him for a VAT receipt. Remember that, for supplies up to £250 including VAT, you only need to obtain a ‘less detailed’ tax invoice (also known as a ‘retailer’s invoice’).