Recovering VAT on Business Meals: The Difference Between Subsistence and Entertaining

Regardless what size a business is, it will almost certainly incur costs to buy food and drink when staff travel, and for entertainment. The VAT rules applicable to these are not straightforward and can require an element of judgement when calculating what can legitimately be reclaimed from HMRC.

Any cost will fall into one of the following categories:-

Category	VAT Treatment
Business Travel and Subsistence	VAT is recoverable
Staff entertaining	VAT is recoverable
Business entertaining	VAT is blocked
Private benefit (Personal expense)	VAT not recoverable

Accurately allocating costs to these categories requires an understanding of what each is, and how the law defines them.

Basic VAT housekeeping rules for company expenses

As ever with VAT the core housekeeping rules apply. In order to reclaim VAT incurred, a business has to have sufficient appropriate evidence of the VAT it has paid out. Generally speaking, this means a VAT Invoice.

When staff are out travelling, they need to be ‘reminded’ to obtain proper invoices for all costs. The receipt from a credit card terminal proves payment but doesn’t detail VAT so can’t be used to evidence a VAT reclaim.

Many larger businesses have a policy that they won’t re-imburse staff for expenses if they don’t have a VAT Receipt. This sounds harsh, but depending on the situation it can be a necessary motivation to ensure everyone follows the rules.

What is considered as ‘subsistence’?

When thinking about ‘business meals’ the word ‘subsistence’ is always helpful when judging if VAT can be recovered on the cost. If the expenditure is necessary to keep an employee healthy and safe while travelling away from their ‘home base’, then VAT recovery can be considered. If the expenditure strays into territory where they’re enjoying an experience outside of the ordinary – something beyond what’s needed to keep them properly fed and hydrated – then the VAT may become irrecoverable and there may be further personal tax considerations!

If the scale of the subsistence becomes ‘unreasonable’ then the employee receives a “private benefit”. Technically, the business would reclaim VAT on the expense but simultaneously charge VAT to the employee to cover their private use. For simplicity’s sake, it is generally easier to just treat the VAT incurred as being non-recoverable.

The word “employee” is also critical here. The business can only cover “subsistence” for its own employees; anything where the business picks up the cost of feeding anybody else will automatically class the cost as “entertaining” which is covered later.

Classifying subsistence costs relies on good judgement and many things will be self-evident:

• A coffee/pastry at the airport/station when catching a 6am departure is likely allowable on the basis the person travelling likely had to skip breakfast to get there in time.
• A coffee from the shop outside the office or round the corner from the employee’s home is unlikely to be ‘subsistence’ because they can put the kettle on.
• A meal deal/fast food for lunch is likely allowable if they’re not in their hometown as it can be tricky to take a packed lunch on an airplane.
• An evening meal in a hotel bar, or mid-range restaurant if catching an 8pm flight home or staying overnight is likely allowable.
• Buying an entire bottle of wine or several pints with the evening meal will change the nature of the expense. A drink and a coffee afterwards is normally regarded as ‘ok’ but anything more is not necessary for ‘survival’ and therefore blocks VAT recovery on the whole cost.
• Going to a ‘Fine Dining’ or Michelin Star restaurant is not ‘subsistence’ and recovering VAT would not be appropriate.

Anyone who has worked for a larger organisation will recognise that these look similar to Travel and Entertainment policies laid out by HR to cover such expenses. Typically, staff will have to feed themselves within a capped budget. For example, they might be limited to £30.00 for an evening meal. The thinking behind this is it keeps the expense on the ‘right’ side of being recoverable.

Do the same rules apply for directors of owner-managed businesses?

For owner-managed businesses, where there might not be formally documented policies and the staff member travelling is also director and shareholder of the business, restraint is often the wisest policy. If your expenses are the same as you’d grant to any other employee, then you’re likely safe – but these all have to be judged by the metric of what an outside person would deem ‘reasonable’. Be honest with yourself to avoid tax issues down the line.

Applying ‘per diem’ rates for employees

If chasing receipts sounds too time consuming, some of this can be avoided by using HMRC approved ‘per diem’ rates. Instead of paying ‘actual’ costs, the business pays its employee an allowance for each day they’re away from home on business. It is then the employee’s responsibility to feed themselves within this allowance (and they can retain any ‘surplus’ tax free). The downside is that VAT cannot be recovered on any of the costs.

What is considered as ‘Entertainment’?

Business meals in situations beyond “subsistence” are likely to be classed as “entertainment”. In order to determine if VAT can be recovered on Entertainment costs, it is necessary to identify who is being entertained, and why. The rules are different for a business’ employees, and non-employees.

If the people being entertained are all payrolled employees, then recovering VAT is likely to be permitted. The commercial purpose of staff entertainment is to reward performance, promote ‘team building’ or improve morale. Any VAT incurred on staff parties or outings is generally recoverable by the business.

What are the exceptions of claiming VAT on ‘entertainment’ costs?

The main exception to be aware of is if the situation is attended by directors only. HMRC takes the view that a company’s directors do not need to reward or motivate themselves with entertainment. This is not an automatic ‘block’ as there can be circumstances where director-only events have a commercial purpose beyond entertainment – for example VAT incurred when having an ‘offsite’ would likely be recoverable but potentially open to challenge by HMRC. It would be wise to retain evidence of the work done offsite to support the VAT claim if challenged.

As soon as the scope of an event is widened to include anyone other than employees, it is likely that the expenditure becomes ‘business entertaining’. VAT on any food, drink, accommodation, entry to events and so forth is likely to be blocked meaning a business cannot reclaim it. The block includes anything provided to customers, suppliers (including staff who work on a ‘subcontract’ basis), job applicants/interviewees and former employees. If they’re not on the payroll, they don’t count.

Conducting business over coffee or drinks?

There are many situations in business where deals are done over ‘a coffee’ or ‘drinks’. Food and drink are very much part of the social situations where business relationships are built. They’re also a time-honoured way of saying ‘thank you’. Consequently, it’s often ‘expected’ that a client might be taken out to a restaurant after a meeting. It might also be considered ‘polite’ to take a visitor out for lunch or drinks if they’ve travelled a long distance for a meeting. However, rules are straightforward: recovery of VAT on business entertaining costs is blocked. If there is any doubt over the nature of the expense, the wisest approach is to assume that the cost is business entertaining and avoid claiming the VAT.

What about claiming VAT on business meeting expenses conducted in the office?

One final point to note is around business meetings. If a meeting is organised in your office and basic refreshments are provided so the meeting can continue through lunchtime without disruption, it should be possible to recover any VAT that has been paid (even if attendees include non-employees). The HMRC example of ‘basic refreshment’ is sandwiches and soft drinks, and the recipients don’t have a choice of where or when they eat. Judgement is required here, but anything involving more than finger food is likely to tip over into ‘business entertainment’ where VAT is blocked. Anything involving alcohol is a definite ‘no’ as regards VAT recovery!

Got another VAT question?

As ever with any business expense or VAT queries, it is often best to speak to a professional. Give our Associate Director, Iain Harris a call if you have any VAT questions. Call him on 0131 364 4191 or email Enable JavaScript to view protected content.

Please note the above commentary is a general guide only, and should not form the basis of specific decision-making.