Following the ECJ judgement in the joined case of Danfoss and AstraZeneca, HMRC have announced some changes in the tax treatment of business entertainment of overseas customers.
Subject to evidence of the details of the overseas customers and the type of expenditure, they will now allow the VAT paid out on business entertainment to be reclaimed.
In order for the VAT on entertainment costs to be recovered HMRC expect the business to meet two tests: a necessity test and a strict business purpose test. If the tests are not met then any vat recovery is subject to an equal output VAT payment as a private use charge. The tests are designed to ensure that the entertainment is only to enable the smooth running of the business, i.e. food provision at business meetings, and that the element of private benefit is incidental to the provision of the underlying services or goods by the business i.e. paying for transportation to enable attendance at remote sites.
Clearly as a result of these changes it is now possible to claim back vat incurred on the costs of entertaining overseas business customers, subject to the normal four year cap, and the usual evidence will be required to support any Input Tax claim.