Entertainment is a primary cost item for businesses when managing both clients and employees. The general rule is that the input tax paid when acquiring goods and services for further production is deductible. Typically, though, taxes in this category don’t fall into a business’ usual operational procedures. To understand whether VAT on entertainment expenses can be reclaimed or deducted, it’s important to understand which items are defined as business expenditures.
VAT on entertainment expenses in the EU
There are two general restrictions on reclaiming or deducting VAT defined by the EU directive.
- Article 176 of the VAT Directive states that value-added tax can’t be reclaimed on items that are not strictly business expenditure.
- Article 177 of the Directive goes into restrictions placed on capital goods. Given how capital goods deteriorate over time, Member States can consult the VAT Committee to decide if they choose to allow or reject deductions.
Entertainment items are affected by Article 176, where the EU identifies luxuries, amusements or entertainment as items that are not strictly business expenditure. So on the face of it, it may seem that the tax on these expenses can’t be recovered, but this isn’t the case.
The broad restriction or block is only set to take place when all EU member countries agree to this article unanimously, which hasn’t taken place. Given that, states can keep restrictions that were in place on 1st January 1979, or those in place when they joined the Union.
Consequently, every individual EU country is free to pursue its own provisions on leisure costs. To see how different the rules can be from one country to the next, it’s best to make use of a few examples. The problem arises when every country has its own definition of what qualifies as recreation.
VAT on entertainment in the UK
The general maxim in the UK is that VAT on entertainment expenses can’t be recovered. However, this depends wholly on what kind is being discussed. In the UK, there are two main types: business entertainment and employee entertainment.
The former covers items provided to non-employees for free, which can include items such as food and drink, hospitality, and tickets to concerts or sporting events. Hospitality of any form counts as entertainment in the UK. If these costs are incurred, the tax is non-recoverable. However, there are exceptions. For instance, taxes on hospitality costs spent on behalf of foreign customers can be recovered if done during the course of business.
Employee entertainment expenses, on the other hand, are not blocked from recovery. If certain leisure items are expensed to improve company morale or reward employees, they’re done for business purposes. As a result, the input tax can be recovered.
A contrasting example
To create a sharp contrast with the UK, we can look at France, where VAT on entertainment expenses can be reclaimed easily. Expenditure on hospitality, luxury services, and receptions can be recovered without much resistance.
Germany, too, has less stringent takes on deductibility, where blocks are placed on only a few goods and services. VAT on entertainment is 100% recoverable when done during the course of business, as long as the items aren’t luxury goods or gifts to non-employees worth more than €35 a year. In addition, if less than 10% of the expense went toward operational use, the charge can’t be reclaimed.
Each country has its own stance on recoverability, with some nations taking a harder position while others adopt a more relaxed view on leisure costs. To see how the regulatory situation changes based on location, take a look at our Rules Map. It’ll display all the required information, showing countries where the VAT is fully recoverable, partially recoverable, and not recoverable at all.
As you can see, whether VAT on entertainment can be recovered depends on your local tax authorities. While generally irrecoverable, definitions of what constitutes entertainment changes from one place to the next, and then the exceptions to standard rules also diverge based on location. It’s extremely difficult to keep track of all these rules, especially for companies operating internationally. A possible solution is to turn to an automated online recovery solution such as VAT4U. We monitor over 2000 rules to make sure you don’t miss out on opportunities to recover the value-added tax.