Blocked input tax part 2
This is the second part of the article I started on Blocked input tax.
Strangely enough I’ve spent some time explaining blocked input tax on business entertainment to a client since posting part 1, so here fresh from that experience are my comments:
Business Entertainment
What is business entertainment? It’s providing hospitality for guests who are not your employees. Let’s take an example: You have a new product that you want to launch with a suitable fanfare so you organise a launch event. This event, you decide, will consist of a presentation, a chance for guests to see the product and handle it, refreshments before and during the presentation with a buffet afterwards. Doesn’t all that fall under marketing? So it’s fully recoverable, right? Wrong!
I have to be a little bit technical here and mention the Thorn EMI plc case in 1995. What this case confirmed was that it is necessary to apportion input tax between business entertaining and other business purposes.
In the example above part of the costs are attributable to ‘other business purposes’ such as advertising. The input tax on these costs is recoverable. The cost of the refreshments and the buffet, however, are clearly business entertainment. The input tax on these costs is not recoverable. Just because a cost can be defined as a legitimate business expense doesn’t mean you can recover the input tax.
HMRC regard business entertainment as including:
Business entertaining of staff
This is treated differently from entertaining customers or potential customers, or anyone who is not an employee. Since the Ernst & Young case HMRC have accepted that entertainment provided for staff is wholly for business purposes so the input tax on the costs is not blocked. Where, however, guests are entertained as part of a ’staff party,’ e.g. spouses and partners of staff, the input tax on the cost of entertaining the non-staff is not recoverable. Again this is supported by the decision of a VAT & Duties Tribunal in the case of KPMG.
I could go on providing examples and supporting them with case law, but you’ll probably be yawning if I continue for much longer in that vain. So let’s have a look at the next topic in the list.
Private Use
The private use of something paid for by a business means that the input tax on the private use is not recoverable. This is most likely to apply to things like telephones, light and heat, etc. and most likely to affect small businesses. It is particularly applicable to businesses that are run from home that, for example, have only one phone line. In such cases it would be necessary to restrict the amount of input tax recovered to reflect the amount of private use.
This is something that a VAT inspector will normally check on an inspection because it is an area where an apportionment of the input tax for private use isn’t always done so is an easy way for them to get an assessment. You have been warned!
Domestic Accommodation
Generally VAT cannot be recovered on costs incurred on Domestic Accommodation. Where, however, there is a clear business connection for the cost the input tax may be recoverable. Each case will need to be considered on its own merits.
That’s it for now. I hope you’ve found the two articles useful. Please leave a comment if you have any questions.
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