Running a business:
Entertaining and travel expenses

• you cannot reclaim the VAT on business entertaining
• you can reclaim the VAT on expenses for entertaining your employees, for example to reward them for good work or to improve staff morale;
• you cannot reclaim the VAT where your employee acts as a host to someone who is not an employee, so if a director entertains a customer, none of the VAT is recoverable;
• you cannot reclaim the VAT incurred on entertaining only directors or partners of the business. However, you can recover all the VAT where the directors or partners attend staff parties together with other employees;
• if you have an event where you entertain both employees and non-employees, you can only recover the proportion of the input VAT relating to your employees.

Entertaining includes, for example, the following, where they are provided free:

• providing food and drink, accommodation and theatre tickets;


• entry to sporting events, clubs and nightclubs;


• using capital assets such as yachts and aircraft for entertaining

Employees include, for this purpose:

• your employees


• directors, partners and people engaged in the management of the business


• helpers, stewards and others essential to running a sporting or similar event.

The general rules are that:

• if you pay an employee a flat rate for subsistence expenses, then you cannot claim as input tax any VAT incurred on those expenses.


• if you reimburse the employee for actual expenses incurred (eg meals and hotel bills), then you can claim the input tax incurred so long as VAT invoices (which may be made out to the employee) are obtained;


• if you pay only a proportion of the actual costs, then you can treat as input tax the VAT fraction of the amount the business pays. The VAT fraction for a standard rated supply is 7/47.

If you have a policy, which you enforce, of not allowing the mobile to be used for personal calls then you can reclaim all the input VAT on the calls. If you tolerate only a small amount of personal calls, then the minimal use is treated as insignificant and you can still recover all the input VAT.

If you allow your employees to make personal calls, then you can only recover the proportion of the VAT that relates to the business calls. Where you subscribe to a fixed monthly contract, and there is no separate standing charge, then you must apportion the VAT on the total charge for the pasckage.

If you charge your employees for any private calls they make, then you may treat the VAT incurred on the calls as input tax, but must account for output tax on the amounts charged to employees.

You can, however, reclaim VAT on the purchase of a car which:

• is a stock in trade of a motor manufacturer or dealer;


• intended to be used primarily as a taxi, driving instruction car or self-drive hire; or


• will be used exclusively for the purpose of your business and will not be available to anyone for private use.

If you reclaimed the VAT but then change the use so that it no longer qualifies, you must account for output VAT on the value of the car when the use is changed.

If you sell a car on which you have recovered the input VAT, you must charge output VAT when you sell it.

The 50% block is to cover the private use of the car. It applies to the VAT on all the charges relating to the rental of the car, including, for example, the excess mileage charge.

The 50% block does not apply to an early termination charge or if you hire a car for not more than 10 days.

Where fuel is used for both business and private mileage, you have three options. You can

• reclaim all the VAT and apply the fuel scale charge. The amount of the fuel scale charge depends on the cylinder capacity of your car and not on the level of your fuel bills. It is added to your outputs and increases your output VAT.


• use detailed mileage records to separate your business mileage from you private mileage; or


• claim no input tax. You may prefer to do this if you do not want to maintain records of business and private mileage and your fuel bills are very low so that the VAT payable on the scale charge exceeds the input VAT you can reclaim.

If you reimburse employees for fuel, you can treat the VAT they paid as your input VAT so long as you can show you have reimbursed them for their actual expenditure on road fuel.

If you pay employees a mileage allowance, you can reclaim input VAT by applying the VAT fraction (currently ⁷/₄₇) to the payment. You need to retain records for each employee showing:

• the mileage travelled;


• whether the journey is both business and private;


• the cylinder capacity of the vehicle;


• the rate of mileage allowance; and


• the amount of input tax claimed.