New treatment of overseas entertaining

In the light of the European Court of Justice (ECJ) judgment in the joined case of Danfoss and AstraZeneca (C-371/07), HMRC have concluded that their block on the recovery of input tax on the business entertainment of overseas clients is inconsistent with EU law.

UK rules will be amended shortly. In the meantime, the Revenue will consider claims (subject to the normal four year cap) for previously restricted VAT in respect of the entertainment of overseas customers, as a direct effect of European law.

The block on recovering input tax on entertainment provided to anyone other than an overseas customer remains unchanged.

With regard to the private use charge, this is intended to ensure that the taxable person, staff and others do not achieve an advantage over private individuals because the taxable person is registered for VAT and can recover VAT incurred on costs.

The ECJ addressed the question of the applicability of such a charge and it is clear from two particular decisions that the circumstances under which an individual can benefit privately from a business expense without a private use charge arising should be very narrowly defined.

Two cases, Julius Fillibeck Sohne (C-258/95) and Danfoss and AstraZeneca, introduced conditions:  the necessity test and the strict business purpose test that should be applied to private use of business expenditure.

As no advantage arises if the VAT is not recovered by the taxable person, there is no need to consider the applicability of the private use charge unless the business intends to recover the VAT paid.

HMRC suggest that, where a business decides that the entertainment provided should trigger a private use charge, the VAT incurred should be treated as non-deductible, rather than claiming a deduction and offsetting it with an output tax charge.

The department says this approach is consistent with the view that VAT incurred on the entertainment of overseas customers should only be recovered where it is clearly used for the making of taxable supplies, as well as being reasonable in scale and character.

Revenue & Customs Brief 44/10 sets out  scenarios intended assist in deciding the correct VAT treatment of any expenditure incurred on entertaining overseas customers.

Issue: 4280 / Categories: News , VAT