CW Energy LLP

Change in the treatment of business entertainment of overseas customers

HMRC have just announced a change to their policy on the treatment of business entertainment provided to overseas customers.  This follows a decision of the ECJ in the joined case of Danfoss and AstraZeneca (Case-371/07).  

 The changes are to be enacted shortly, but, in the meantime, HMRC have said they will consider claims for previously restricted input VAT wrongly denied (subject to the normal four-year cap). Businesses may also begin to claim relevant current and future input VAT straight-away on the new basis.


 The UK has blocked the recovery of input tax on business entertainment since VAT was introduced here on 1 April 1973.  At the time, the block denied recovery of input tax on all entertainment costs, except for entertainment of members of staff or where business entertainment was provided to an overseas customer. In 1988, however, the law was changed in line with that for direct tax, so as to extend the block to cover all business entertainment (including that of overseas customers). 

 The recent ECJ judgments show this to be contrary to EU law, with the result that the rules on the input tax block are now to be changed.  Until this happens, HMRC have said they will consider claims for previously restricted input tax VAT wrongly denied.  As a direct effect of EU law, businesses may, therefore, wish to submit relevant claims – subject to the normal four year cap, Direct tax is unaffected by the change.


 Entertainment, by definition, includes hospitality of any kind but business entertainment, by definition, does not include anything provided to employees.  The block on recovering input VAT on entertainment costs remains for anything provided to anyone other than an overseas customer; for example, suppliers, UK customers and non-UK business contacts who are not customers.   All claims are subject to the qualifications and may need to be supported by evidence.

 Although, in appropriate cases, the input tax may be recovered, in some situations, HMRC now take the view that this recovery may be counter-balanced by a corresponding charge to output tax where the entertainment confers a personal benefit on the recipient.  Where that is the case, businesses will need to consider whether there is ultimately any benefit in making a claim.  Revenue & Customs Brief 44/10 gives examples of situations where such a charge may be sought – for example corporate hospitality.  It will not normally be expected where entertainment is at the business’ own premises or its provision does not go beyond merely providing basic food and refreshment to facilitate, say, the smooth running of a meeting or event .

 Anyone wanting further clarification on this may contact Peter Landon or their usual CWE contact.