Businesses can reclaim VAT on costs incurred for their business provided they will be used in making VATable supplies (i.e. sales that include VAT).
The law specifically blocks VAT reclaims on entertainment costs except for those incurred on staff entertainment and entertaining overseas customers.
Business entertainment includes hospitality of any kind with the most usual form being client dining but also extends to accommodation and theatre and sporting tickets.
Whilst the VAT on entertaining overseas customers can be reclaimed, it will be of any benefit to the business unless it is ‘reasonable’. Reasonable is not strictly defined so it should be taken in its ordinary meaning. Where the cost is not reasonable HMRC rules state that the supply of the services (i.e. meal) must include output VAT negating any benefit to the business of reclaiming VAT.
An example of what is reasonable – refreshments such as sandwiches and soft drinks for the duration of a meeting can be essential to the smooth running of the meeting lasting several hours and therefore any VAT reclaim should be allowed.
However, a three-course meal with alcohol is not necessary for the purposes of the meeting and any VAT will be accounted for on it as a perk.