VAT on Client and Business Entertainment: What You Can and Cannot Claim

Can you claim VAT on client entertainment?

No. VAT on entertaining clients, customers or suppliers is blocked as input tax under Article 5 of the VAT (Input Tax) Order 1992, so you cannot reclaim it on your VAT return. There are three exceptions: entertaining overseas customers, the employee's own share of a mixed meal, and events where you apportion the cost between staff and non-staff attendees.

This is a common input tax error. Businesses assume that because a client dinner was necessary to win the work, the VAT must be recoverable. It isn't - the block applies regardless of how commercially justified the spend was.

The three exceptions are set out in full below, and the checker above tells you which applies to a receipt.

What HMRC counts as business entertainment

HMRC defines business entertainment as hospitality of any kind provided free of charge to someone who is not an employee of your business. The recipient is the deciding factor, not the amount you spent or the reason you spent it.

Typical examples that fall inside the block:

• Meals and drinks for clients, prospects or suppliers
• Hotel accommodation provided for a visiting client
• Tickets to sporting events, concerts or theatre
• Golf days, track days and similar hospitality events
• Use of a company asset - a box, a boat, a lodge - for entertaining
• Drinks receptions and networking hospitality where guests attend free

Two words in that definition carry the weight. Free of charge - if you make a genuine charge for admission, it stops being business entertainment. Not an employee - hospitality for your own staff is a separate regime with its own rules, covered further down. See our guide to VAT on food and catering for related rules.

Why the VAT is blocked

The block is statutory, not a matter of HMRC discretion. Article 5 of the VAT (Input Tax) Order 1992 (SI 1992/3222) specifically excludes input tax incurred on business entertainment from recovery.

The policy reasoning is that hospitality of this kind is not consumed in making your taxable supplies in any measurable way - it sits closer to private consumption than to a business cost, even when the business motive is real. HMRC sets out its detailed position in VAT Notice 700/65 and in its internal manual at VIT43200.

Because the restriction is in legislation, there is no "reasonableness" argument available. A £12 sandwich lunch for a client is blocked on exactly the same basis as a £1,200 hospitality box.

The three exceptions: when you can reclaim

Entertaining overseas customers

Since 2010, when HMRC changed its policy after the 2008 Court of Justice decision in Danfoss and AstraZeneca, the block has not applied to entertaining overseas customers. An overseas customer is one who is not ordinarily resident in the UK and does not carry on business here.

There is a significant catch. If the hospitality goes beyond what HMRC regards as basic, and there is an element of private use, an output tax charge arises that cancels out the input tax you recovered. In practice this means a working lunch during a genuine business meeting is recoverable; taking the same overseas client to a Michelin-starred restaurant and then to Wimbledon is not.

Keep contemporaneous evidence of the customer's overseas status and the business purpose of the meeting. This is the exception HMRC scrutinises most closely.

The employee's own share of a mixed meal

Where an employee is travelling on business and entertains a client during that trip, the employee's own subsistence remains recoverable - that cost would have been incurred and reclaimed regardless of whether a client was present.

Only the employee's proportion qualifies. The client's share stays blocked. Split the invoice on a reasonable basis, usually per head, and keep the workings.

Apportionment at mixed events

Where an event has both employees and non-employees attending, you can recover the VAT attributable to the employees and must block the rest. A per-head split is normally acceptable to HMRC.

There is a legitimate alternative that many businesses miss. If you make a genuine charge to non-employee guests - even a modest one - the hospitality is no longer provided free of charge, so it falls outside the business entertainment definition entirely. You recover the input tax in full, and account for output tax on the admission charges you receive. For a large event, this can produce a materially better outcome.

A fourth situation sits close to the exceptions without quite being one: sponsorship. Where you sponsor an event and receive genuine advertising and brand exposure alongside the hospitality, the cost can be apportioned between the recoverable advertising element and the blocked entertainment element. The apportionment needs to be defensible and documented.

VAT on staff entertainment is different

Employee entertainment is not caught by the business entertainment block. VAT on staff parties, team events and similar costs is recoverable as input tax, provided the expenditure is for a genuine business purpose such as staff morale, reward or team building.

Three conditions matter:

It must be available to all employees, not a chosen few. A department-wide summer event qualifies. A dinner for the senior team only is harder to defend.

"Employee" has a narrow meaning here. It covers employees, directors and partners. It does not cover subcontractors, shareholders who are not employees, former employees, pensioners or job applicants - those people are non-employees, and hospitality for them falls back into the block.

Directors entertained alone are blocked. Where directors or partners hold an event for themselves with no wider staff involvement, HMRC's position is that there is no business purpose in the required sense and the input tax is not recoverable.

Where guests attend a staff event, apportion between employees and guests, or use the admission-charge route described above.

Client gifts are not the same as entertainment

Business gifts sit under a different rule and are frequently confused with entertainment.

VAT on business gifts is recoverable. However, if the total value of gifts made to the same person exceeds £50 excluding VAT in any rolling twelve-month period, you must account for output tax on the value of those gifts. Below that threshold, no output tax arises and the input tax stands.

Branded promotional items, samples and low-value goodwill gifts generally fall on the recoverable side. A hamper worth £200 to a single client does not.

What happens if you reclaim it incorrectly

If you recover input tax on blocked entertainment, correct it as an error. Net errors up to £10,000 (or up to £50,000 if within 1% of Box 6) can be adjusted on your next return; larger errors must be reported to HMRC separately. Correcting it yourself before HMRC finds it usually reduces any penalty.

Where HMRC finds the error first, the position is worse. HMRC can usually assess up to 4 years back, 6 years where the error was careless and 20 years where it was deliberate, and inaccuracy penalties apply on top where the error is careless or deliberate. Entertainment is a known problem area, so expect it to be checked during an HMRC review. For related guidance on blocked input tax and partial exemption, see our dedicated guide.

Corporation Tax treats it separately

The VAT position and the Corporation Tax position are two different questions, and a cost can fail both.

Client entertaining is not deductible for Corporation Tax under section 1298 of the Corporation Tax Act 2009. Staff entertaining generally is deductible. Separately, the £150 per head annual function exemption is an employment tax rule under section 264 ITEPA 2003, governing whether a benefit in kind arises for the employee. It has no bearing on VAT recovery, and it is an exemption rather than an allowance - exceed £150 per head and the whole amount becomes taxable, not just the excess.

Treating the £150 figure as a VAT threshold is one of the more expensive misunderstandings in this area. For broader context on business entertainment expenses and service-related VAT, see our services guide.

Recording entertainment correctly under MTD

Under Making Tax Digital, your digital records need to capture the VAT you did not reclaim as clearly as the VAT you did. Set up a dedicated nominal code for blocked entertainment so the cost is posted gross and no input tax is picked up automatically. Where you are apportioning, record the basis of the split in the same place - HMRC will ask for it, and a note written months later is worth considerably less than one written at the time.

Your VAT return only shows totals, so the split has to be in your records. Only the reclaimable VAT should reach Box 4. For related rules, see our guides to partial exemption and what tradespeople can reclaim.

Final thoughts

Client entertainment is blocked; staff entertainment, overseas customers on a basic level, and the staff share of mixed events are not. Gifts follow the £50 rule. Record the split when you spend the money, keep the VAT invoice, and only the reclaimable VAT goes in Box 4.

Disclaimer: This guide gives general information, not advice for your business. If you are unsure how the rules apply to you, speak to an accountant or contact HMRC.