Following recent ECJ judgments HM Revenue & Customs (HMRC) concludes that the UK’s block on the recovery of input tax on the business entertainment of overseas clients is inconsistent with EU law.

The law will be adjusted shortly and HMRC will now consider claims for previously restricted VAT in respect of the entertainment of overseas customers.

The block on recovering input tax on entertainment provided to anyone other than an overseas customer, for example, UK customers and non-UK business contacts who are not customers, remains effective and any VAT incurred on the costs of such entertainment cannot be recovered.

There is no change for direct tax purposes, entertaining is still disallowed.

Time limits

You may make claims in respect of input tax on the costs of entertaining overseas business customers, subject to the normal four year cap. HMRC announced in March 2009 that, pending the outcome of its review of policy in this area, it was inviting claims for such input tax incurred between 1 August 1988 (the date when UK law was amended) and 30 April 1997 (as prescribed following the Fleming judgement). HMRC will no longer accept claims for this period.

VAT incurred in future tax periods in respect of the entertainment of overseas business customers can be recovered in the usual way.

Source: HMRC Business Brief