The employer wants to know if they can reclaim the tax on the water and coffee they provide to staff
VAT q&a: What entertainment expenses can my company reclaim VAT on?
VAT legislation around what constitutes allowable and disallowable entertaining expenses is not detailed enough for me to determine where I can and cannot reclaim the tax. I want to do the right thing but also want to reclaim where I legitimately can. For example, am I able to reclaim VAT on the water and coffee I provide to my employees? Depending on who I ask, I get conflicting opinions. Can you clarify? MT, Fujairah
The legislation in this area is very general, so it was welcomed when the Federal Tax Authority recently issued detailed guidance on the subject.
Where goods or services are purchased for employees to use - at no cost for them and for their personal benefit - including the provision of entertainment, then the VAT incurred on the cost is not recoverable. There are three circumstances in which a taxable entity is entitled to recover the tax on such costs.
Firstly, where there is a legal obligation to provide those services or goods to employees, for example medical insurance in Dubai. Secondly, where there is a contractual obligation or company policy to provide those goods or services to employees to ensure they perform their role, it must also be part of the normal business practice. For example, if a company provides a mobile phone where the employee is expected to make and receive significant business calls. Finally, VAT may be recovered where the provision of goods or services is a deemed supply, in which case both the input and output tax would be accounted for.
Another example is where a new employee is provided with accommodation for a set period prior to finding their own housing; in this instance, this is not deemed to be entertainment and the VAT incurred is recoverable. The rationale is that this cost is necessary for the employee to perform their duties. Conversely, if a business provides a lunch or dinner for employees, for example a Ramadan iftar, this would be entertainment and VAT incurred would not be recoverable.
The FTA allows certain hospitality and entertainment expenses to be classed as normal business expenses, which do not give rise to non-recoverable input tax. Where modest food and refreshments are provided during a business meeting any VAT incurred is recoverable.
The FTA has further guidance on what falls under the definition of simple hospitality during a meeting. This would include where the hospitality is provided at the same venue as the meeting. So, if a meeting stops for a short break for refreshments and then resumes as normal, for example a lunch break, the cost per head does not exceed any internal policy for usual employee subsistence. Finally, the food and beverages must not be accompanied by any entertainment; examples might be a motivational speaker or a live band.
If the food and refreshments are so substantial that they would constitute an end in themselves and may encourage someone to attend the meeting, the input VAT incurred is non-recoverable. As a general rule, if you cannot be certain what is within the normal course of business, VAT should not be recovered.
The FTA has given examples of what it considers normal incidental office expenses used by both employees and visitors where the VAT may be reclaimed. Examples of these are tea, coffee or snacks consumed by employees and visitors for no charge, and flowers for offices or for decoration during special events.
Where events are held solely to entertain employees, for example staff parties, the VAT incurred on the costs is not recoverable unless a charge is made for attending.
It’s common for businesses to give occasional gifts to staff free of charge and VAT on these types of gift is not recoverable. Examples include long service awards, gifts on retirement, gifts for holidays, festival or special occasions such as weddings, the birth of a child and rewards for employee of the month or dinners to recognise performance.
Many businesses will fund or reimburse an employee for certain costs borne by the employee during the performance of their role. In such cases, the costs are considered genuine business expenses and the VAT incurred is recoverable, as long as a tax invoice is provided and the cost is incurred solely for business purposes. Examples given by the FTA are costs from a domestic business trip, which requires overnight accommodation, or input tax incurred on subsistence costs during the business trip. Other similar examples might be fuel costs incurred in an employee’s car for business travel or personal mobile phone costs used for business purposes. In both these cases it is vital to keep details of the expenditure to support that it is business related.
Lisa Martin, a chartered accountant with more than 20 years commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to firstname.lastname@example.org