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Business Entertaining VAT Test Case

Perennial issues in respect of the tax treatment of business entertaining expenses came to the fore as a leading accountancy firm sought a VAT refund, going back more than 25 years, on the costs of feeding and watering its clients.

From the inception of VAT in 1973, businesses were in general barred from reclaiming input tax in respect of meals and refreshments offered to clients. An exception was made for the reasonable costs of entertaining overseas customers; however, that concession was withdrawn in 1988.

Following an authoritative decision of the European Court of Justice (ECJ), the UK government conceded that the overseas clients exception had been unlawfully revoked and it was restored in 2011. In the light of those developments, HM Revenue and Customs refunded VAT incurred on entertainment of overseas customers between 1 August 1988 and 1 May 2011.

The firm argued that, in light of the unlawful withdrawal of the concession in 1988, it was entitled to recover VAT on all business entertainment expenses incurred since that date, not just those attributable to overseas clients.

In rejecting that argument, however, the First-tier Tribunal (FTT) ruled that the firm’s interpretation of the legal position was supported neither by ECJ authority nor logic. Having expressed ‘no real doubt’ about the outcome of the case, the FTT refused to refer the matter to the ECJ for a definitive decision.