Is it a Repair, Replacement (RDI) or Improvement?

This is probably one of the most difficult cost types to define and is extremely confusing for property investors.

The guidance never seems to quite fit with the work undertaken.

Its an issue for accountants too, often the investor lists all the costs rather than the projects so you end up with lots of entries like B&Q and have to try to reshuffle them into projects like a new kitchen.

HMRC has a tool kit Capital v Revenue which gives some guidance.

In general investors want costs to be repairs (which can be deducted from profit and save tax now) where as HMRC would probably prefer improvements (which are held back and used the Capital Gains Computation when the property is sold).

In this blog I will try to give some further help aimed at owners of Buy to Let properties, the rules apply both to individual investors and those who invest via a company.

Pre-Letting Costs

The general rule is that if you buy a run down property that needs work doing on it before it can be let then that work is an improvement (capital cost).

However, if you had a letter from an letting agent saying it was lettable in its purchase condition then the works could be a repair (revenue).

If substantial work is needed, its best to discuss this with your accountant before the work is done to determine its status as an Improvement or Repair.

The important point is the property needs to in fit state to let before the alterations, refurbishment, repairs are carried out if you want the costs to be repairs.

Here is HMRC’s Guidance from PIM2030

Repairs after a property is acquired

Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the customer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

  • A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
  • The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the customer makes the repairs just after they acquire the asset.
  • The customer makes an agreement that commits them to reinstate the property to a good state of repair.

Repairs

HMRC have agreed “A replacement of a part of the “entirety” with the nearest modern equivalent is allowable as a repair for tax purposes.” (Tax Bulletin 59)

Examples

  • Replacing single glazed windows with double glazed windows
  • Replacing guttering with a new modern guttering
  • Replacing lead pipes with copper or plastic pipes
  • Replacing wooden beams with steel girders

What about Kitchens?

The following refurbishment works would be repairs

  • Stripping out
  • Replacing Base Units
  • Replacing Wall Units
  • Replacing Work Tops
  • Re-tiling
  • Floor repairs
  • Plastering
  • Wiring

Provided you are replacing with a similar standard kitchen

But if you add storage or equipment these items would be capital improvements.

There are also special rules relating to expenditure on specified parts of buildings called
‘integral features’. The following are integral features:


• an electrical system (including a lighting system)
• a cold water system
• a space or water heating system, a powered system of ventilation, air cooling or air
purification, and any floor or ceiling comprised in such a system
• a lift, an escalator or a moving walkway
• external solar shading.


Under these rules if expenditure on an integral feature represents the whole, or more than 50%,
of the cost of replacing the integral feature, then the whole of the expenditure is to be treated as
capital expenditure

Replacement of Domestic Items (RDI)

Since 2016 Replacement of Domestic Items Relief has replaced the Wear and Tear Allowance. The rules are in PIM3210.

Note – RDI is not given for the purchase of new items that are not replacements

In order for relief to be given, 4 conditions must be met:

Condition A – the individual or company looking to claim the relief must carry on a property business that includes the letting of a dwelling-house(s).

Condition B – an old domestic item that has been provided for use in the dwelling-house is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the lessee in that dwelling-house and the old item must no longer be available for use by the lessee.

Condition C – The expenditure on the new item must not prohibited by the wholly and exclusive rule (see BIM37000) but would otherwise be prohibited by the capital expenditure rule (see BIM35000).

Condition D – Capital Allowances must not have been claimed in respect of the expenditure on the new domestic item.

If the 4 conditions are met, then a deduction for the expenditure on the new item can be claimed.

However, a deduction is not allowed if:

  • The dwelling-house in question is, in full or part, a furnished holiday letting (special rules apply to FHL’s)
  • Rent-a-Room receipts have been received in respect of the dwelling-house in question and Rent-a-Room relief has been claimed in relation to those receipts.

If the new item is of broadly the same quality/standard as the old item and doesn’t represent an improvement then the deduction is the cost of the new item. Note that for these purposes, just because an item is brand new does not make it an improvement over an item which has been in use for several years and suffered general wear and tear. For example, a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

RDI will be given for ‘domestic items’ such as:

  • Moveable furniture such as beds and free-standing wardrobes.
  • Furnishings such as carpets, curtains and linen.
  • Household appliances such as televisions, fridges and freezers.
  • Kitchenware such as crockery and cutlery

Improvements

If an alteration increases the market value of the building, changes its function, or extends the life of the whole building then its an improvement.

We also noted under pre-letting that work to make a property lettable could be an improvement.

PIM2030 states

But there is usually no improvement if trivial increases in performance or capacity arise solely from the replacement of old materials with newer but broadly equivalent materials. For example, the replacement of pipes or storage tanks of imperial measure with the closest metric equivalent may result in slightly increased diameter or capacity but the cost is still revenue expenditure.

Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure. This includes things like redecoration after the main work has been done (redecoration would ordinarily be a revenue expense). The entire cost is capital expenditure, including the expense of making good any damage to decorations.

Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure and it can’t be deducted as an ordinary revenue business expense. 

steve@bicknells.net

Zero Rating Commercial Conversion First Grant of Major Interest (Residential)

Conversion of Commercial Buildings for example Office Buildings, Shops, Warehouses, Barns into Residential qualify for 5% reduced rate VAT in relation to the Conversion Costs. But when the first major interest is granted it will be Zero Rated giving full VAT recovery.

Note that Building Materials supplied separately to the contract for the conversion will be charged at 20% standard rate but you will recover that VAT.

The most common approach is to create a group with the subsidiary carrying out the conversion work and granting the first major interest, either by directly selling the first major interest or transferring the completed residential property as first major interest to the holding company

A Group will qualify for Group SDLT Relief (subject to conditions).

This means that full recovery of VAT has been achieved and no SDLT suffered, however, the converted property will be transferred at Market Value which could create a profit in the developing subsidiary.

If this isn’t done and the subsidiary rents out the property partial exemption may apply reducing the VAT recovery or limiting it.

Below are the key sections relating to VAT.

VAT Notice 708 Section 5.3 Non-residential conversion

A ‘non-residential conversion’ takes place in 2 situations. The first is when the building (or part) being converted has never been used as a dwelling or number of dwellings (see paragraph 5.3.1) for a ‘relevant residential purpose’ (see paragraph 14.6), and it is converted into a building ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose (see paragraph 14.6).

The second situation requires that in the 10 years immediately before (see paragraph 5.3.2) the sale or long lease, the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’ and it is converted into a building either ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose’ (see paragraph 14.6).

Examples of a ‘non-residential conversion’ into a building ‘designed as a dwelling or number of dwellings’ include the conversion of:

  • a commercial building (such as an office, warehouse, shop)
  • an agricultural building (such as a barn)
  • a redundant school or church

VAT Notice 708 Section 7 Reduced rating the conversion of premises to a different residential use

Section 7.3

A qualifying conversion includes the conversion of:

  • a property that has never been lived in, such as an office block or a barn

But Zero Rating (0%) applies on the first grant of a major interest where a developer has converted a non-residential building into a home.

VAT Notice 708 Section 5.6 First Grant of a Major Interest

Subject to the conditions at paragraph 5.1.2, you can only zero rate your first sale of, or long lease (see paragraph 4.2) in, a building (or part of a building).

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT

VAT Notice 708 Section 4.2 Granting a major interest in a building

You’re granting a major interest in a building when you sell, assign or surrender:

  • the freehold
  • in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
  • in relation to Scotland, the estate or interest of the owner
  • in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years

steve@bicknells.net

HMRC Making Tax Digital for Landlords – its easy isn’t it?

Making Tax Digital for the self employed and landlords with gross income over £10,000 will be compulsory from April 2023, but lets look at some the potential requirements and issues

Reporting

MTD means reporting to HMRC 4 times a year plus a 5th year end return. The records have to be digitally linked using HMRC approved software Find software that’s compatible with Making Tax Digital for VAT – GOV.UK (www.gov.uk)

The information will probably be the same as Self Assessment Returns, we won’t know exactly what is needed till September 2021 when HMRC release the API requirements.

Landlord report in quarters start from 6th April (some are suggesting this should be moved to whole months – as having 6th to 5th each period doesn’t seem logical)

Many landlords have other businesses so they may have a separate quarter for VAT and possibly yet another one based on their Sole Trader or Partnership reporting period (year end).

So you could be reporting 3 separate quarters or more where as previously they were just doing an annual self assessment. That’s a lot of extra returns to file!

Software/Accounting

Accounting is the next problem area, here are the issues

Properties

Its likely that you will use Tracking Codes or Projects to account for each property within you software. This will mean you can report by property.

Cash Accounting or Traditional

Landlords can choose to use either cash accounting or traditional accounting, Cash Accounting is the default.

Most software is not set up for cash accounting (except in the case of VAT, but thats not applicable to landlords as Residential Rent is Exempt from VAT)

Furnished Holiday Lets or Residential

Many Landlords now have a mixture and they are reported in separate sections of the Self Assessment Return.

Potentially you could EU or other Property income too, how will HMRC handle that?

These need separating within the accounting system to produce the information needed.

Jointly Owned Property

Its unlikely that a Landlord with jointly owned property would maintain two sets of accounts with 50% in each (or whatever the split needs to be), so software will need to be able to deal with this. Some Landlords may have a mixture of jointly owned and sole owned.

Rent a Room

Rent a Room can be used even by those exceeding the £7,500 limit, the balance above this level is then taxed Rent a Room – What if Rent exceeds £7,500? « Steve J Bicknell Tel 01202 025252

Lots to consider and the clock is ticking.

Steve@bicknells.net

2021/22 Tax and Financial Strategies

Forward planning is essential if you want to ensure that you are on course to achieve your business and personal financial goals, and this is even more the case in times of ongoing economic uncertainty.

Using strategic planning tools, we can suggest methods to maximise both your business and your personal wealth, while also helping to keep your tax liabilities to a minimum.

With this in mind, here is our 26 page 2021/22 Tax and Financial Strategies Brochure, which explores some of the key planning opportunities that could help to protect and make the most of your finances.

Click here to download a free copy

steve@bicknells.net

Hospitality VAT rates – what is going on? Can I use Flat Rate and pay No VAT?

Serviced Accommodation/Furnished Holiday Lets (FHL) are currently enjoying special rates of VAT

The government made an announcement on 8 July 2020 allowing VAT registered businesses to apply a temporary 5% reduced rate of VAT to certain supplies relating to:

  • hospitality
  • hotel and holiday accommodation
  • admissions to certain attractions

The temporary reduced rate will apply to supplies that are made between 15 July 2020 and 31 March 2021.

These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.

That rate is set to change to a new rate of 12.5% from 1 October 2021 to 31 March 2022

What is the Flat Rate scheme?

The Flat Rate Scheme is designed to simplify VAT because the Flat Rate % is applied to your turnover including VAT.

It doesn’t change the VAT rate charged to the client it just helps to calculate the VAT to be paid to HMRC.

You can join the Flat Rate Scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
  • you get a 1% discount on the flat rate if you’re in your first year as a VAT-registered business.

You must leave the scheme if:

  • you’re no longer eligible to be in it
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

What are the Flat Rates?

Hotel or accommodation before 15 July 202010.5
Hotel or accommodation from 15 July 2020 to 30 September 20210
Hotel or accommodation from 1 October 2021 to 31 March 20225.5

Why would Flat Rate VAT help?

Example You bill a client for £1,200 including VAT, so thats £1,000 plus 20% VAT.

You’re a Holiday Let, so the VAT flat rate for your business is 0%.

Your flat rate payment will be 0% of £1,200, so nothing to pay

This is great news for Furnished Holiday Lets especially if they are just crossing the £85,000 VAT Threshold

Most Holiday Lets can’t increase their prices to incorporate VAT when they cross the VAT threshold because they would be uncompetitive so VAT is direct hit to their profits.

On the basis that the accommodation fee is unchanged but now includes a VAT element, if Flat Rate is used and the rate is 0% then no VAT is paid to HMRC.

That may not work for every business, it depends on whether you have a high level of VAT expenses which would offset the VAT and could result in a refund for example when you first register you may be able to reclaim VAT on pre-registration costs. Flat Rate restricts the recovery of expenses, you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000

Its also a problem if you’re classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher flat rate of 16.5%.

steve@bicknells.net

When can’t property investors use Micro Entity Accounts?

Most property investors love Micro Entity Accounts:

  1. No property revaluation – property is shown at historic cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
  2. Minimal disclosure and no notes
  3. No deferred tax
  4. Most property investors fit within the size criteria
  5. No Directors Report

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

The FRC (Financial Reporting Council) aren’t big fans of Micro Entity reporting due to concerns about the minimal accounts giving a ‘true and fair’ view but the whole reason for FRS105 and Micro Entity Accounts was to simplify reporting for SME’s and they definitely do that.

FRS105 allows Investment Property – see FRS105 Section 12

There are certain companies which can not qualify as micro entities regardless of their size

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

Investment Undertakings

Article 2 of the Accounting Directive – 2013/34/EU as follows:

2(13) ‧associated undertaking‧ means an undertaking in which another undertaking has a participating interest, and over whose operating and financial policies that other undertaking exercises significant influence. An undertaking is presumed to exercise a significant influence over another undertaking where it has 20 % or more of the shareholders’ or members’ voting rights in that other undertaking;

2(14)‧investment undertakings‧ means: a)undertakings the sole object of which is to invest their funds in various securities, real property and other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, (b) undertakings associated with investment undertakings with fixed capital, if the sole object of those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;

2(15) ‧financial holding undertakings‧ means undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders

Is this a problem for Property Investment Companies?

No, most property investment companies are not Investment Undertakings!

I know that sounds odd as it is a property investment and the investment makes it sound like an Investment Undertaking so lets look at this in more detail

  1. Are there multiple shareholders? generally not its often owned by a husband and wife (or civil partners) – if you have lots of passive investors that could make it an Investment Undertaking, we would need to look at the primary purpose of why the passive investors invested
  2. Are there shareholders with no involvement in the operation or management of the business? if their primary purpose was investment then it could be an Investment Undertaking – generally that’s not the case because normally property is funded by loans not shares (if you do use external investors you could fall within FCA regulations)
  3. Are there multiple properties in the same company? This could be seen as spreading the risk which might be an Investment Undertaking but most portfolio investors are seen by HMRC and others as running a property business and they are active in running it, many new investors have multiple companies with a single property in each Company – its better for lenders (charge on property and debenture over company), its better when you sell GCT is based on the share value (net worth) and the purchaser gets very low SDLT 0.5% and may not need to refinance
  4. Is a small property portfolio a risk management strategy? No, the assets are all of the same class so how can it be a risk management strategy!
  5. What about a company with one property used by a related party or member of a group? there is no management or spreading of risk so its not an Investment Undertaking

steve@bicknells.net

How do you pay interest to a director or individual lender? CT61

A few basics first:

  1. CT61 does not apply when a company in the UK pays interest to another company in the UK
  2. If you are seeking loans or investment make sure you check the FCA rules as it could be a regulated activity
  3. CT61 payments are quarterly and based on when payment is made
  4. The rules are not optional
  5. Its a deduction of Income Tax paid directly to HMRC
  6. The lender may be able to get the tax back on their self assessment return
  7. The borrower should give the lender a statement showing the Gross, 20% Tax and Net payment – HMRC R185 Certificate of deduction of interest

What does CT61 apply to and what form do you need?

If your company or organisation pays interest, royalties, alternative finance payments, manufactured payments, relevant distributions or any similar recurring payment, you must generally make these payments after deducting Income Tax at the basic rate – currently 20%. You need to tell HMRC about these payments and pay the Income Tax that you’ve collected. Use form CT61 for companies.

If you are an LLP you must send a letter and clearly state that you are a LLP and quote your Unique Taxpayer reference with details of the payment made and the tax deducted to:

Self Assessment
HM Revenue and Customs
BX9 1AS

How do apply for CT61?

To get a CT61 you have to complete the e mail template

HMRC: Structured Email (tax.service.gov.uk)

Nil Returns

Unlike other taxes you don’t need to file Nil Returns (see ‘When must I send a CT61’ section of CT61 notes)

But if you do need submit a return you need to do it within 14 days of the return period

Penalties

The CT makes this a Corporation Tax return so penalties should be inline with Corporation Tax penalties

Time after your deadlinePenalty
1 day£100
3 monthsAnother £100
6 monthsHM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax
12 monthsAnother 10% of any unpaid tax

steve@bicknells.net

When you get married does your Buy to Let become jointly owned?

If a married couple or civil partners buy an investment property HMRC the rules are

TSEM9812 – Property held jointly by married couples or civil partners: Overview: two main rules

There are two rules about property held jointly by married couples and civil partners:

  • the ‘50/50 rule’ (ITA/S836) whereby most income from jointly held property is treated as split equally between the two spouses or civil partners for income tax purposes; the 50/50 rule applies unless there is a valid declaration on form 17; sections TSEM9814-9840 contain the details;
  • the ‘form 17 rule’, whereby, if the true income split is different from 50/50, the couple can opt to be taxed on that basis for income tax purposes (ITA/S837); sections TSEM9842-9878 contain the details.

When you get married there are tax changes

Marriage Allowance

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).

Capital Gains Tax

If you and your spouse or civil partner are living together, any transfer of an asset between you is treated as giving rise to neither a gain nor a loss to the person transferring it. Any amount actually paid is ignored. If the person receiving the asset later disposes of it, they will be treated as if they had paid an amount equal to the total of your costs.

Inheritance Tax

In addition to the CGT exemption for gifts between spouses, a similar relief exists for inheritance tax (“IHT”) purposes in most cases, so that assets can be gifted from one spouse to another without triggering an IHT charge.

Plus unused Nil Rate bands can be transferred on death.

What about Investment Property?

The short answer is that it does not automatically become jointly owned on marriage, but at least you can transfer part of the ownership without incurring capital gains tax.

steve@bicknells.net

Do you need a certificate from the client to zero rate or reduce rate construction VAT?

Dwellings

The rules are in the VAT Notice 708 and in section 17.1 it states

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

Zero Rating – an example would be building a new house

Reduced Rating – this applies to converting a non-residential building to a dwelling or multiple dwellings

If your builder needs further details just point them at VAT Notice 708.

Don’t accept invoices which have the wrong VAT rate on them, even if you can claim the VAT back because HMRC will only accept the recovery of VAT when its charged at the correct rate

When do you need a Certificate?

You need to hold, within your business records, a valid certificate when you make any zero-rated:

  • or reduced-rated supply in connection with a building that will be used solely for a ‘relevant residential purpose’ – see paragraph 14.6
  • supply in connection with a building that will be used solely for a ‘relevant charitable purpose’ – see paragraph 14.7

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of notice 708 to zero rate or reduce rate your supply.

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 of VAT Notice 708 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

The 2 available certificates confirm that you’re either eligible to receive:

  • zero-rated or reduced-rated building work (the certificate can be found at paragraph 18.1)
  • a zero-rated sale or long lease (the certificate can be found at paragraph 18.2)

What if you get it wrong?

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

What if the use changes?

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, HMRC expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

What about Materials?

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on ‘building materials’ that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not ‘building materials’ and remain standard-rated.

steve@bicknells.net

That’s Entertainment! but can I claim a tax deduction or VAT refund?

What is Business Entertainment

Entertainment is defined as hospitality of any kind, the following are examples:

  • provision of food and drink
  • provision of accommodation (such as in hotels)
  • provision of theatre and concert tickets
  • entry to sporting events and facilities
  • entry to clubs and nightclubs
  • use of capital assets such as yachts and aircraft for the purpose of entertaining
  • Gifts BIM45065

Is it tax deductible?

No its not, Entertainment is not tax deductible

Hospitality by definition is giving something for free.

So if its a ‘Quid pro quo’ where you have to give something in exchange its not hospitality its a trade and would therefore be tax deductible. This also applies if you are contractually obliged to provide the entertainment for example Celtic Football Club were contractually obliged to pay the visiting opponents board and lodging under UEFA rules. Another similar case was Kilroy Television Co Ltd who provided food and train travel to participants in their programs.

Also of interest is the case of Merlin Scientific LLP v HMRC [2015] TC04441 they supplied corporate meeting facilities but the supply was considered a minimal amount of a composite supply.

What about staff entertainment?

Staff entertainment is allowable BIM45033

Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45034). For more information on how to establish the purpose of expenditure, see BIM37050.

Where an employer provides a staff Christmas party, or a sporting event which is open only to employees, the expenditure is not disallowed by the legislation. However, it is still necessary to establish that the expenditure is wholly and exclusively for the purpose of the business.

In practice, the definition of ‘employees’ is extended to include retired members of staff and the partners of existing and past employees. 

You might find these blogs helpful

Let’s have a Virtual Tax Free Party « Steve J Bicknell Tel 01202 025252

Will the Christmas Party be tax free? « Steve J Bicknell Tel 01202 025252

It’s time for a Tax and NI free Trivial Benefit « Steve J Bicknell Tel 01202 025252

Will I be taxed on Christmas gifts recieved at work? « Steve J Bicknell Tel 01202 025252

How to have a tax free Christmas « Steve J Bicknell Tel 01202 025252

Can I have a Tax Free Lunch? « Steve J Bicknell Tel 01202 025252

What about VAT?

You cannot recover input tax incurred on the provision of business entertainment expenses. VAT Notice 700/65

2.5 Subsistence expenses for employees working away from their normal place of business

These are not covered by the business entertainment rules because they are not business entertainment.

Meetings

If normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, then a private use charge will not apply.

If there is no other alternative than to hold a meeting outside the office, only similar basic provisions would be allowable. Hospitality provided following a meeting will not meet the strict business purpose test and neither will hospitality involving the provision of alcohol. Taking a customer to a restaurant is very likely to lead to a private use charge.

Corporate hospitality events

Many businesses offer their customers or potential customers general entertainment and hospitality. Examples include:

  • golf days
  • track days
  • trips to sporting events
  • evening meals
  • trips to nightclubs

Where the related expenditure is incurred for the purpose of the business, and recovered, an output tax charge will be due. This is because such events are unlikely to have a strict business purpose or are necessary for the business to make its supplies.

3. Employee entertainment

3.1 Overview of employee entertainment

Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.

Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.

However, there are two exceptions to the general rule. These are where:

  • entertainment is provided to directors, partners or sole proprietors of the business
  • employees act as hosts to non-employees

steve@bicknells.net