VQOTW: Dry January? Input Tax Recovery on Alcohol

My client company is a wholesale vintner of long-standing reputation. To capitalise on the current popularity of botanical gins they have recently opened a micro-distillery. To promote and celebrate this new venture the company held a party for staff and business associates, both suppliers and customers. Hospitality was provided at the event in the form of bought-in catering, as well as alcohol from their own stock, some of which were consumed at the event and some of which was given as gifts to take away. Please could you clarify the input tax recovery position? 

It is a common misconception that where the provision of alcohol is involved, input tax recovery is denied. This may be due to the direct tax rules, which are more restrictive, but for VAT purposes, the fact it is alcohol is not necessarily material to the VAT recovery position.

The VAT rules differentiate between the treatment of business entertainment classed as services, and business gifts classed as goods.

Article 176 of Directive 2006/112 allows the UK to restrict input tax claims on business entertainment via article 5 of The Value Added Tax (Input Tax) Order SI 1992/3222.

For the purposes of the Input Tax Order business entertainment means the free provision of any hospitality to persons who are not employees. For VAT purposes entertainment or hospitality can take many forms. Some common examples include:

  • the cost of giving away food and drink;
  • the cost of giving away accommodation, for example in hotels;
  • the cost of giving away theatre and concert tickets;
  • giving free entry to sporting events and facilities;
  • giving free entry to clubs, nightclubs etc., and
  • using yachts and aircraft to entertain.

However, VAT incurred on staff entertainment can be recovered in full, providing the staff are not merely acting as hosts. This includes the cost of any alcohol.

As your client’s event was attended by both employees and non-employees, they should apportion the VAT incurred on the cost of providing catering and any beverages consumed at the event. This would include any stock manufactured by the client in the distillery, whereby a fair and reasonable apportionment should be applied to any standard-rated costs of production and any wine taken from stock, where the input tax should be disallowed on the cost value.  Further information can be found at https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit43200.

With regard to gifts of goods, there is no input tax restriction, but the free disposal immediately triggers a charge under Schedule 4 paragraph 5(1). However, sub-paragraph 5(2) (a) provides that there is no supply if the cost value of the gift which, together with cost of any other business gifts made to the same person in the same year, is not more than £50. Further information on business gifts can be found at https://www.gov.uk/guidance/business-promotions-and-vat-notice-7007#sect2.

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VAT Advice Consultant
0844 892 2470

Sally is the Team Leader of the VAT Advice and Consultancy team at Croner Taxwise. She has worked in VAT since 1990, including eight years spent with HMRC, both as an Assurance and Enquiries Officer involved in presenting seminars and business education. Since joining private practice in 1999, Sally has specialised in providing VAT technical advice to a variety of clients, ranging from small one-man bands to large multi-national corporations, on the full range of VAT technical matters.

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