Revenue & Customs Brief 09/11 discloses the draft legislation concerning exclusion of the entertainment of overseas customers from the general block on business entertaining, in line with the policy spelt out, in detail, in their earlier Brief of 44/10. Comments have to be submitted by 28 March, and the new legislation will come into force on 1 May (though as a general legal principle under EU VAT law, it is in force already).
A restrictive policy
It is interesting to note that there has been no formal impact assessment of the change on the assumption that the administrative impact on business will be negligible. Of course that is true, if the business decides not to exercise its right to make the claim, and any business will naturally assess whether it is worth their while to do so. But I detect a view within HMRC that the rules will prove so restrictive that very few claims of any substance will be made. Certainly, the policy described in Brief 44/10 leads to that conclusion.
Restricted to overseas customers only
There are several barriers to the policy proving worthwhile to business. First, only overseas customers are included, so that excludes suppliers or agents (though there are possible exceptions concerning agents), unless businesses decide to contrive low level sales to such parties to cause them to be defined as customers, and which, no doubt, HMRC would try to challenge.
Second, the drafted law defines an overseas customer as ‘any person not ordinarily resident nor carrying on a business in the UK or IoM…’. So, to validate a claim you must be sure that the customer’s UK affairs are fully open to you, in case they are tainted by business involvement in the UK. The nature of ‘carrying on a business’ is not defined. It could relate to the usual VAT concepts of a place of establishment, or refer to the place of supply rules and how they impact on the activities of the customer, but could the definition go any wider? Might such a customer also be tainted by, say, carrying out ad hoc consultancy services in the UK, but not from a UK establishment, and not subject to UK VAT except under the reverse charge, accounted for by their UK customer?
The draft legislation gold plates this by requiring the customer to use the services of the UK supplier/entertainer for business activities which are deemed to be carried on outside the UK. The danger inherent in the draft legislation is that, where the customer is using the supplies in respect of a business which is wholly outside the UK, it seems that the possible fact that the customer has unrelated business involvement in the UK taints the claim. This makes it very difficult to prove that the entertained customer is an ‘overseas customer’.
How does that impact on a corporate group of customers, some of which may have UK business activities while others do not. How does the UK business, providing entertainment, control who, within that group, it is entertaining?
The customer must be involved in a business
It is also clear that the customer must themselves be involved in a business, and not be a private consumer. The UK business therefore must prove or demonstrate that his goods or services form a cost component of a wider business activity. There will probably be situations where that is difficult to ascertain.
Thankfully, the provisions also include entertainment of any non-UK government or public authority. It may prove interesting the extent to which representatives of these are likely to be ‘entertained’ and in any case it is often difficult to define a ‘public authority’.
What is ‘reasonable’?
And this is before we grapple with the requirement that the entertainment be ‘of a kind and on a scale which is reasonable, having regard to all the circumstances’. Brief 44/10 went into that point in some detail and gave the impression that only the most basic (even derisory) entertainment would qualify. The problem is that the legislation as proposed does not even attempt a definition, so there is going to be litigation on that aspect as well.
A significant development for tax lawyers, but something of a disappointment for taxpayers.
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Graham Elliott, VAT Partner, haysmacintyre
