VAT on launch party

[Rebecca H]

Hello,
I have a simple tax related question.
I am setting up a small consultancy biz, and am thinking of having a small launch party for a few customers.
Can I reclaim input VAT on the launch party, or is it strictly entertaining and therefore not allowable?
Can I set the expense off against corporation tax, or again is it disallowed?
Thanks everybody,
RebeccaH

[spidersong]

I can't answer on Corporation tax as that's not my area, but for the VAT side I'm afraid the majority of costs will be business entertainment.

The actual 'party' expenses (room hire {if VAT is charged}, catering, entertainment) will be business entertainment and not recoverable, VAT on business gifts, if you're giving out 'goody bags' or freebies (i.e. branded memory sticks, mousemats, pens etc. within the business gifts limits (£50 worth of goods to a single person in a single year), should be allowable.

If you'll be buying in items that you'll be using in the business later for advertising purposes etc., then you should also be able to get some recovery on these.

Hope this helps

[Zeno]

Disallowed for corporation tax too I am afraid.

[JulianHobbs]

disallowable, I'm afraid

[The Master]

I'd disagree with the previous respondents in the reclaimability against VAT and CT for the following two reasons.

1. Ok, certain expenses are naturally disallowed because everyone knows they aren't allowed. e.g. golf club subs, buying a new Prada dress. However certain items of expenditure are a grey area. Officially for them to be allowed be it for Vat or CT is that they have to be "wholly and exclusively for the purpose of trade". By your own statement, it is a launch party, therefore I would contend it is advertising more than entertainment. You are renting a venue, providing refreshments and presumably giving a spiel to the attendees as to what you can "do for them". So is the intent to have a hooley, or is the intent to speculate in the hope that a future benefit will arise. At worst case, yes you could perhaps disallow a percentage of the VAT for entertaining purposes, but I'd suggest this be minimal.

2. Second reason is much more pragmatic. If you claim everything, by default you have "got off with it", unless it is enquired into. Unless your business sky rockets, there is very little chance of it being inspected until 2 years post commencement, and by that stage no one will care about day one.

So claim it.

[Zeno]

I'd disagree with the previous respondents in the reclaimability against VAT and CT for the following two reasons.

1. Ok, certain expenses are naturally disallowed because everyone knows they aren't allowed. e.g. golf club subs, buying a new Prada dress. However certain items of expenditure are a grey area. Officially for them to be allowed be it for Vat or CT is that they have to be "wholly and exclusively for the purpose of trade". By your own statement, it is a launch party, therefore I would contend it is advertising more than entertainment. You are renting a venue, providing refreshments and presumably giving a spiel to the attendees as to what you can "do for them". So is the intent to have a hooley, or is the intent to speculate in the hope that a future benefit will arise. At worst case, yes you could perhaps disallow a percentage of the VAT for entertaining purposes, but I'd suggest this be minimal.

2. Second reason is much more pragmatic. If you claim everything, by default you have "got off with it", unless it is enquired into. Unless your business sky rockets, there is very little chance of it being inspected until 2 years post commencement, and by that stage no one will care about day one.

So claim it.

I would be inclined to believe that a small company that submits accounts to HMRC showing entertainment costs that are not added back on the tax return would run a fairly large risk of enquiry.

[The Master]

I would be inclined to believe that a small company that submits accounts to HMRC showing entertainment costs that are not added back on the tax return would run a fairly large risk of enquiry.


Exactly, hence I would respectfully suggest that it is a launch expense and not entertainment. Its technically advertising, as the lady is trying to sell herself and not merely have a knees up. The entertainment aspect to the launch is incidental, and not the main intent.

[Zeno]

Exactly, hence I would respectfully suggest that it is a launch expense and not entertainment. Its technically advertising, as the lady is trying to sell herself and not merely have a knees up. The entertainment aspect to the launch is incidental, and not the main intent.

Sure and 'tis that not the reason the good Lord gave us the heading "miscellaneous expenses"?

I assumed the main costs of the party would be booze. Why else would anyone come?

[The Master]

presumably to Network and perhaps get a few freebies to take away to give their kids.

[An Oasis]

Good to see not everyone bending over. ;)

Terminology seems wrong to me it's a solo exhibition. We'd give it a 6000 code (advertising & marketing) after all that it exactly what you are doing it’s a marketing exercise. Then you need to work out what is allowable.

[The Master]

Good to see not everyone bending over. ;)
.....
Then you need to work out what is allowable.

Personally I'd disallow no element of it, as its a one of event and I'd happily justify it to HMRC, on the basis of materiality.

[Zeno]

It all depends on what the actual costs are. The word party suggests that it will be booze, snacks etc which would be disallowable in circumstances given.

If we are actually talking about a get together where people are given a cup of tea, a leaflet, and a wee bag with a company ruler & whistle then it this will be different. Not really my idea of a party though...

[The Master]

Hello,
..... am thinking of having a small launch party for a few customers.

RebeccaH


I read the OP to being a sedate affair, to showcase the business, and not being a "hammering event", hence the Entertainment side being ancillary.

If it is a "heavy session", may I have an invite :D

[spidersong]

The following relates to the VAT position only:

Isn't the whole purpose of business entertainment to advertise and encourage trade?

If I take the purchasing manager of a large potential client out to lunch then aren't I just advertising my services to them. I could even take a leaflet with me to make sure.

If we use this logic then 'Business Entertainment' is an imposibility, we just use the dicta that "there's no such thing as a free lunch" and anyone taken out by a business is there to listen to services being advertised.

The findings of tribunals in Wilsons Transport Ltd (decision 1468), Fraserburgh Harbour Commisioners (decision 15797), Miller Freeman Worldwide plc (decision 15439) on parties and receptions for new ventures and conferences/exhibitions, seem to indicate that they don't think much to this way of thinking, and refuse recovery.

Also if the party is on the first return before any major trading is under way and it results in a repayment then there's a good chance HMRC will see it, want to verify it, and refuse it. I know I used to!

[An Oasis]

Personally I'd disallow no element of it, as its a one of event and I'd happily justify it to HMRC, on the basis of materiality.

Definition "Materiality is a concept or convention within auditing and accounting relating to the importance of an amount, transaction, or discrepancy."

I love it, why do so few accountants talk like this? Most seem to be nice people but a bit wimpy. Accountancy with fighting talk, faith restored.

[allsquare]

This expense would go straight under my Advertising & Promotion Expenses and i'd be claiming back any VAT paid too. A launch party has to be advertising & promotion as that is exactly what it is.

When we opened one of our shops in 2003 we did exactly as the OP and had a VAT inspection in 2005 with no problems at all. Guess it depends on the visiting VAT officers and if you take them to lunch or not ;)

[Mattonella Tile Studio]

Our accountant doesn't see a problem on the grounds that it was a part of advertising/promotion, and the costs incurred weren't massive. It wasn't entertainment, as there was no guarantee that anybody would have come to be entertained.

[The Master]

This expense would go straight under my Advertising & Promotion Expenses and i'd be claiming back any VAT paid too. A launch party has to be advertising & promotion as that is exactly what it is.

When we opened one of our shops in 2003 we did exactly as the OP and had a VAT inspection in 2005 with no problems at all. Guess it depends on the visiting VAT officers and if you take them to lunch or not ;)


Well I agree totaqlly with this sentiment, other than one doesn't need to Entertain an HMRC official to get a pragmatic answer. I do take the point of "spidersong" re the commissioners hearings, but facts pertinent in those cases (ie potential loss of Revenue to the Crown) were an order of magnitude larger. Yes, it establishes a precedent, but merely as a guidance for an inspector (CT or VAT) to make a judgement call on the day.

[Kevin Hall]

why do so few accountants talk like this? Most seem to be nice people but a bit wimpy. Accountancy with fighting talk, faith restored.

Speaking for myself, I have two modes of advice: play-it-safe (i.e. complying with HMRC's interpretation) and risk-taking (i.e. challenging HMRC's interpretation).

As an adviser, I have to recognise that not all clients want to challenge HMRC, as it usually involves a lot of time and expense. Many clients are simply not interested and just want the job done so there is no hassle from HMRC.

But it is also important to recognise that many of the cases HMRC take to court/tribunal are lost by HMRC. So their interpretations in grey areas are very much open to challenge - if your client's pockets are deep enough and your client is a risk-taker.

So if Rebecca wants a quiet life, she will have to follow Spidersong's accurate comments: HMRC are clear that VAT cannot be reclaimed on food/drink/amusements which are given free to potential customers. HMRC's view is derived from UK law at Section 5 of VAT (Input Tax) Order 1992, which specifically prevents VAT recovery on expenses incurred in providing any kind of hospitality to third parties. Even more specifically, HMRC's views on launch parties have been upheld many times in caselaw (see Wilsons Transport Ltd, Fraserburgh Harbour Commissioners, and even BMW (GB) Ltd): very simply, HMRC's policy is not to allow VAT to be recovered on the food/drink costs of a launch party. Genuine promotional expenses are reclaimable of course (e.g. advertisements, marketing brochures, etc.), so Rebecca's blocked VAT reclaim might indeed be very small.

But if Rebecca wants to take on the risk, it might be possible to find a new way to structure a launch event so the food/drink is not a "business entertainment" or "hospitality" expense. After all, who would have thought that E&Y would have won their battle on their own Business Entertainment case?

Rebecca needs to quantify the risks, of course.

Firstly, what are the chances of HMRC picking up on the expense? Well, I recall one case on this website where a VAT Officer disallowed VAT on the purchase of alcoholic drinks, allowing only VAT on coffees, for someone who was drinking with his meal whilst out of the office on a business trip. On the other hand, other VAT Officers are more reasonable. As Allsquare says, it depends who you get. But I would suggest that HMRC's general policy is clear and a VAT Officer would usually look to claw back the VAT on food/drink costs which were provided free at a launch party. In my opinion, if a business wants the VAT Officer not to claw back the VAT on such expenses, it is merely hoping that the VAT Officer will overlook the expense or will mistake HMRC policy.

Secondly, what are the consequences if (as seems likely) a VAT Officer does disagree with Mr Master's viewpoint? Well, there might be penalties to pay (e.g. 30% of the VAT lost to HMRC) on top of the reclaimed VAT which must be repaid. There will also be the time spent in arguing the case with HMRC, perhaps including VAT specialist fees. But worst of all, Rebecca might be flagged up for an early re-Inspection (e.g. in 12 months' time) to ensure she is behaving herself. A VAT Inspection is time-consuming, expensive and stressful for a new small business.

Finally, if Rebecca decides to stand her ground and defend Mr Master's view, she will have to take HMRC to court. Again, this would be an expensive and time-consuming option for a new small business. Some risk-takers would live with this if the chances of success were reasonable. But in my opinion, Rebecca's chances of success are minimal, since Mr Master's point of view has been argued in many previous cases (see above) and has almost always lost. It would need a new way of structuring and conceiving of a launch party for a court even to entertain the case. This could perhaps be done, but it would be extremely expensive even if you could find a VAT specialist willing to advise you.

So, how much risk are you willing to take Rebecca?

[Rebecca H]

Thank you all very much for this helpful advice. My mind has now melted and I'm questioning the desire to live now!!!
I think in this case, the safer quieter option is better for me. I don't want to create any waves with HMRC especially being as I'm a start-up company, and I certainly don't want to invite an inspection or anything else.
For the tax involved, it doesn't seem worth the trouble for me.
If all you accountants are debating it, I don't stand a chance!!!

THANKS!!

Rebecca H