Following decisions of the European Court of Justice (ECJ) in 2009, HMRC policy on input tax on business entertainment changed where the recipient was an overseas customer.
It is interesting to note that the cases concerned situations where the customers simply enjoyed a meal in the company canteen. This was true in both Danfoss and AstraZeneca.
The change of policy was announced in HMRC Brief 44/10, which is now found in the National Archive.
This brief explains the two tests which must be applied for input tax claims:
The necessity test; was it necessary for the claimant to provide those goods or services in order for him to make his taxable supplies?
The strict business test; consider the full circumstances of the entertainment provided. Was it necessary to provide those goods or services for the smooth running of the business meeting?
HMRC guidance also refers to a private use output tax charge. This will apply where the input tax for the supply is incurred (as in the operation of a staff canteen), and only part of the use is attributable to business entertainment.