VAT on subsistence : all you need to know

What is subsistence?

“Subsistence” refers to certain expenses incurred when employees are working away from their usual place of work. When employees have to travel for business, they necessarily incur additional costs. The cost of expenses such as transport and accommodation are covered by specific rules. Subsistence costs include all the additional expenses incurred, such as meals, drinks, parking charges, road tolls, congestion charges and business phone calls.

Under certain circumstances, the input value-added tax (VAT) on these expenses can be reclaimed by VAT-registered businesses. 

VAT and subsistence

When expenses fall within the definition of “subsistence” given by HMRC, the VAT on these expenses is deductible. This covers accommodation, meals, drinks and associated costs incurred by being away from the usual workplace.

For example, if an employee has to attend a 9 am meeting at a venue three hours away from their home, they are likely to want to travel there the day before, eat dinner, stay overnight and have breakfast before attending the meeting. The VAT on all these costs can, under usual circumstances, be VAT-deductible. 

Limitations and grey areas

Businesses cannot claim back VAT on subsistence expenses when a fixed allowance (per diem) is paid to employees. This is because nothing has been supplied to the business.

The rules on subsistence apply to situations where employees are away from their usual place of work. They do not apply to everyday meals that are taken as part of the regular working day. Similarly, travel to and from the usual place of work is not considered an eligible expense.

Subsistence also does not cover special events such as staff entertainment (end-of-year parties, functions etc.). If a business buys trays of sandwiches and drinks to mark a special event in the company’s history, this is called “staff entertainment”. In some circumstances, the VAT can still be recovered on this expenditure, although the reclaiming process is slightly different.

When subsistence costs and “entertainment” costs overlap, it can be tricky to work out what can be reclaimed. If after a successful meeting, an employee invites a client to finalise a new contract over a game of golf, there is certainly an element of “entertainment” to the get-together, despite the business aspect. Some, but not all, of the expenses are likely to be covered by the rules on subsistence. If at the end of the round of golf, the employee then presents the client with a gift, specific rules apply as to whether the VAT on this business expense can be reclaimed.

The legislation does not set limits on exactly how much subsistence expenses can be. The key word is “reasonable”. Although the term could be debated, there is a certain element of common sense in its application. Eating out at a mid-range restaurant while on a business trip would be “reasonable”, but sampling the tasting menu and enjoying fine wines at a five-star exclusive restaurant would probably not be considered “reasonable” under normal circumstances. Businesses sometimes turn to the HMRC’s “scale rate” mechanism to get an idea of the amounts that may be considered “reasonable”.

Conclusion

As is the case with all VAT matters, it is important to keep meticulous records of all expenditures on subsistence. Itemised receipts showing the date, place of purchase and VAT amounts should be kept and archived in the event of an inspection. Mooncard corporate cards can help keep track of your business expenses and make record-keeping easier.

Find out more by booking a free demonstration.