VAT on Entertaining Clients: The Rules That Trip Up Many Directors

Input VAT on entertaining clients cannot be reclaimed by a UK limited company, because business entertainment of anyone who is not an employee is specifically blocked under the VAT (Input Tax) Order 1992. Directors regularly discover this only when an accountant strips the claim out of a return, having assumed that a client lunch put through the company card works like any other business cost. The position becomes more complicated once VAT registration for a limited company in the UK is in play, because the scheme the company sits on changes whether recovery was ever possible at all. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps small company owners register at the right time, pick the right scheme and keep entertaining costs out of trouble. This article covers the entertaining block, the staff and overseas exceptions, registration obligations, the schemes available, and how VAT feeds into pricing.

Key Takeaways

• Input VAT on entertaining clients, prospects and other non-employees is blocked in full, so a UK limited company cannot recover it regardless of how clearly business related the meal was.
• Input VAT on entertaining employees is recoverable, but recovery is restricted where employees act as hosts to clients at the same event.
• Client entertaining is also disallowed for corporation tax, so a £3,600 spend costs a company paying 25% corporation tax the full £3,600 rather than the £2,250 an equivalent deductible cost with recoverable VAT would cost.
• VAT registration is compulsory for a limited company once taxable turnover exceeds £90,000 in any rolling 12-month period, with the VAT threshold 2026 unchanged at that level and deregistration available below £88,000.
• The flat rate scheme, open to companies with taxable turnover of £150,000 or less excluding VAT, removes input VAT recovery on almost all purchases, so entertaining rules become academic on that scheme.
• The annual staff function exemption is £150 per head including VAT, and exceeding it by even £1 makes the entire cost a taxable benefit rather than just the excess.

Can a Limited Company Reclaim VAT on Entertaining Clients?

No. A UK limited company cannot reclaim input VAT on entertaining clients, customers, prospects, suppliers or any other non-employee, because business entertainment is expressly blocked from recovery by the VAT (Input Tax) Order 1992. The block applies to meals, drinks, hospitality, event tickets, accommodation and travel provided free of charge to those guests.

There is no de minimis and no exception for modest amounts. A £40 coffee meeting and a £4,000 hospitality box are treated identically. The block also survives the fact that the cost was incurred wholly for business purposes: HMRC accepts that entertaining may generate work and still denies the input tax. Directors sometimes try to sidestep this by describing the cost as marketing, staff welfare or a meeting expense, which does not change the treatment and creates an inaccuracy in the return if HMRC looks. For the full picture of how VAT operates across a small company, see our guide to VAT for limited companies.

When Can VAT on Entertaining Actually Be Recovered?

Input VAT on entertaining is recoverable in two main situations: entertaining your own employees, and, in limited circumstances, entertaining overseas customers. Employee entertainment such as a staff summer party or Christmas function counts as staff welfare, and the VAT on it is recoverable in the normal way.

The overseas exception is narrower than most directors expect: VAT on entertaining an overseas customer may be recoverable where the hospitality is basic, provided strictly for a business purpose and not private in nature, but HMRC applies an output tax charge where any private benefit arises, which usually cancels the advantage. Where employees and clients attend the same event, HMRC treats the employees as hosts and restricts recovery to the employee proportion. Worked example: a company spends £2,700 including VAT on an event for 10 employees and 5 clients. The total input VAT is £450, but only ten fifteenths of it, £300, is recoverable, with £150 blocked. Entertaining directors or partners alone is treated as having no business purpose and is blocked entirely. Subsistence incurred by an employee travelling on genuine business, by contrast, is not entertaining and the VAT is fully recoverable. Separately, the corporation tax position mirrors the VAT one: staff entertaining is deductible, client entertaining is not, and the annual staff function exemption of £150 per head including VAT is an all-or-nothing limit, so £151 per head makes the whole amount a taxable benefit.

When Must a Limited Company Register for VAT?

VAT registration for a limited company in the UK is compulsory once taxable turnover exceeds £90,000 in any rolling 12-month period, or when the company expects to exceed £90,000 in the next 30 days alone. The rolling test is recalculated at the end of every month, so registration can be triggered part way through an accounting year rather than at the year end.

The VAT threshold 2026 remains £90,000, and the deregistration threshold is £88,000. A company that crosses the line must notify HMRC within 30 days of the end of the month in which it happened, with registration taking effect from the first day of the following month. Registering late is expensive because HMRC still assesses the VAT that should have been charged from the effective date, whether or not customers ever paid it, and adds a failure-to-notify penalty. Voluntary registration below the threshold is permitted and often sensible for companies selling business to business, since it unlocks input VAT recovery on genuine costs, though never on client entertaining.

Which Small Business VAT Schemes Change the Position?

The flat rate scheme changes the entertaining position most, because it removes input VAT recovery on virtually all purchases, meaning a company on that scheme was never going to reclaim entertaining VAT in the first place. The scheme is open to companies with taxable turnover of £150,000 or less excluding VAT, and a company must leave once total income exceeds £230,000 including VAT.

Under the flat rate scheme a company charges 20% to customers but pays HMRC a lower fixed percentage of gross turnover, recovering input VAT only on single capital purchases of £2,000 or more including VAT. Companies with low costs fall into the limited cost business category and pay 16.5%, which rarely leaves anything worthwhile. The other small business VAT schemes work differently: cash accounting, available up to £1.35 million of taxable turnover, defers VAT until customers actually pay, which protects cash flow where clients settle slowly. Annual accounting, with the same £1.35 million entry limit, replaces quarterly returns with one annual return and interim payments on account. Neither cash accounting nor annual accounting alters the entertaining block, but both change when the money moves.

How Should Directors Handle Entertaining Costs and Pricing?

Directors should code client entertaining to its own nominal account with no VAT recovered, and keep it separate from staff entertaining and business subsistence, because the three have different VAT and corporation tax outcomes. Mixing them in one "entertaining" account is the single most common cause of an incorrect claim.

The full cost of client entertaining should also be understood before it is committed. Worked example: a company spends £3,600 including VAT on client lunches over a year. The £600 of VAT is irrecoverable and the £3,000 net is disallowed for corporation tax, so at the 25% main rate the company loses £750 of relief it might have expected. The true cost is £3,600, not the £2,250 a director assuming full recovery and full deduction would have in mind. On pricing, registration itself matters more: a company selling to consumers that registers at £90,000 either absorbs 20% or raises prices, while a company selling to VAT-registered businesses passes the VAT on with no commercial effect. All VAT-registered companies must keep digital records and file returns through compatible software under Making Tax Digital for VAT, which makes clean nominal coding a practical requirement rather than a preference.

Frequently Asked Questions

Can I claim VAT back on taking a client to lunch?

No. Input VAT on taking a client to lunch is blocked and cannot be reclaimed by a UK limited company, however clearly the meeting related to business. The block under the VAT (Input Tax) Order 1992 applies to all business entertainment of non-employees, with no minimum amount and no exception for hospitality that generates work.

Is staff entertaining treated differently from client entertaining for VAT?

Yes. Input VAT on entertaining your own employees is recoverable, whereas input VAT on entertaining clients is blocked. Where employees and clients attend the same event, HMRC treats employees as hosts and allows recovery only on the employee proportion of the cost. Entertaining directors alone is blocked in full.

What is the VAT registration threshold for a limited company in 2026?

The VAT registration threshold for a UK limited company is £90,000 of taxable turnover in any rolling 12-month period for 2026. Registration is also required if turnover is expected to exceed £90,000 within the next 30 days alone. The deregistration threshold is £88,000.

Does the flat rate scheme let me reclaim VAT on entertaining?

No. The flat rate scheme removes input VAT recovery on almost all purchases, allowing it only on single capital assets costing £2,000 or more including VAT. Entertaining is therefore never recoverable on the scheme. The flat rate scheme is open to companies with taxable turnover of £150,000 or less excluding VAT.

How much can a company spend on a staff party tax free?

A company can spend up to £150 per head including VAT on annual staff functions without creating a taxable benefit for employees. The limit covers all annual events in the tax year combined, and it is an exemption rather than an allowance, so exceeding £150 per head makes the entire cost taxable, not just the excess.

Is client entertaining deductible for corporation tax?

No. Client entertaining is disallowed for corporation tax as well as blocked for VAT, so the expenditure is added back when calculating taxable profits. Staff entertaining is deductible, provided it is genuinely for employees. The combined effect means client entertaining costs a company its full gross outlay.

How Blue Tick Can Help

Blue Tick Accountants reviews entertaining and expense coding for limited companies, corrects claims before they become an HMRC inaccuracy, and advises on registration timing and scheme choice so that recoverable VAT is actually recovered. Getting the flat rate versus standard scheme decision right at registration is usually worth more than any individual expense claim. Head to our website and book a meeting now.

Conclusion

Client entertaining is one of the few costs where a limited company gets no VAT relief and no corporation tax relief, so every pound spent is a real pound of profit. Staff entertaining, business subsistence and client hospitality need separate nominal codes from the outset, because that separation is what makes a correct return possible. If your company is approaching £90,000 of taxable turnover, decide on registration timing and scheme choice deliberately rather than reacting to a threshold breach after the fact.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: Going Over the VAT Threshold Mid-Year: What Your Limited Company Must Do.