A recent Opinion from the European Court of Justice (ECJ) has cast doubt on the UK’s ability to block the deduction of input tax relating to business entertainment.

Background

In the recent case of X Holding BV/Oracle Nederland BV, the Advocate General (AG) has opined that the Netherlands has complied with European legislation in respect of blocking input tax deduction in respect of certain goods and services, but has not complied in respect of others.

The basis for his reasoning that the Netherlands is non-compliant is that some categories are defined by the ‘purpose’ of the goods and services, rather than their nature.  For example, the AG found that the category of ‘providing staff with opportunities for recreation’ was too widely drawn and not compliant with European law.  For a Member State to block input tax deduction, the category should, in the view of the Advocate General, be descriptive e.g. food and drink, rather than purpose-driven e.g. recreation.

The final judgement of the Court is not expected for another 3-4 months.  However, it is questionable whether the ECJ will follow the AG’s opinion on this matter.  It could well be that the Court decides to take a broader view on the subject and follow the principles outlined in the Danfoss/Astra Zeneca ECJ case; namely that VAT on expenditure should be deductible if those costs were incurred for a business purpose.  The test to apply may be to look at the reasoning behind the expenditure, rather than limiting VAT deductibility based on a simple description of the goods and services.

Opportunity

The UK has a block on VAT recovery in respect of business entertainment. 

The ECJ is currently considering a case which may mean opportunities for UK businesses to make claims for VAT in respect of business entertainment.

There will be a rolling 4-year cap on claims.  This means that you should consider submitting claims as soon as possible to ensure that you can go back as far as 2006.