Entertainment expenses can be defined as the cost of entertaining customers or employees at social and sports events, restaurants meals and theater tickets, amongst other things. Deduction of business entertainment expenses is applicable only under certain conditions: a. you or one of your employees must be present, b. you should have a reasonable expectation of generating business from the event. For most eligible entertainment expenses, you may deduct 50% from sales to calculate taxable income. However, you can also deduct 100% of certain entertainment expenses.

To delve a little deeper, if your business is registered under VAT, it cannot recover input tax on expenses incurred for providing entertainment to anyone who is not employed by the business, including existing customers, potential customers, officials, shareholders, owners, and investors in the business. The type of entertainment expenses which do not fall under input VAT recovery include, hospitality, such as accommodation, food, and drinks, which are not provided in the normal course of a meeting, access to shows or events, or trips offered for the purposes of pleasure or entertainment. If and when your business incurs any such expense, it will not be able to recover the VAT incurred on these expenses.

How is VAT to be recovered for entertainment expenses of UAE employees?

According to the UAE VAT laws, there are certain expenses incurred for employees, also known as entertainment services, which include the following:

  1. Accommodation facilities
  2. Entry to any shows or events
  3. Pleasure or entertainment trips
  4. Food and drinks which are not provided normally

The recoverable VAT on entertainment include- simple hospitality in the regular course of business, initial hotel accommodation for new employees, sundry office expenses such as tea/coffee, snacks, etc. reimbursement of hotel stays and other expenses during business trips. On the other hand, the non-recoverable VAT under entertainment expenses include, employee lunches during Ramadan, gala dinners/conferences organized by the employer, farewell parties, events organized by the office, and so on.

No VAT for gifts less than 500 AED

It should be noted that any gift which a business entity gives to an employee for a period of 12 months, and which is worth more than 500 AED will be deemed as supply and hence, will be taxable. In case the value is less than 500 AED, it will not come under supply. Eid gifts, gifts for occasions, employee-of-the-month incentive, and wedding/birthday gifts cannot be recovered if their value is less than 500 AED.

VAT recovery for business trips of employees:

An employer will provide a refund or reimburse an employee for certain expenses incurred by the employee for business trips, while performing his/her role. If an employee is sent on a business trip by the company that needs overnight stay, the VAT incurred on hotel costs would be recoverable, along with the input tax incurred on sustenance costs, such as food items purchased by the employee for their on consumption in the course of the trip.

Check out the circumstances in which a taxable person can recover VAT on entertainment services:

  • An employer is legally obliged to provide those services/goods to the employees.
  • It is under a contractual condition to provide those services/goods to employees so as to facilitate their role, and also, in general, it aids smooth business operations.
  • The provision of goods or services deemed a supply under UAE VAT law.

For example, in the employment contract of call centre employees, offices offer conveyance to and from the office, for late night shifts. Since it is a contractual obligation to the employees, the organization can recover the VAT paid on the conveyance expenses.

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