The tax consequences of entertainment spend
The World Cup is set to increase the amount that South Africans generally spend on entertainment. Where the entertainment is linked to a business undertaking, tax considerations arise, especially around VAT and Income Tax.
Firstly, from a VAT perspective, a VAT vendor may not claim an input relating to the supply of ‘entertainment'. Entertainment' is a defined term in the VAT Act and specifically includes any food, beverages, accommodation, amusement or recreation.
Classic examples are food and drinks supplied to customers for marketing purposes, or staff tea and coffee. It should be noted that it makes no difference whether the expenses are considered valid business expenses or not - VAT relating to the supply by the vendor of ‘entertainment' may not be claimed.
There are exceptions to this rule where the vendor regularly and continuously supplies entertainment for a market related charge i.e. is in the business of supplying entertainment, or supplies the entertainment to an employee and charges a market related price.
So, for example, input may not be claimed relating to the supply of food and drinks to customers in entertainment boxes or other areas at sporting events generally. If the vendor's decals are emblazoned on the entertainment area then the correct approach is to claim the input VAT in full on the cost of the decals, which are an advertising expense not falling within the definition of ‘entertainment', and a proportionate input on the hire of the entertainment area, on the basis that it is partly for entertainment and partly for advertising purposes.
Certain concessionary rules will apply during the period of the World Cup only, whereby supplies of hospitality or merchandise will be zero-rated at the World Cup Championship sites only. This will mean that VAT will not be charged on supplies of hospitality or merchandise at these sites and so the vendor will, in effect, not lose out by not being able to claim an input on these supplies. Tickets for the matches are however subject to VAT at the normal rate of 14 % and the VAT input on these tickets may not be claimed by a vendor as the tickets relate to the supply of entertainment, unless one of the exceptions, noted above, applies.
From the perspective of Income Tax, as long as the type and quantum of the expenditure can be justified for valid marketing purposes and it is not capital in nature, a deduction may be claimed under section 11(a) of the Income Tax Act.
The deduction for Income Tax purposes would be the actual cost to the taxpayer of the expenditure - in other words it would include the VAT that was not claimable as input VAT, due to the prohibition on the claiming of VAT inputs relating to the supply of entertainment. For example, if the taxpayer incurs R20 000 (excluding VAT) ie, R22 800 (including VAT) on the supply of food and beverages to customers for marketing purposes and may not claim the VAT input, the Income Tax deduction would be the full R22 800.
*David Warneke is a tax partner at Cameron and Prentice Chartered Accountants