As we have previously written about in Tax matters, the rules concerning deductibility for hospitality are changing at the turn of the year. The Swedish Tax Agency has now arrived at a position regarding how deductibility for VAT shall be calculated for hospitality. Deductibility for VAT is granted according to the new rules on a taxable amount of a maximum of SEK 300. At the same time, the option of making deductions against income tax for hospitality costs for lunch, dinner, dinner parties or other food consumption is abolished. However, the transitional regulations allow an opening for companies that have a split financial year to apply the old income tax provisions until the new financial year begins.
The purpose of the new directives is to abolish the deductibility against income tax for costs pertaining to meals and similar food consumption in connection with hospitality. Deductions with regard to income tax may only be made for expenses for refreshments and simple foods that cannot be considered meals and which are of lesser value. This includes, for example, coffee, tea, biscuits and simple sandwiches. Instead, an extended deductibility for VAT is implemented for hospitality expenses for meals or similar consumption. Meals and simpler consumption in this regard pertains to everything that is edible or potable. No difference is made between internal and external hospitality.
The Swedish Tax Agency points out in its position that one condition for deductibility for input VAT to be granted is that the hospitality expenses have an immediate connection with the business activity, for example, in the form of introductory or maintained business relations. As well, the expenses must not exceed that which is considered reasonable. The guidelines for assessing what can be considered reasonable, and whether the expenditures can have an immediate connection with the business activity can be found in previous conventions. The new legislation contains no change in this regard.
Moreover, just like before, the taxable party must conduct a business operation that in its entirety entails deductibility or a right to a refund of VAT in order fully to take advantage of the opportunity to make deductions for VAT on hospitality expenses. It should also be pointed out that hospitality in contexts other than in connection with food consumption is not affected by the change in the VAT Act. The opportunity to make deductions for input VAT on, for example, tickets to events and hospitality gifts, are thus unchanged.
In short, the Swedish Tax Agency’s guidelines are described in the following manner:
Food and non-alcoholic beverages (tax rate of 12 percent) - actual cost
- Hospitality costs of a maximum of SEK 300 (excl. VAT) per person and occasion entitle one to a VAT deduction. The new rules involve the price total being the same for both external and internal hospitality. Deductions for input VAT can thus be granted at a maximum of SEK 36 (12% x SEK 300) per person and occasion.
- An expenditure for lunch, dinner or dinner party of SEK 300 per person and meal is considered normal according to the Swedish Tax Agency if the other conditions for granting a deduction are met. The equivalent should also apply for consumption at demonstrations or exhibitions for groups of companies or other professionals that are of significance to the company.
Food and alcoholic beverages (tax rates 12 and 25 percent) - proportional
- If the costs pertain both to food (12 percent VAT) and alcohol, i.e., hard beverages, win or beer (25 percent VAT), but the total cost excluding VAT is a maximum of SEK 300, deductions can be granted by the amount of VAT that applies to the actual cost.
- If the cost exceeds SEK 300 excluding VAT per person and occasion, the deductibility for VAT must be determined according to a proportionality of the actual costs for food and for alcoholic beverages.
- This means in practice that if the total cost excluding VAT per person is SEK 500 (SEK 300 for food and SEK 200 for alcohol), a proportioning of the deductible tax base of SEK 300 must be done. Such a proportioning means that SEK 120 ((200/500) x 300) of the total taxable base pertains to drinks and SEK 180 of the total taxable base pertains to food ((300/500) x SEK). Deductions for VAT can then be granted at a maximum of SEK 30 (120 x 25%) for drinks, and SEK 21.60 (180 x 12%) for food, i.e., a total of SEK 51.60.
Food and alcoholic beverages (tax rates 12 and 25 percent) - standardised form
- As an alternative to doing a proportional calculation of the actual cost according to the above, the Swedish Tax Agency finds that the taxable party instead may choose to calculate the deduction based on a simplified standardised form. The standardised form entails deductions for input VAT being granted by a reasonable SEK 46 per personal and occasion.
- The standardised form can only be applied if the hospitality costs exceed SEK 300 excluding VAT and the debited VAT amounts to at least SEK 46 per person and occasion.
Compound provision (tax rate of 25 percent)
- If the hospitality costs in their entirety are subject to 25 percent VAT, a deduction for input VAT can be granted with a maximum of SEK 75 (25% x SEK 300) per person and occasion.
The change of the VAT Act comes into effect on 1 January 2017 and the expanded deduction for input VAT can be applied by all companies as of the turn of the year. Furthermore, the abolished deductibility in the income taxation comes into effect on 1 January 2017. However, the transitional regulations allow an opening for companies that have a split financial year to apply the old income tax provisions until the new financial year begins. A company with a financial year of 1 July to 30 June may thus continue to make deductions for hospitality costs in accordance with the old rules until 30 June 2017.
Previously, different amount limits for deductions have applied for the same expenditures, for example, depending on whether the hospitality has been external or internal, and whether the hospitality included alcohol. The companies have found the differences impractical and cumbersome to monitor. The hope is that the new rules shall simplify this procedure.
The new rules likely simplify procedures for many companies. However, assessments for which many business systems are not adapted, will also continue to be necessary if the provisions contain different tax rates.
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