As if we Israelis don’t have enough on our plate, an important Supreme Court case tells us what is food and how much can be assessed to 17% VAT if meals are provided at work. The Israel Tax Authority (ITA) and the National Insurance Institute (NII) are expected to follow suit. In short, will your lunch break… break the bank? (Netanya VAT director vs. Amdocs Israel Ltd., January 30, 2023).
Fortunately, the courts imposed some checks and balances in the food area.
What’s the beef?
An army marches on its stomach, and so does the business sector, especially hi-tech. Work proceeds at a dizzy pace around the clock, and going out for a sandwich is often a non-starter. So, many Israeli workplaces provide in-house food facilities, such as a well-stocked kitchenette, a fridge and a dining hall.
The problem is that VAT Regulation 15A says businesses cannot recover input VAT on certain expenses for employees. These expenses include “an asset or a service, such as a meal, accommodation, a gift or entertainment, intended for their enjoyment, their use, their welfare or for the benefit of the employee or his family.” An employee for these purposes includes an owner or a director. The intention may be to deny VAT recovery regarding employee fringe benefits, but this is not stated in the VAT Regulations.
Facts of the case
Amdocs is a publicly traded hi-tech group. At its offices at Ra’anana junction, it has an extensive dining area where meals are prepared and served daily to thousands of employees. It has kitchens with equipment, ovens, pantries and cold-storage facilities, dishwashers and other equipment, as well as dining halls where the employees sit and eat.
The main issue
It was agreed that input VAT is not recoverable on the caterer’s invoices, kitchen equipment and dining-hall furniture. But does “meal” in VAT Regulation 15A also include a pro-rata portion of rent and other expenses attributable to the dining area, such as electricity, water, management charges and city taxes? The taxpayer thought not, especially if the dining hall is also sometimes used for other purposes, such as rest or cultural enrichment.
The judgment
The Supreme Court upheld an earlier District Court ruling, which said the aim of Regulation 15A is to help ensure that VAT is borne at the stage of the final consumer, namely, the employee in the dinner hall. This is done by denying the employer any recovery of input VAT on meals consumed by the employee.
But in the court’s view, the dining hall itself is not part of the “meal,” nor is it a benefit for the purposes of Regulation 15A. This is because an employee can bring his own food from home, buy “takeaway” or have his own meal delivered to be eaten somewhere on the employer’s premises. That place clearly would not be a meal per se.
As for cleaning the dinner hall, plates and cutlery, the court ruled that input VAT could be denied because these cleaning services are an integral and necessary part of employee meals.
To sum up
Input VAT cannot be recovered on expenses connected to meals supplied by an employer to its employees, such as the ingredients, kitchen equipment, cooking and baking, tables, chairs, cutlery and cleaning. But input VAT is recoverable on the cost of the location itself, the dining hall or food area.
Comment: Food for income-tax purposes
The Amdocs case related to VAT. On the income-tax side, the tax regulations generally allow a business to deduct 80% of the cost of providing light refreshments at the place of business. Light refreshments are defined as “hot or cold drinks, cookies and so forth.” Anything else is a matter of interpretation, and the ITA sometimes seeks to impose monetary limits.
Any excess is generally treated as a fringe benefit allocable to employees and taxable at their marginal tax and NII rate – up to 50%. Entertainment (restaurant meals, etc.) in Israel are expressly not deductible, except for the reasonable cost of entertaining a person from abroad.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.