Often, at this time of year, businesses will take the opportunity to reward staff with a gift or a Christmas party. They may also offer gifts to customers to show appreciation of their custom and promote the business. It is important to consider the implications of the rules for recovering VAT on this expenditure to avoid any unpleasant VAT bills in the New Year.
HMRC accepts that where an employer provides entertainment solely for the benefit of its employees it does so wholly for business purposes. As a result VAT incurred is not blocked from recovery under the business entertainment rules. However, VAT cannot be recovered if the party is only for directors, partners or sole proprietors of a business.
What about guests?
Where employees are allowed to bring guests VAT can only be recovered on the cost of entertaining the employees and only a proportion of VAT on the expenditure can be recovered. The tribunal held in the case of Ernest Young that if a charge is made for guests attending the party VAT can be recovered even where the charge is less than the cost. This additional complexity is probably only worth considering if the costs involved are large.
VAT on business gifts can be recovered so long as the total cost of all gifts to the same person does not exceed £50 (excluding VAT) in any 12 month period. If the value of gifts exceeds this amount VAT must be accounted for on the cost value of the gift, thus any VAT recovery will be affected by the VAT on the “deemed sale”.
If gifts are given for personal purposes, to a relative or friend perhaps, VAT cannot be recovered on the purchase of the gift as there is no business purpose.
If you entertain customers over Christmas the VAT incurred on the cost of entertaining prospective or current UK customers cannot be recovered. Where the customer is an overseas customer VAT can be recovered if it is ‘reasonable in scale and character’. However, a private use charge on which VAT must be declared is likely to arise where there is more than very basic provision of food such as sandwiches and soft drinks at a meeting. HMRC are likely to view hospitality following a meeting or at a restaurant as leading to a private use charge and again any VAT recovery in relation to overseas customers is likely to be offset by a corresponding output VAT liability.