VAT Update for Employers - Business Gifts, Staff Parties and Business Entertainment


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The festive season is all but a fond and hazy memory, and it's back to business with a bump!  For many, January conjures up visions of corporation tax payments, and submitting personal tax returns.  But lest we forget our favourite tax - VAT!

calculating tax

In this article, Mitchell Charlesworth's VAT expert, Gemma Gower, looks at three areas (Business Gifts, Staff Parties and Business Entertaining) where VAT can become complicated and outlines, using examples, the best ways to manage these issues in your own firm:

1. Business Gifts:

If you were feeling full of Christmas spirit, and bestowed your staff and contacts with lavish gifts for their hard work and dedication over the past twelve months, ensure that you don't get caught out by HMRC's Business Gift rules.

For VAT purposes, an article is a gift where the donor is not obliged to give it and the recipient is not obliged to do, or give anything in return.

Business gifts can cover a whole host of items, such as:

  • Branded golfing umbrellas;
  • Diaries and desk calendars;
  • A magnum of Louis Roederer's Cristal Champagne (2004 Vintage, naturally);
  • Vouchers for an up-market department store;
  • Selection boxes;
  • A pair of turtle doves.

No output tax is due on a business gift, so long as the total cost of all of the business gifts to a particular recipient, in a twelve month period, does not exceed £50 excluding VAT (the cost to the donor).
Where the cost to the donor of business gifts in a twelve month period exceeds £50, output tax becomes due on the total cost of all of the gifts.

Example:

Generous Employer Ltd gives staff small business gifts throughout the year, including a huge chocolate egg at Easter (costing £15), a high street voucher on their birthday (costing £20) and a luxury hamper at Christmas (costing £40).  Although all of the gifts individually cost less than £50, the total gift to each staff member exceeds £50, so output tax is due to HMRC on the total cost.

All is not lost, however, as business gifts are made for business purposes, input tax can reclaimed on the cost to the donor, subject to normal rules.

It is worth noting that the business gift rules also apply to:

  • Long service awards;
  • Retirement gifts to staff;
  • Samples;
  • Prizes for competitions.

2. Staff Christmas Parties:

Despite the economic climate, staff Christmas parties, are as popular as ever.   After all, what better way to reward your team, than a good old-fashioned knees-up?

If your staff were firmly on the 'good' list this year, you may have decided to go all out, and pay for this year's get-together.  You may be aware that there are strict rules concerning VAT recovery on Business Entertainment (see below), however, hospitality provided for staff does not fall within the input tax blocking order.  HMRC consider it to be a 'motivational' business expense, and input tax can be claimed, subject to normal rules.

 

However, where non-staff members attend the party (i.e. partners of the staff), for free, then this input tax is blocked in full.  Where a charge is made to non-staff members attending (say, a nominal fee of £5) input tax can be recovered in full for the event.  In this case, output tax must be declared on the fee paid to the business.

Businesses which choose to entertain only directors or partners do not benefit from input tax recovery under 'staff entertaining'.  HMRC consider that these individuals do not need to be rewarded or motivated with entertainment! [HMRC Manual VIT43600].  Instead, where only directors and partners of the business are entertained, the input tax incurred is subject to the business entertainment blocking order.  However, HMRC do concede that when these individuals attend a staff party, input tax can be recovered in full.  So it's not all bah-humbug….

… Unless you are planning any business entertainment that is!

3. Business Entertainment:

Many businesses offer clients, contacts and suppliers hospitality and entertainment.  After all, where would our businesses be without them?

Business entertainment means entertainment, including hospitality of any kind, provided by a taxable person in connection with a business carried on by him.

Business entertainment includes:

  • A delightful three course meal with drinks;
  • Hotel accommodation afterwards;
  • Entry to a guaranteed sporting extravaganza at Anfield (I can dream, can't I?);
  • Entry to one of the city's finest discothèques;
  • Use of your triple deck yacht.

Input tax on business entertainment is specifically blocked, in full, under special VAT provisions.  Furthermore, where your employees 'act as hosts' to non-employees, HMRC consider that the entertainment of the employees is incidental to the business entertainment, and related input tax is also blocked (although there is an argument that this can be considered 'subsistence').

Example:

SportMad Ltd invites ten of their best clients to the Nation's best loved day at the gee-gee's - The Grand National.  In order to ensure that their best clients' glasses are topped up all day, ten of the highest performing staff are also invited to attend.  The input tax on the costs incurred are blocked under the business entertainment provisions.

The business entertainment provisions also apply to businesses which own and run racing cars or horses at events, and invite guests to attend the events.

VAT on the cost of buying, keeping and repairing the item are also subject to the business entertainment rules, and HMRC closely scrutinise claims by businesses, that these items are kept purely for advertising reasons, although it is possible to persuade HMRC that a proportion of the cost is not business entertainment, and not subject to the blocking order.

[NB  for completeness, the business entertaining rules do not apply to entertaining of overseas customers - if you would like further clarification, please contact us]

Finally…

All that remains is for us to wish you a very Happy New Year! We hope that 2013 proves to be both healthy and successful.

The information provided in this article should be used as a guide.  If you would like further details on any of the topics raised, please do not hesitate to contact Gemma Gower, who will be delighted to assist on tel: 0151 255 2300 or email: gemma.gower@mitchellcharlesworth.co.uk

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