Tax and VAT recovery on entertainment
The festive season is upon us and we will shortly be donning our light up musical elf jumpers and singing along to Slade. It’s always important to keep in mind the tax rules surrounding business gifts, Christmas parties and entertaining – especially during the season of giving.
If you are feeling full of Christmas spirit, and decide to bestow 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 or end up with an income tax charge for gifts to employees.
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 VAT 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 VAT becomes due on the total cost of all of the gifts.
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 VAT is due to HMRC on the total cost.
All is not lost, however; as business gifts are made for business purposes, input VAT 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;
- Prizes for competitions.
With regards to the direct tax implications, frustratingly, these don’t mirror the VAT rules, so it’s important not to get caught out. Gift vouchers and cash bonuses are subject to income tax and national insurance contributions in the same way as salary. Therefore, in our example above, the employee would be required to pay both income tax and national insurance on the cost of the high street voucher - they probably wouldn’t be sending you glad tidings for the additional tax bill, so the employer can generate some additional festive cheer and choose to pay the charges on behalf of employees.
‘Trivial’ seasonal gifts given to employees such as a turkey, an ordinary bottle of wine or a box of chocolates are exempt gifts as long as the cost is reasonable. HMRC do not provide a monetary limit on what is considered trivial but it is generally accepted that anything below the value of £50 would be allowed. Unfortunately for our fizz loving friends, the aforementioned magnum of champagne is likely to be considered a luxury by HMRC (although a complete necessity in our view). Any gifts exceeding the £50 limit are subject to income tax and should be included on the employee’s P11D or a PSA (covered below).
Remember that client gifts usually fall under the business entertaining rules and are not an allowable business expense for direct tax purposes. There is a glimmer of light though as there is an exception for gifts which cost less than £50 each, however, this exception specifically excludes food, alcohol and tobacco (which are the only presents we could get excited about!) additionally, the gift must contain a conspicuous advert for the company. So a tax efficient gift is a branded diary rather than a bottle of wine, but we know what we would rather receive!
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 VAT blocking order. HMRC consider it to be a ‘motivational’ business expense, and input VAT 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 VAT is blocked in full. Where a charge is made to non-staff members attending (say, a nominal fee of £5) input VAT can be recovered in full for the event. In this case, output VAT must be declared on the fee paid to the business.
Businesses which choose to entertain only directors or partners do not benefit from input VAT 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 VAT incurred is subject to the business entertainment blocking order. However, HMRC do concede that when these individuals attend a staff party, input VAT can be recovered in full.
Annual parties made available to all employees are covered by a tax exemption of up to £150 per head. This £150 limit covers the entire cost of the event including VAT, taxis home and overnight accommodation and applies to all who are attending the event, not just employees. If you decide to go all out, and throw a particularly lavish party - because what better way to show your appreciation to the best asset you have – your team - then as the total cost per head exceeds £150, unfortunately the full cost (not just the excess) will be a taxable benefit, and should be reported on the employees’ P11Ds.
Some generous employers may throw more than one event for their staff throughout the year (where do we sign?), so provided that the total cost of all parties does not exceed the £150 exemption, there is no taxable benefit.
Where the total value of all staff parties throughout the year is greater than £150, employers can choose which event to set the tax exemption against. The remaining parties are again taxable on the employees as a benefit.
However, you probably wouldn’t be very popular for throwing a party and then expecting the staff to foot the tax bill – Merry Christmas! Employers can agree a PAYE settlement agreement with HM Revenue & Customs which means that the employer pays the grossed up tax on the benefit on behalf of the employees.
So it’s not all bah-humbug…. Unless you are planning any business entertainment that is!
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 out 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 VAT 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 VAT is also blocked (although there is an argument that this can be considered ‘subsistence’).
Any entertainment which involves clients or contacts is a disallowable expense for direct tax purposes, so this is certainly something to bear in mind when preparing the marketing budget….
SportMad Ltd invites ten of their best clients to the Nation’s best loved day at the races – 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 VAT on the costs incurred are blocked under the business entertainment provisions, and the cost is a disallowed for direct tax purposes.
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 horse or car 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.
[Note for completeness, the VAT business entertaining rules do not apply to entertaining of overseas customers – if you would like further clarification, please contact us]
If you would like further details on any of the topics raised, please do not hesitate to contact our specialist advisors who will be delighted to assist.
The information provided in this article should be used as a guide.