VAT Update for Employers - Business Gifts, Staff Parties and Business Entertainment
The area of entertainment and gifts always seems to raise questions for businesses about what can, and cannot, be reclaimed. In this article, Mitchell Charlesworth's VAT expert Alison Birch 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.
Always a grey area, what you may consider advertising and promotion, HMRC may consider to be a gift, so make sure 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!)
- Selection boxes
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.
Generous Employer Ltd gives staff small business gifts throughout the year, including a huge chocolate egg at Easter (costing £15), flowers 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.
It is worth noting that the business gift rules also apply to:
- Long service awards
- Retirement gifts to staff
- Prizes for competitions.
An important point to note when considering gifts, is that gift vouchers have specific VAT rules and are treated differently to other gifts. Please get in touch if you gift a lot of vouchers as it is currently being litigated and the rules may be subject to change.
Staff parties, are as popular as ever to keep staff motivated. After all, what better way to reward your team, than a good old-fashioned knees-up?
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.
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
- 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').
SportMad Ltd invites ten of their best clients to 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 who 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 these 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 therefore 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.
As a reminder, a VAT invoice is required to support input tax deduction. However in some circumstances HMRC may accept alternative evidence if a VAT invoice has not been supplied by the employee. Please do get in contact if you would like to know more about this, in some instances we have helped businesses to recover healthy amounts of VAT!
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 Alison Birch below.