Christmas Gifts and Parties

With Christmas approaching, it’s important to understand whether VAT can be reclaimed on seasonal gifts and staff parties. The rules on these can be confusing, so here’s our advice

Seasonal gifts

The cost of giving business gifts, for example to staff or customers, is a legitimate business expense and HMRC guidance confirms that the VAT incurred can be recovered as input (purchase) VAT.

The problem. By making a gift, the business is making a supply for VAT purposes so the general rule is that it will also have to account for output (sales) VAT on the value of goods given away. This completely wipes out any cost saving from reclaiming the VAT. There is, however, an important exception to this general rule. 

Less than £50?

As long as the cost of the gift, or series of gifts, to the same person, doesn’t total more than £50, excluding VAT in any twelve-month period, VAT can be reclaimed in full without the need to account for output VAT.

What’s included in the cost? The £50 limit for the cost of goods does not include any administrative costs such as post and packaging. 

Nothing in return. In order to be a “gift” there must be no obligation on the business to provide it or on the recipient to do anything in return. For example, if a business offers potential customers an item described as a “free gift” in return for attending a sales presentation, it’s not a free gift for VAT purposes and output tax should be accounted for on the value of the item. 

Watch out! The twelve months is a rolling period starting on the day the first gift is made rather than a fixed calendar or financial year. 

Our advice 1. If you intend to give gifts in excess of £50 in a year, then we can confirm that HMRC accepts that businesses can avoid the hassle of creating a notional ‘sale’ in their accounting records by not reclaiming the VAT on the initial purchase. So, don’t reclaim the VAT on the original purchase and then you don’t have to account for the VAT on the deemed ‘sale’

Our advice 2. If the cost of the goods exceeds the £50 limit and there’s a reasonable time between you purchasing the gifts and giving them away, you may want to consider claiming the VAT back initially, to take advantage of the cash flow benefit. But don’t forget to declare the VAT due when you do finally give the gift away though.

What does the same person really mean?

Previously, HMRC’s view was that the £50 per year limit for small business gifts, applied to gifts made to any one organisation. HMRC changed its view following a court case and now allows the phrase ‘the same person’ to mean the same individual and not the same organisation.

Our advice. If you are providing small gifts to several individuals within the same organisation, ensure that it’s you, rather than the main contact at the organisation, that decides how the gifts are allocated. 

VAT and Christmas staff parties

No recovery limit. Unlike business entertaining, VAT rules on employee entertaining are very generous because there’s no limit to the amount of input VAT that can be recovered. Plus, as long as you don’t charge employees for providing the entertainment, no output tax is due. 

Note: Please remember that the above generous rule does not apply to the business tax position or the staff BIK position. See last month’s video on the tax rules on staff entertaining.

What is a staff party? 

A staff party is one organised for entertaining staff, in contrast to a party organised for entertaining business contacts. 

In the latter situation, there can be no recovery of input VAT (not even an apportionment), even if most of the people in attendance are employed by the business that organised the party. HMRC’s view is that employees who attend a party to entertain business contacts are there as hosts, so the recovery of input VAT on business entertainment will not be allowable. 

What about guests?

Many employers encourage staff to bring their spouses or partners to the Christmas party as guests. In this situation, the input tax should be apportioned between employees and guests, assuming no charge is made for the guests to attend. 

Our advice. Introducing a (not unrealistically) small charge for guests means that the supply of entertainment to them is a taxable supply so input tax can be recovered on the related costs. 

No time for a Christmas party?

The good news for you (or your staff) is that even if it’s too late to organise a Christmas party, or your staff are too busy to enjoy one (like we are!), the VAT rules on employee entertainment apply throughout the year. HMRC gives the following examples of entertainment:

• provision of food and drink
• provision of accommodation, e.g. hotels
• provision of theatre and concert tickets
• entry to sporting events and facilities
• entry to clubs and nightclubs
• use of capital assets such as yachts and aircraft for the purpose of entertaining.

Summary

HMRC allows all the VAT on business gifts to be recovered, but it will have to be paid back as output tax, unless the value of all gifts to the same individual in a year, is less than £50.

If you make a small, but realistic, charge for guests to your staff party, then all the VAT on the party costs can be recovered.