Be aware of the VAT rules surrounding business gifts, meals, and parties
Jonathan Main · December 8th 2023 · read
Traditionally, businesses may give gifts at Christmas to reward employees for good work or show appreciation to clients. Generally, when a business incurs VAT on these expenses, the VAT will be recoverable as input tax if the gift is a ‘business gift’.
There are unlikely to be any invoices raised to, or monetary payment received from, the lucky recipient, so it is easy to overlook the VAT implications when you come to pass the gift on.
Many businesses will also be looking forward to bringing colleagues together at dinners, lunches, or parties to celebrate the season. Later in this article, we will break down the VAT treatment of these events and explain the rules for recovery.
Input tax incurred on the purchase of gifts is only recoverable if it is given away, as a ‘business gift’. Concerning gifts, if the gift costs less than £50 (excluding VAT), no output tax will be due.
The £50 limit applies per person within a rolling 12-month period. So, if you provide an individual customer with 3 gifts in a period of 12 months, each costing £20 plus VAT, you have breached the annual limit and would need to pay output tax for each gift given, in the corresponding return period. The threshold applies to individuals, not businesses, so you can spend up to £50 on employees working within the same organisation or on individual customers.
A business gift is a gift which:
- Is made in the course of promoting the business;
- You were entitled to reclaim the VAT charged on its purchase; and
- Is voluntarily and unconditionally given, with no consideration received from the recipient in return (whether monetary or non-monetary).
The gift can be given to customers as well as employees, and it doesn’t need to be branded with the business logo or name to qualify.
You won’t be able to recover input tax in the first place on goods which are given away for non-business purposes, for example to friends, relatives, or the owners of the business, so there is no need to account for output tax.
You might have noticed that we have only mentioned goods so far. This is because the gift of a supply of your own services for no charge is generally not seen as a supply and no output tax will be due. However, if services are purchased from a third-party and later given away, free of charge, output tax will be due.
When it comes to Christmas parties and meals, you are probably familiar with the idea that for business entertainment, you can only recover VAT on hospitality when it is provided, free of charge, for your staff. This includes directors and partners, as long as the event is open to all staff.
Recovery of input tax incurred on entertainment which is freely given to non-staff is blocked. ‘Business entertainment’ refers to hospitality of any kind, including the provision of food and drink, accommodation, or tickets to events. If you do decide to invite customers, plus-ones, or previous employees, you will need to apportion your input tax claim based on how many of your guests are members of staff.
For VAT there is no limit on the cost of entertaining employees. Input tax is recoverable regardless of the amount spent per staff member.
What can I take away from this?
This festive season, you might like to consider a VAT-efficient approach as follows.
The most cost-effective gifting option would be to keep the cost of your gifts below £50 plus VAT per person (within a 12 month period). If you do this, you can recover the input tax incurred, without having to pay over any output tax. It’s a win-win!
Perhaps, your business might specialise in the manufacturing of corporate gifts. Considering the above, keeping your prices below £50 could boost your sales!
Meals and parties
For maximum input tax recovery, the simplest option is to only invite your own staff, directors, and partners to your Christmas party. However, if you would like to invite other guests, you might consider charging a small admission fee.
Do you remember that business entertainment is only blocked from recovery if the entertainment is provided free of charge to non-staff? In charging an entry fee, the party is no longer supplied free of charge and the input tax is fully recoverable.
The fee cannot be optional (or ‘discretionary’), but there is no set minimum.
What does this mean for me?
At VAT compliance visits and checks, HMRC will routinely review VAT recovery on entertainment expenditure. It is therefore important to know when input tax is recoverable and when output tax is due on gifting or staff entertainment expenses, to ensure you have accounted for VAT correctly and do not run the risk of incurring VAT assessments, interest, and penalties.
You should make sure that your accounting system can cope with the different treatment and implications of any parties planned or gifts to be given.
How can MHA help?
If you would like clarification on any of the points discussed in this article, please contact our VAT and Indirect Taxes team.
Our specialist team are also able to provide a risk-assessment review of your supplies or, in the event of any errors, assist with your error correction with a view to mitigating penalties.