Q) Our business provided a Christmas party for staff and their guests, some ex-staff were also invited to attend. We also provided some of our loyal trading client’s with a small thank you gift for their continued allegiance. What are the tax and VAT implications of these two gestures?

I know that everyone is trying to put the seasonal excesses of Christmas and New Year celebrations behind them; before we consign them to memory lets consider how we can wrap it all up in our VAT returns and finally put a lid on it.

The Christmas party…what an event; this is the time of the year when as an employer you can demonstrate your heartfelt appreciation to employees for their dedication and hard work throughout the year. The hotel’s been picked and hired and no expense has been spared; it’s free to all; employees their guests and ex-employees too.  But what about the VAT on the cost of the evening, the meal, the drinks and the entertainment, 20% is quite a margin these days; can this be recovered on the VAT return?

Provided the directors, partners or sole proprietors attend the staff party together with other employees and don’t enjoy the shindig by themselves, HMRC accept that the VAT can be recovered, unlike business entertainment expenses which are not allowed. However, if the scenario is one where the employees act as hosts to non-employees, costs are viewed as incurred solely for the purpose of entertaining the non-employees and the VAT is irrecoverable under the business entertainment rules.

Well, glad tidings apart, from a VAT point of view you may have been better off in making a charge to the ex-employees and guests of existing employees to attend the party. Output tax will need to be accounted for on the charge made which can be less than the cost of the party; but not so insignificant that the evening is provided free of charge. The alternative is to apportion the VAT recovered that relates solely to employees; a head count ratio can be applied.

From a Tax point of view no benefit arises from expenditure on an annual Christmas party or similar annual function open to the staff generally, or to staff at a particular location, of up to £150 per head per annum, including VAT and any transport or accommodation costs, or of non-cash vouchers for obtaining such provision. Where expenditure exceeds this amount the full amount will be taxable. The total cost is for this purpose divided by the total number of people attending the function, to determine whether the limit is exceeded. The expenditure may be split between more than one annual event, and where the total expenditure for the year exceeds the £150 limit, a function or functions whose cost or the sum of whose costs is within the limit will not be taxed, the cost of the remaining functions being taxed in full. No P11D return is required in respect of expenditure not exceeding the limit. The expense of providing staff entertainment is allowable in computing taxable profits as long as it is not incidental to the entrainment of non-employees.

The Christmas festivities provide a time of year when, as a business you can demonstrate your appreciation and esteem for valued customers and clients who have shown their loyalty over the years in time honoured tradition of gift giving. Gifts for VAT purposes are goods that the donor is not obliged to give and the recipient is not obliged to do something in return for.  VAT on the purchase can be reclaimed, to the extent that the business makes taxable business supplies. Provided the value of the gift or the accumulated value of a succession of gifts in a twelve month period, to a person doesn’t exceed £50; if this value is exceeded then output tax has to be accounted for on the total value of the gift. The value is deemed to be the price that would have to be paid to purchase goods identical in age, condition, etc.  The twelve month period is taken from the date when the gift is given. Gifts given to different individuals having the same employer are not treated as given to the same person.

Gifts to business are not an allowable expenses for tax purposes unless they are of an item which it is the trader’s trade to provide and are made for advertising purposes or  they incorporate a conspicuous advertisement for the trader and do not consist of food, drink, tobacco or a token or voucher exchangeable for goods and the cost to the trader of all such gifts to the same person in the same basis period does not exceed £50 or  they are provided for the trader’s employees (except where such gifts are incidental to the providing of gifts for non-employees); or they are made to a charity.

If you need any further help or information you can also call our tax consultants on 01455 852550 who will be able to advise you.