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VAT (how to avoid a Christmas hangover!)

Posted: October 21, 2016

It’s coming to that time of year when business owners look to provide some festive cheer for their workers and favoured customers. With that in mind, Burgess Hodgson’s VAT and Duty Specialist Greg Mayne explains how employers need to bear VAT in mind when planning their celebrations.

Whilst the taxman might not be averse to the odd mince pie and glass of something warming, the tax rules relating to entertainment and gifts do place some restrictions on what can be provided and how much can be spent without incurring a VAT loss.

In terms of parties, there is nothing to stop any employer from throwing the most lavish spread and entertainment event for staff and their other halves, customers, suppliers and so on – after all it’s their money they’re spending.

If that employer wants to make sure that the VAT rules are obeyed they would need to restrict any VAT recovery on the event to the proportion that relates only to their staff. In other words if 200 people attend, and 50 of those people are staff (and ‘staff’ does not include the business owners, directors or partners) then of the total VAT bill on the event only a quarter can be recovered as input tax.

If that same generous business owner wants to thank loyal customers by providing them with a gift then, once again, they are entitled to spend as much or as little as they want, and as often as they want.

However in order to stay on the right side of the VAT rules as long as there is no succession of gifts to the same person, and the value of the gift is less than £50 excluding VAT, then any VAT incurred on the gift can be recovered as input tax. Anything over that amount, or more frequently provided, would mean that the input VAT recovered would be negated by a compensating output VAT payment, i.e. no VAT benefit to the business.

So if you’re starting to look at where to have the Christmas party this year, and which customers are worth sending that bottle of spirits to, it’s probably worth a quick glance at the VAT and tax rules to make sure that any festive hangover doesn’t spread into the New Year tax calculations.