With Christmas approaching, clients are likely to start asking whether VAT can be reclaimed on seasonal gifts and staff parties. The rules on these can be confusing, so what should your advice be?
SEASONAL GIFTS
The cost of giving business gifts, for example to staff or customers, is a legitimate business expense and HMRC guidance at para2.2 VAT Notice 700/7 confirms that the VAT incurred can be recovered as input tax (see Follow up ).
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 VAT on the value of goods given away (para 5(1), Schedule 4 VATA 1994) (see Follow up) . So 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 tax (para 5(2), Schedule 4 VATA 1994) . Unlike direct taxes, you don?t need to have any form of advertising on the gift for it to qualify.
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 (para 2.3 VAT Notice 700/7) .
Pro advice 1. If the client intends to give gifts in excess of £50 in a year, then VAT Manual VIT25600 confirms that HMRC accepts businesses can avoid the hassle of creating a notional sale in their accounting records by not reclaiming the VAT on the initial purchase (see Follow up ).
Pro advice 2. If the cost of the goods exceeds the £50 limit and there?s a reasonable time between your client purchasing the free gifts and giving them away, the client may want to consider claiming the VAT back to take advantage of the cash flow benefit.
WHO IS ?THE SAME PERSON??
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 the European Court?s decision in EMI Group v HMRC (see Follow up ).
What are the case facts? EMI Group distributed free copies of CDs to disc jockeys working for the same broadcasting company. A point the Court considered was whether the monetary limit applied to each individual recipient or to the organisation they worked for and decided it applied at an individual level. As a result of this decision, HMRC now accepts that the phrase ?the same person? in paragraph 5(2), Schedule 4 VATA 1994 means ?the same individual? and not ?the same organisation?.
Example. Addit & Co Accountants has a client with six employees who all like fine wine. It could give each of them a £50 bottle of wine without exceeding the monetary limit, providing this was the only gift the firm gave those individuals in the same year. If the six bottles are to be delivered in a crate, Addit & Co should ensure it?s clearly specified that a bottle is intended for each employee.
As it?s a business gift, Addit & Co can recover the VAT on the cost of the wine as input tax. Providing it is the only gift in the year, Addit & Co is not required to account for output tax on the gift.
Pro advice. If a client is providing small gifts to several individuals within the same organisation, ensure that it?s your client, rather than their main contact at the organisation, that decides how the gifts are allocated.
VAT AND STAFF PARTIES
No recovery limit. Article 5 of SI 1992/3222 effectively blocks the recovery of most input tax on business entertainment but then specifically excludes VAT on employee entertainment from the general input tax block (see Follow up ). The effect of this exclusion is that the VAT rules for staff parties are very generous because, unlike with direct tax, there?s no limit to the amount of input tax that can be recovered. Plus, as long as the employer does not charge for providing the entertainment, no output tax is due.
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 tax (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 block on recovering input tax on business entertainment will apply.
WHAT ABOUT GUESTS?
Many employers encourage staff to bring their spouses etc. 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.
Example. Addit & Co organise a Christmas party for its partners and employees at a cost of £40 plus VAT per person. In total 60 people attend, 30 of whom are guests. When it comes to preparing its VAT return the partnership will only be able to recover 50% of the VAT incurred on the party as input tax.
Note. The input tax relating to the partners can be recovered because it?s not a partner-only event. If, however, the partners go out for a Christmas lunch on their own then as per para 3.2 VAT Notice 700/65 the VAT incurred on the lunch is not input tax and cannot be recovered (see Follow up).
Solution. If Addit & Co charged guests who attended the event, it would need to account for VAT on the charge, but this would also allow it to recover the VAT on the related costs. The charge does not have to be so much that the £40 plus VAT cost of providing the entertainment to the guest is recovered, but it should not be so small that the entertainment is in effect provided for free. For example, if Addit & Co charged £24 per guest it would account for output tax of £4 (£24 x 20/120) but would be able to recover VAT of £8 (£40 x 20%) as input tax.
Pro 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 with tax returns to enjoy one, 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.
Perhaps you could think about organising a tax return filing celebration in February to reward your hardworking staff?