Can you claim VAT on staff entertaining?
Understanding how to reclaim value-added tax (VAT) can be challenging for any business. It pays to find out more about how and when you can reclaim the VAT on certain expenditures. Expenses which are incurred “wholly and exclusively” for business purposes can be eligible for a VAT refund under most circumstances. However, while many expenses seem clear cut, others, such as staff entertaining and giving gifts to staff, may raise questions. Find out more about when VAT can be reclaimed with Mooncard.
VAT and business expenses
Value-added tax (VAT) is a consumption tax that is added to the price of most goods and services in the UK. Businesses collect this tax on the items they sell and pay it on the items that they buy.
VAT-registered businesses can claim relief on the VAT that they have paid on certain eligible items. This can add up to a significant amount, especially when employees spend a lot of time travelling or driving company cars. Business expenses such as parking costs, road tolls, fuel, overnight accommodation and food and drink can represent a large part of a business’s outgoings. It makes sense for businesses to try and recover the VAT on these essential expenses, which they do through their quarterly VAT returns.
But what about when it comes to expenses incurred during less obvious business activities? Can the VAT be recovered on expenditures such as a staff Christmas party, a team-building day out, gifts on staff birthdays, or an office sports day?
What is staff entertaining?
There are a number of areas where hospitality costs can arise for a business. “Corporate hospitality” refers to such things as treating loyal clients to tickets to a sporting event, a day at the golf, a hamper, branded calendars, keyrings and other publicity items. Specific rules apply to the VAT treatment of entertaining clients and to entertaining clients from outside the UK. If you regularly entertain overseas clients, it is worth finding out more about the VAT implications.
Rewarding customers for their business obviously makes good business sense. Similarly, sometimes it pays to reward employees for their hard work in ways other than through their salaries. Many businesses organise staff Christmas parties, team-building days, staff lunches and dinners at key points in the year, and gifts, tokens and other gestures throughout the year. These bonuses can have the effect of boosting morale, building team spirit and generally improving life in the workplace for everyone. This in turn can have a positive impact on the business. As such, these expenses are considered by HMRC to be incurred for business reasons.
Can staff entertaining be considered a business expense and can a business claim back the VAT on these expenditures?
Under certain circumstances, the VAT on expenses related to staff entertainment can indeed be reclaimed. There are two main conditions which must be respected:
- All staff must be eligible to take part
- No non-staff guests may take part
In other words, the entertainment cannot exclude certain employees and cannot include guests who are not employed by the company.
VAT on the cost of a dinner to which only executive staff or directors of the company are invited would not, therefore, be a deductible expense. The VAT on the costs of hosting a Christmas party with a buffet and drinks which was open to all staff would. However, if staff were told they could bring their partners and children along to the party, the entertainment would cease to be a staff-only event and only the portion of the input VAT on the expenses related to entertaining the staff could be recovered.
What is more, if your business decides to run an annual event which all employees can enjoy, such as a sports day, Christmas party or talent show, if the cost per head amounts to less than £150, then HMRC also considers this to be a non-taxable benefit for staff. It is important to keep within this limit and to ensure that all staff can take part.
How are employees defined?
For the purposes of businesses wanting to reclaim VAT on staff entertainment, the term “employee” is strictly defined. An employee is someone who is currently employed by the business. This can include temporary or casual staff.
It does not, however, include former employees, retired employees, job applicants or interviewees, shareholders who are not employees, and partners, friends and family of employees.
Providing entertainment for staff in various ways, through parties, meals, concerts, sporting events, gifts and other tokens can be a great way of boosting morale and creating a sense of belonging. Provided your business makes these events open to all employees and that only staff members are invited, your business can usually recover the input VAT on the cost of hosting such events.