Bah humbug; HMRC, VAT and the Christmas party

Maintaining staff morale is a critical task for most businesses and so it might appear safe to assume that the VAT on staff parties should be recoverable. Sadly, UK VAT legislation does not bear out this assumption and there are two routes available to HMRC which could prevent your business from reclaiming the VAT; a VAT restriction on ‘business entertainment’ and a requirement to retain a VAT invoice to prove the right to VAT recovery. 

The VAT cost of entertaining; 20%?

A good party needs catering, and that usually means a VAT bill at the end of the evening. While VAT on many business costs is recoverable, VAT on business entertainment provided for free cannot be recovered. There is, fortunately, an allowance for staff entertainment so that VAT incurred to entertain employees of the business can be reclaimed (along with directors and partners, of a partnership, but only if the event includes employees). 

Partial party poopers; apportioning the cost

What if staff are able to bring along their partner to the party? Well, VAT can’t be reclaimed on the partner’s costs and so some form of partial block (usually based on the number of staff and non-staff attendees) can be applied. 

If the invite is extended to the company’s suppliers or customers then the question of recovery becomes more complex. A straightforward apportionment might not be appropriate as HMRC might argue that the staff are only attending to host customers. There’s also a difference between entertaining UK customers (where a block must be applied) to reasonable entertaining of foreign customers (where VAT may be recoverable, but a VAT charge will be levied if it’s extravagant).

Recovering the VAT; but spoiling the party?

There is a solution to these problems, the organisation hosting the party can charge a fee to those invitees whose attendance will not attract VAT recovery. Although invitees might feel that’s not quite in the spirit of a celebration. 

One final point before we conclude. As with any VAT recovery, HMRC will expect the taxpayer recovering the VAT to hold the appropriate evidence. That means requesting the all-important VAT invoice; the till receipt that some venues provide to their customers might not qualify as a VAT invoice, nor will a copy of a staff member’s credit card statement (even if it’s a company credit card).

What does this mean?

Some care should be taken when organising your celebrations to select the correct venue, menu choices and date. Please don’t forget to check the VAT treatment too.