Be aware of the VAT rules surrounding business gifts, meals, and parties

Traditionally, businesses may give gifts at Christmas to reward employees for good work or show appreciation to clients. Generally, when a business incurs VAT on these expenses, the VAT will be recoverable as input tax if the gift is a ‘business gift’. 

There are unlikely to be any invoices raised to, or monetary payment received from, the lucky recipient, so it is easy to overlook the VAT implications when you come to pass the gift on. 

Many businesses will also be looking forward to bringing colleagues together at dinners, lunches, or parties to celebrate the season. Later in this article, we will break down the VAT treatment of these events and explain the rules for recovery.

Input tax incurred on the purchase of gifts is only recoverable if it is given away, as a ‘business gift’. Concerning gifts, if the gift costs less than £50 (excluding VAT), no output tax will be due. 

The £50 limit applies per person within a rolling 12-month period. So, if you provide an individual customer with 3 gifts in a period of 12 months, each costing £20 plus VAT, you have breached the annual limit and would need to pay output tax for each gift given, in the corresponding return period. The threshold applies to individuals, not businesses, so you can spend up to £50 on employees working within the same organisation or on individual customers.

A business gift is a gift which:

• Is made in the course of promoting the business;
• You were entitled to reclaim the VAT charged on its purchase; and
• Is voluntarily and unconditionally given, with no consideration received from the recipient in return (whether monetary or non-monetary).

The gift can be given to customers as well as employees, and it doesn’t need to be branded with the business logo or name to qualify.

You won’t be able to recover input tax in the first place on goods which are given away for non-business purposes, for example to friends, relatives, or the owners of the business, so there is no need to account for output tax.

You might have noticed that we have only mentioned goods so far. This is because the gift of a supply of your own services for no charge is generally not seen as a supply and no output tax will be due. However, if services are purchased from a third-party and later given away, free of charge, output tax will be due.

When it comes to Christmas parties and meals, you are probably familiar with the idea that for business entertainment, you can only recover VAT on hospitality when it is provided, free of charge, for your staff. This includes directors and partners, as long as the event is open to all staff. 

Recovery of input tax incurred on entertainment which is freely given to non-staff is blocked. ‘Business entertainment’ refers to hospitality of any kind, including the provision of food and drink, accommodation, or tickets to events. If you do decide to invite customers, plus-ones, or previous employees, you will need to apportion your input tax claim based on how many of your guests are members of staff. 

For VAT there is no limit on the cost of entertaining employees. Input tax is recoverable regardless of the amount spent per staff member.