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Christmas: how does hospitality and gifts affect the VAT return?

Newsletter issue - January 2022

The Omicron variant of Covid-19 saw new guidelines issued by the government in December. However, at the time of writing no lockdown, circuit breaker or otherwise, has been announced. As a result, many businesses will be going ahead with plans for hosting parties for staff and clients. Some may choose not to due to concerns, but may still give festive gifts, for example to the biggest spending customers during the previous year. All these things have VAT implications.

Starting with entertainment, the input tax incurred on any hospitality can only be reclaimed to the extent that it is provided to current staff of the business. Where non-staff members attend, an apportionment must be made. So, for example if a company has 30 employees, and all of them are permitted to bring a partner or other family member, only half of the input tax would be available to recover - assuming everyone brings a guest.

Note that section 3 of VAT notice 700/65 precludes recovery of input tax where the entertainment is provided solely to the directors (or partners) of the business. However, there is no problem recovering input tax in situations where directors attend staff parties that are open to all employees.

As the bill for a Christmas party, particularly for large businesses, is likely to be substantial, the position regarding service charges should also be considered. If the venue adds a compulsory service charge, this is simply an additional charge for the service and so the input tax treatment follows that of the charge for the hospitality, i.e. it can be claimed in the proportion of staff v non-staff. However, a service charge paid voluntarily is outside the scope of VAT and so the venue should not charge input tax on it. This is the case even if the venue adds the charge to the bill in the first instance, as long as the business is permitted to request that it is taken off or reduced.

If there are a substantial number of non-staff guests, for example where customers are in attendance, the business could make substantial savings if it requires the guests to make the payment for attendance. There is no minimum amount for this so it can be a token amount. The input tax block then does not apply because the business is no longer providing free hospitality. To illustrate, suppose the cost of the function is £100 per guest. The VAT will be £12.50 at the current reduced rate for hospitality. Let's suppose there are 50 non-staff guests, so the VAT in respect of them is £625. If the business charged each guest say £5 for a ticket it could reclaim all of this. It would need to account for output tax on £5 x 50 but it is still a significant saving.

Some businesses may wish to reward loyal customers, for example a business might choose to make a gift of fine wine or champagne to the five customers that have spent the most with the business during the previous year. The VAT rules for business gifts work to permit a business to make gifts without needing to account for output tax as long as the VAT exclusive cost does not exceed £50. The input tax can be recovered in full. This £50 limit is per person, it is not a cumulative total of all gifts. However, if gifts with a total cost of more than £50 excluding VAT are made to the same person in any 12-month period, output tax must be accounted for - not only on the gift that exceed the limit, but to all gifts made in that 12-month period.

For this reason, it is sensible for a business to do a look-back test shortly before the date it intends to make the gifts to ensure the same people haven't already been given goods that would cause the limit to be exceeded.