The rules relevant to Christmas parties
If you hold a Christmas party for employees only, or in the case of a company, directors and staff, then you can claim all the VAT you incur in holding the party. On the other hand, if you hold an event just for directors, then you cannot claim any VAT.
If you hold a staff party and allow employees and directors to bring guests for no charge, then you must apportion the VAT and only recover the element relating to employees and directors.
This all derives from the basic rule that VAT cannot be reclaimed where it is incurred on business entertainment. Business entertainment is defined as any free provision of hospitality to persons other than employees.
Who are employees?
Employees for these purposes includes temporary or casual staff, and any helpers or stewards essential to running an event. It does not include pensioners or other former employees, job applicants, interviewees, shareholders who are not also employees and any partner, relative or friend of an employee.
VAT may be recovered where incurred on the entertainment of an overseas customer, provided it is “reasonable in scale and character”. If the recipient receives any private benefit, then the input tax claim is likely to be cancelled out by an output tax charge. HMRC look for an output tax charge unless the entertainment is necessary and for a “strict business purpose”. It is not clear what that might comprise as HMRC state that
“Hospitality provided because it would be polite, because it is expected, or because it would improve relationships is not for strict business purposes”.
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About Terry Dockley
Terry Dockley is a Fellow of the Chartered Institute of Taxation and has been advising on VAT for over 25 years. He joined the Inland Revenue in 1977 as a direct entrant inspector, leaving in 1985 to join Deloitte, Haskins & Sells, which later became part of PwC. He has run his own VAT advisory practice since January 2011.
Terry advises businesses and charities on VAT when it gets more complex, often working closely with other professionals, such as lawyers and accountants.
Terry keeps bees and has four children and four Burmese cats.