As it is only a week until Christmas, it seems a fitting time to discuss whether input VAT can be recovered on the costs of employee Christmas parties.
Where an employer pays for the Christmas party (which may include a meal with a disco/band), the expense is seen as having a clear business purpose (whether that’s a reward for hard work or motivational) and as such, VAT recovery would be appropriate – subject to the normal rules and comments below.
This also applies to other occasions, for example an end of quarter meal at a restaurant, a team activity event following a good trading month or celebrating a business anniversary.
VAT recovery relating to the attendance of non-employees is blocked, as this is viewed as business entertainment. As such, it is important to ascertain if employees have taken a plus one to the event who is not employed by the firm.
Please note, if a self-employed person that undertakes work for the business attends a Christmas party, they are also classed as a non-employee.
If the business pays for the whole event and non-employees attend, the VAT incurred must be distributed between employees and non-employees, as only the VAT incurred on the costs associated with employees can be recovered. This apportionment does not apply in a situation where employees are acting as hosts.
If non-employees are asked to pay a small charge (for example, £5 per head) to attend the event, then this is no longer considered business entertainment, as the event is not supplied free of charge. This is applicable even if the charge is considerably less than the actual cost per head. The business will need to account for output VAT on this charge, but should be able to recover all of the input VAT.
There is no monetary cap on how much input tax can be claimed on staff meals. However, you may wish to consider the interaction of other taxes when considering the cost per head, and whether this will result in a benefit in kind.
Another caveat to VAT recovery is that the business must ensure that the Christmas party (or any other event) is available for all employees to attend. As such, VAT recovery would be blocked on, for example a directors or partners-only events.
Julian Borley, Director of VAT at Milsted Langdon said “Christmas parties are an enjoyable time for staff. It is important that finance teams consider the VAT position of these events to ensure they do not create any problems for the recovery of VAT.”
“As with most VAT recovery, there are always exemptions to the rules. For advice relating to the VAT treatment of Christmas parties or other relevant areas, such as business gifts, please do not hesitate to contact us.”