Understanding VAT on staff entertainment: A guide to maximising your reclaims
Understanding VAT on staff entertainment can be perplexing. You may be able to reclaim VAT on expenses such as staff parties and team events, but the rules are nuanced. Our guide breaks down the essential conditions for VAT recovery, so that you can navigate tax regulations around VAT on staff entertainment more efficiently.
Overview:
- Decoding VAT for staff parties and events
- The fine line:Claimable VAT on employee entertainment
- Identifying your workforce
- Navigating VAT claims on staff entertainment costs
- Expert insights
- Understanding client entertainment VAT rules
- Food and drink at corporate events
- The impact of entertainment on Corporation Tax purposes
- Keeping records: Best practices for VAT
Decoding VAT for staff parties and events
Staff parties, team-building exercises, and outings, including those on a business trip, are not just fun and games. They also present an opportunity for businesses to reclaim VAT. These forms of hospitality are considered input tax and can be reclaimed under business entertainment rules, provided they serve a business purpose, such as rewarding employees or improving morale.
However, there are certain conditions to meet. For instance, staff entertainment becomes a tax-free benefit when it is an annual event, open to all employees, and costs no more than £150 per head per year. This includes costs for food, drink, tickets to events, accommodation, and even taxi fares to get your employees home safely.
Determining whether an event, such as a Christmas party, is recognized as a ‘qualifying event’ for tax purposes can be tricky, and it is advisable to seek expert advice.
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The fine line: Claimable VAT on employee entertainment
While VAT can generally be reclaimed for expenses incurred in the course of entertaining employees, such as for staff parties and team-building exercises, there are nuances to consider.
For example, entertainment expenses that benefit someone other than the employees, such as a party inviting family members or friends, may not be considered for business purposes and thus not eligible for VAT recovery.
Therefore, keeping clear records of business entertainment expenses is crucial to differentiate between recoverable employee entertainment and non-recoverable entertainment, and to properly apportion the tax for goods or services used for both purposes. The line between recoverable and non-recoverable VAT can be thin, making accurate record-keeping a critical aspect of VAT claims.
VAT reclaim exceptions: Directors and partners
When it comes to VAT reclaims, directors and partners of a business often find themselves in a unique position. VAT incurred on entertainment provided solely for directors or partners is not considered input tax as it lacks a business purpose and cannot be reclaimed. This is because, in most cases, entertainment for directors or partners is seen as a personal expense rather than a business expense.
However, there is a silver lining. When directors and partners are part of a staff event that includes other employees, the VAT incurred on their attendance is accepted as input tax and can be reclaimed. This means that if directors or partners attend the annual Christmas party alongside other employees, the VAT on their participation can be claimed back.
When employees entertain clients
The VAT landscape becomes more complex when employees entertain non-employees, such as clients. In these instances, VAT incurred for entertainment expenses is considered input tax but cannot be reclaimed due to business entertainment rules.
This means that while you can enjoy a business lunch with a client, the VAT on that lunch cannot be reclaimed. However, when employees entertain non-employees,
VAT can be reclaimed for the portion that relates to employee entertainment, with the non-employee entertainment costs being blocked. For example, if an event’s attendance includes a mix of employees and non-employees in roughly equal numbers, only 50% of the VAT can be reclaimed, based on the apportionment policy.
Identifying your workforce: Who counts as an employee?
Determining who counts as an employee for VAT purposes is a critical step in correctly applying VAT rules. Employees include:
- Current staff
- Directors
- Management
- Partners
- Self-employed individuals treated as staff for subsistence
- Helpers at events
- Temporary or casual staff
This expansive definition of an employee means that VAT can be reclaimed for a wide range of individuals involved in your business.
However, there are exceptions. Sole traders, those in a partnership or LLP, and the business owner are not considered as employees for VAT purposes.
Furthermore, while HMRC previously took a more relaxed approach to employing casual workers if they were employed for a week or less, this concession is now largely limited to short-term harvest workers.
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Navigating VAT claims on staff entertainment costs
It’s not just about planning employee entertainment; it’s also about navigating VAT claims on these costs. VAT can be fully recovered for staff entertainment costs, such as staff parties, team building exercises, and outings, provided they primarily benefit employees and serve a business purpose like rewarding good work or boosting morale.
To claim VAT on staff entertainment expenses, necessary evidence such as documentation must be provided to demonstrate that the entertainment was primarily for the employees’ benefit and not for personal reasons. Therefore, it is important to maintain detailed records of these events and ensure that the costs incurred meet the criteria for VAT reclaims.
Expert insights: Seeking professional advice on VAT claims
Navigating the complexities of VAT on entertainment expenses can be daunting. That’s where professional advice comes in. Engaging a VAT expert ensures the correct VAT treatment of entertainment expenses and compliance with complex regulations. It also helps businesses to maximise tax relief on allowable entertainment expenses.
Small businesses, in particular, can benefit significantly from professional VAT advice and claim tax relief. By becoming more tax efficient, they can save both time and money. Therefore, staying informed about the ongoing updates in VAT rules related to entertainment expenses and the impact of vat on business is crucial to ensure they do not miss out on potential VAT reclaims.
Understanding client entertainment VAT rules
Entertaining clients is a common practice in the business world. However, it’s important to understand that entertainment expenses for non-employees, including clients, are generally not recoverable as input tax under the business entertainment rules.
However, there’s an exception. If entertaining overseas customers is necessary for strict business purposes, does not provide a private benefit, and the overseas customer is not usually resident or carrying on business in the UK, the input tax incurred might be recoverable.
But remember, if the entertainment results in a private benefit, it could potentially negate any recoverable input tax.
Food and drink at corporate events: What’s covered?
Food and drink are often central to corporate events. When it comes to VAT, the standard rate is charged for supplies of food and drink provided on-premises, during corporate events, and for hot takeaway food and drinks. However, cold takeaway food that is not always standard-rated may sometimes be zero-rated for VAT.
But remember, packed meals provided incidental to corporate hospitality events or functions are supplied in the course of catering and should be standard-rated for VAT. Understanding the VAT rules for food and drink at corporate events can help businesses plan better and potentially save on costs.
The impact of entertainment on Corporation Tax purposes
Beyond VAT, entertainment expenses also have an impact on corporation tax. Staff entertainment can be claimed as an allowable expense for corporation tax purposes if its intent is wholly for the company’s trade, whereas costs for business entertainment, like client or supplier encounters, are not permissible as they are disallowed expenses.
Recognizing the impact of entertainment on corporation tax purposes is crucial for businesses planning employee entertainment.
For instance, travel expenditures linked with business entertainment are deemed as non-deductible for corporation tax. Understanding these rules can help businesses maintain tax-efficiency while planning for entertainment expenses.
Keeping records: Best practices for VAT and entertainment expenses
Accurate record-keeping is essential to substantiate VAT reclaims and comply with HMRC regulations. Businesses must maintain detailed records of entertainment expenses, including receipts, invoices, and the purpose of the event. This helps to avoid complications during VAT reclaims for entertainment expenses.
A VAT expert can assist in ensuring that the proportion of VAT incurred in entertaining employees is accurately separated from VAT incurred in entertaining non-employees, which is crucial for the correct VAT recovery. Remember, businesses are required to keep around four years’ worth of receipts and expenses for VAT reclaims and tax returns.
Get in touch with one of Sleek’s many experts today!
Summary
By decoding the complexities of VAT on staff entertainment, businesses can maximise their VAT reclaims, ensure compliance with HMRC regulations, and potentially make significant savings.
From understanding who qualifies as an employee, to navigating VAT claims on staff entertainment costs and keeping accurate records, every aspect plays a crucial role in managing VAT effectively.
So, the next time you’re planning a staff party or a client meeting, remember to consider the VAT implications.
FAQs
Yes, you can only claim back VAT on a staff Christmas party if it is specifically for your team members, not if it’s for entertaining clients or customers. If your business is registered for VAT, you may reclaim the VAT incurred on the party’s costs.
Input VAT cannot be claimed on entertainment expenses such as client dinners, free hotel accommodation, and tickets to sporting or cultural events as they are not considered wholly and exclusively for business purposes. Therefore, the VAT on these expenditures is not recoverable.
Yes, staff entertainment is considered taxable, but you can minimise tax and NI liabilities by structuring the entertainment to qualify for an exemption or choosing alternative entertainment options.
A qualifying event for VAT purposes on staff entertainment is an annual event that is open to all employees and costs no more than £150 per head per year. This is the criteria that needs to be met.
Food and drink provided at corporate events on-premises are usually subject to the standard rate of VAT, while cold takeaway food may sometimes be zero-rated.
