Can I claim VAT on staff entertainment expenses?
Reclaiming VAT in the context of staff entertainment expenses is a complex area. It is entirely reasonable for employers to take an interest in the welfare of their staff. Building internal relationships is invariably crucial for the company’s long term success.
Before and after WWII, the majority of sizeable British firms organised seaside outings or promoted sports teams. Hovis in East London put on lavish Christmas parties for workers’ families, and Cadbury’s built a whole town, Bournville, for theirs. However, in more recent times, employee benefits have come to mean company cars, office parties and hotel stopovers. All these benefits, grand or mundane, blur the distinction between production and consumption.
It isn’t easy to draw lines between activities that promote the company’s interests and those which simply circumvent taxes on consumption. If you schedule an important business meeting with a prospective client as a lunch date, it isn’t unreasonable for the company to pay for the meal, and for the travel expenses of getting there. You shouldn’t have to book it at a McDonalds, but do you need to book it at the Ritz?
Theoretically, the rules are clear enough. If you need and use anything for business activities, then it is a tool of the trade and qualifies for tax allowances. However, when it is used or enjoyed for non-work-related activities, it should be taxable. Unfortunately, the majority of things that can be used in a place of work can also be used outside work, so it can become tricky when trying to make a claim.
Presenting your case
Not even HMRC gets it right all the time, but being able to argue and itemise your case clearly will make a significant difference. Showing that items, services or entertainment are specifically work-related is easier if you have procedures that keep your outgoings well organised. Whenever possible, create separate accounts for different types of expenditure, and centralise the way that each item is accounted for and approved.
For example, if staff have their own expense accounts, then you can audit their correct usage, and HMRC can easily audit your company expenditure policies. Some expense accounts are designed specifically for this kind of purpose and can even feed directly into company accounting software.
For example, Soldo prepaid cards and virtual company cards can be given to personnel with pre-set budgets for specifically defined activities. This makes it clear to HMRC what you are doing, and the clarity will pay dividends. Similarly, you can separate accounts for allowed staff-entertainment activities such as parties, excursions and other benefits. A well-kept account is less likely to be challenged.
Outings and Christmas parties
Although these forms of expenditure may appear to be perhaps marginally “work-related”, they are invaluable in building working relationships and company loyalty. The Government agrees, and HMRC specifically details how much entertainment of this kind you can undertake before exceeding a reasonable reclaim threshold.
Be aware that whenever a company’s generosity goes beyond the “reasonable” expenditures defined by HMRC, it can, in principle, be regarded as “benefits in kind”. In other words, part of the salary you pay to employees for their labour and as such liable for income tax. Although this rarely happens, in some cases the beneficiaries of your generosity could end up paying for it (and you will be told to pay more National Insurance too).
For VAT purposes, any amount you spend is in principle recoverable, if you can argue it is reasonable. For Corporation Tax purposes, £150 per head per year has been the limit since 2003. Considering that your expenditure may not only be on the event (food, drinks, tickets, venue hire) but also on transport and overnight accommodation, this isn’t very much.
Any non-employees you invite (spouses, clients) will affect your entitlement to VAT relief. You need to account for them separately. However, you may be able to address this problem by asking for a nominal “extra guest fee” (remembering to charge VAT on it). It doesn’t matter whether the charge is far below the true value delivered you may now be in a position to reclaim all the VAT for the event except for the VAT on the tickets. However, you should always consult an accountant or tax professional before making any final decision as to your approach.
What if everyone at your party is a director?
Although directors can attend parties and excursions with employees and recover their own VAT costs, they cannot do so in the absence of employees. However, if it requires you to travel to a particular location, eat out or stay in a hotel, those other costs can be reclaimed.
Following the logic of this, whenever you and a partner travel to close a deal with an important business prospect, you can have a VAT-free meal afterwards to celebrate and also claim for your spouses.
As we have shown, staff entertainment can be a complex area and often difficult to unravel in practice. Always work with an accountancy and tax professional to ensure that you remain within the law while minimising your liability. The more clearly you itemise and compartmentalise your expenditure, the easier it will be to control your costs and claim your legitimate tax entitlements.