Can VAT be Reclaimed from a Staff Christmas Party?

I am frequently asked if VAT is reclaimable against expenses and company parties are a popular topic. So if you are treating your staff to a Christmas party you should be aware of what is allowable by HMRC.

VAT cannot be claimed if entertainment is provided solely to directors, partners or sole traders as the entertainment is not provided for a business purpose.  This is because HMRC does not consider that directors, partners or sole traders need to reward or motivate themselves.

VAT can be claimed on staff entertaining which includes parties, trips or team building events if they are for a business purpose such as to reward staff for good work or to raise morale. VAT can also be claimed for directors, partners and sole traders if they are attending the event with their staff.

But please be aware that if staff are allowed to bring a guest to a company party and the cost is covered by the business, only VAT on the staff element of the cost can be reclaimed.

PAYE liability for entertainment

Another little known rule is the employees’ PAYE liability for entertainment paid for by the employer. If the employer arranges for staff drinks to celebrate for instance, the sales team achieving a sales target, this is classed as staff entertaining and is considered a taxable benefit on the employees.

If the employer does not want his employees to suffer tax on this and would prefer to settle the tax liability on their behalf, an approach can be made to HMRC for a PAYE Settlement Agreement which will address the matter.

Get in touch to find out more.

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