The topic of entertainment and gifts often generates questions for businesses regarding VAT reclaim eligibility. Here are three key areas where VAT rules aren’t so clear-cut - business gifts, parties for team members, and business hospitality together with practical examples to help.
Determining whether something is considered an advertising expense or a gift can be challenging. HMRC’s definition of a business gift may differ from your understanding, so it’s important to be aware of the rules.
For VAT purposes, a business gift is defined as an item given voluntarily, without the recipient being expected to reciprocate. Business gifts – which can be given to external contacts or team members - can include:
VAT can be reclaimed on such items provided the total cost of all business gifts given to a single recipient within a 12-month period does not exceed £50 (excluding VAT).
However, if the total cost to the donor exceeds £50 for all gifts to one recipient within a 12-month period, output tax must be paid on the total amount.
Example: Business XYZ Ltd provides small gifts to its team throughout the year, such as a £15 box of chocolates at Easter, £20 worth of flowers on their birthday, and a £45 gift set at Christmas. Although each gift is under £50 individually, the cumulative value per employee exceeds £50, so VAT must be paid on the total cost.
It’s also important to note that the business gift rules apply to:
Gift vouchers have their own specific, detailed VAT rules. If your business uses vouchers, it’s advisable to consult HMRC guidance or get in touch for more information. Additionally, purchases from the EU are now treated as imports, potentially incurring customs clearance charges, import VAT, and duties if applicable.
While VAT recovery on business entertainment is tightly regulated, hospitality for employees is considered a ‘motivational’ expense and is generally exempt from the input tax block, allowing input tax to be reclaimed under normal rules.
However, if non-employees (e.g. spouses or partners) attend the party for free, the input tax on their share is blocked entirely. If a charge is made for non-team attendees, input tax can still be claimed for the event, but output tax must be declared on the amount charged.
Businesses that host events exclusively for directors or partners do not qualify for input tax recovery, as HMRC does not consider it necessary to reward these individuals with entertainment. However, if directors or partners join a team party (i.e. a motivational expense), input tax can be reclaimed.
Businesses often host clients, contacts, and suppliers as a way of expressing gratitude for their custom and maintaining good relationships. Business entertainment encompasses any form of hospitality provided by a taxable person in connection with their business operations and can include:
However, input tax on business entertainment is explicitly blocked. When employees act as hosts for non-employees, HMRC views the entertainment of the team members as incidental, and input tax is blocked for that portion as well.
Example: Business ABC Ltd invites ten of their best referrers of business to Royal Ascot. To ensure clients are well taken care of on the day, some employees are also invited to act as hosts, or for business development purposes. The input tax for these expenses is blocked under business entertainment rules.
If employees are invited along purely as a reward, not as hosts, it may be possible to apportion the VAT and claim the portion related to team member entertainment.
To support input tax deduction, a valid VAT invoice is typically required. However, HMRC may accept alternative evidence if an invoice is not available. If you would like further information on these exceptions, don’t hesitate to get in touch.
