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VAT on gifts, benefits and entertaining

Trivial Benefits

Many business owners are now making use of the trivial benefits exemption which was introduced a number of years back. Trivial benefits are an allowable business cost and you don’t have to pay tax or National Insurance on a benefit for an employee/director if all of the following apply:

  • it cost you £50 or less to provide (per occurrence)
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • it isn’t in the terms of their contract

However, directors of a company run by 5 or fewer shareholders can’t receive trivial benefits worth more than £300 per person in a tax year.

Examples of trivial benefits may include a birthday or Christmas gift, a bunch of flowers for a bereavement, or a staff meal out etc. Trivial benefits are in addition to the annual staff party exemption of £150 per head.

But what is the VAT position?

Gifts of goods

Input VAT incurred on the purchase of business gifts can be recovered, but you may also have to account for the output VAT on the cost i.e. effectively pay back the VAT to HMRC, unless the total cost of all the gifts given to the same person does not exceed £50, excluding VAT, in any 12-month period.

In simple terms, to avoid this problem, this means that you should not reclaim input VAT on gifts, where the total of all gifts to the same person in a 12-month period will exceed £50, excluding VAT. This rule applies to gifts to all persons, including directors, employees, customers and suppliers etc.

Staff parties and outings

Where an employer provides entertainment for the benefit of employees, for example to maintain staff morale, it does so wholly for business purposes. Therefore, the input VAT paid on costs such as staff parties, team building exercises, staff outings and similar events is recoverable.

However, there are two exceptions to the general rule. These are where:

  • entertainment is provided ONLY to directors, partners or sole proprietors of the business, or
  • employees act as hosts to non-employees.

Therefore, unless other employees, other than the owners or directors of the business, attend the event, you cannot reclaim the input VAT incurred. But if other employees attend, all the input VAT is recoverable.

Strictly speaking therefore, if you are a one-person business or a company consisting only of directors, you should not reclaim the input VAT on staff entertaining.

Entertaining others

Entertaining non-employees is not a tax deductible business expense, although it is perfectly acceptable for the business to pay for the cost; it just won’t save you any tax. Therefore, neither can you reclaim input VAT on non-staff entertaining.

If there is a mixture of staff and non-staff at an event, you can apportion the input VAT and reclaim the appropriate proportion. However, if the attendance of non-staff is for the sole purpose of entertaining a non-employee, the input VAT is not recoverable at all.

Further information

More information about theses topics can be found here:

Business promotions (VAT Notice 700/7)

Business entertainment (VAT Notice 700/65)

Annual Staff Parties

Entertaining employees (including directors) is an allowable trading expense, provided it is not excessive and is wholly and exclusively for the purposes of your trade, and not just incidental to the entertaining of customers. However, to ensure that the employees are not taxed on the benefit, the event must:

  • be an annual occurrence eg Christmas party or summer barbeque,
  • not cost more than £150 per head (including VAT), and
  • be open to all employees (not just directors), unless the company consists only of directors.

However, confusion can occur over the rules so things to watch out for include:

  • If the cost per head is over £150 then the whole amount is a taxable benefit on the employees, not just the excess.
  • If you have more than one event per year, the exempt amount is reduced proportionately.
  • The exempt amount is not a flat rate that you can claim. You must actually incur an expense and keep receipts, so if the event costs £50 per head, that’s all you can claim.
  • The exempt amount includes all expenses incurred (not just food and drink) eg room hire, travel etc.

Directors are eligible employees, so a company consisting solely of directors can have a tax free and tax deductible annual bash. However, self employed people cannot. Subcontractors are not employees and so are not eligible for the exemption. Also this would be business entertaining and would not be an allowable trading expense either.

If there are employees’ partners or friends at the party, then these individuals count as part of the number of people present when you’re working out the amount.

If your business is VAT registered, you should also consider the VAT implications. More information about when VAT is recoverable can be found here

National Minimum Wage Pitfalls

We have covered this topic before, but following some further recent high profile cases brought against WHSmith, M&S and Argos, all found to be underpaying staff because they hadn’t considered the national minimum wage (NMW) legislation carefully enough, it’s worth covering this again.

WHSmith were found to have underpaid staff about £1 million because they had a uniform policy which required staff to buy their own uniforms, but this resulted in their salaries falling below the NMW.

A similar case a few years back involved Wagamama. The restaurant chain was forced to reimburse employees after misunderstanding how wage laws apply to staff uniforms. Front-of-house staff were required to wear black jeans or a black skirt with their branded Wagamama top. HMRC considered this akin to asking the staff to buy a uniform. Wagamama updated its uniform policy and now pays a uniform supplement to cover the black jeans.

The food store chain Iceland was also in trouble in recent years because HMRC claimed that staff should be compensated for their work footwear since staff guidance advocates “sensible shoes” should be worn.

There is also the issue of time taken to put on and take off safety clothing or a uniform. NMW laws take that time into account. If a worker’s hours in a factory are from 9am to 5pm but they have to arrive 15 minutes earlier to dress, and then another 15 minutes after work, that’s part of their duties.

HMRC have a useful checklist on their website of the most common causes of NMW underpayments, which employers can refer to here.

Minimum Wage Changes

From 1 April 2023, the National Living Wage and National Minimum Wage rates will increase. The new rates will be as follows:

  • Aged 23 and over: £10.42 per hour
  • Aged 21 to 22: £10.18 per hour
  • Aged 18 to 20: £7.49 per hour
  • Aged 16 to 17: £5.28 per hour
  • Apprentices: £5.28 per hour

Salaried employees

Employers will need to check if the above changes affect any employees who are paid a fixed salary, rather than variable hours. The salary must be no lower than the equivalent hourly rate calculated by reference to their normal contracted hours.

Non-payrolled employees

If you don’t currently operate a payroll scheme because your employees earn less than the Lower Earnings Limit (LEL), you will need to check whether this increase affects you. From April, the LEL will remain at £123 per week, above which employees’ wages must be reported on a payroll scheme.

National Minimum Wage Pitfalls

Employers should also make sure any calculations of minimum wage levels take account of other circumstances that might occur in the workplace. This previous article provides some examples here.