Now is the time that many businesses are preparing for Christmas parties for staff as well as for customers and prospective clients.
VAT incurred on Christmas parties for staff can be recovered subject to the usual rules. If staff partners/spouses or clients are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees make a contribution to the event, all the VAT can be reclaimed and VAT output tax should be accounted for on the amount of the contribution.
Where entertainment is provided only for directors, partners or sole proprietors, this is not seen as a deductible expense. However, where directors attend parties along with other staff members, then there is no block on VAT recovery.
VAT cannot usually be recovered on business entertainment expenditure. This includes the gratuitous provision to customers or clients of hotel accommodation, food and drink or tickets to events. Business entertainment is defined by HMRC as any form of free or subsidised entertainment or hospitality.