QUESTION: I'm preparing my January VAT return but I'm unsure what VAT I can claim or need to account for on Christmas gifts to clients and Christmas party costs? Can you help?
ANSWER: Generally you cannot reclaim VAT on business entertainment expenses. Business entertainment is any form of free or subsidised entertainment or hospitality to non-employees.
But you can reclaim VAT on employee expenses and entertainment costs if those expenses relate to travel and subsistence or where you entertain only employees. When you entertain both employees and other business contacts together, you can only reclaim VAT on the proportion of your expenses that are not used for business entertainment. The VAT incurred on the cost of a Christmas party for all your staff is therefore recoverable.
However, if the party was also open to staff partners or if any customers attended the party then part of the VAT is not recoverable, as the event is not deemed to have been entirely for the benefit of employees.
You will need therefore to calculate the appropriate apportionment of VAT recovery on the Christmas party costs to reflect the element of costs that related to staff only. If the sole purpose of a party or business function was to entertain non-employees, for example if you or your employees acted as a host to the event, then you cannot reclaim any VAT on the costs of this entertainment.
If partners of staff or clients were charged a nominal amount to attend the Christmas party then the entire VAT costs of the event will be recoverable but the output VAT on the amount you charged non staff to attend the event must be accounted for in your VAT return.
It is also important to remember that former employees, shareholders of your company who do not work in the company, job applicants and retired employees are not considered to be employees for the purposes of reclaiming VAT on entertainment expenses.
The VAT incurred on the cost of Christmas gifts to clients is generally recoverable. However, if the cost of the gifts to any one person in a 12-month period exceeds £50 you are required to account for VAT on the total cost of the gift. For this purpose it is acceptable to adopt any 12-month period that includes the day on which the gift is made.
There are several exceptions to the general VAT rules.
For example, special rules may apply when recognised sporting bodies provide accommodation and meals to amateur sports officials and when airlines provide catering or accommodation to passengers who have been delayed. There are also special rules when entertaining foreign clients.
* Janette Burns (j.burns@ fpmca.com) is tax partner at FPM Chartered Accountants (www.fpmca.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.