Unless your boss has a particularly Scrooge-like attitude to Christmas, chances are that at the very least your company will be having a Christmas party in some shape or form and if your boss is feeling particularly generous, hopefully they’ll even offer to pay.

However, no good deed goes unpunished and HM Revenues & Customs are there to make sure that all festive celebrations conform strictly to their VAT regulations – regardless of whether or not it is the season of good cheer.

HMRC agrees that where an employer provides entertainment, in this case in the form of Christmas parties, for employees to reward them for work performed, or to promote morale, it does so for business purposes. Therefore, the VAT incurred on staff Christmas parties can be treated as an input tax and the good news is that all fully taxable organisations can recover this tax in full.

Organisations with non-business or exempt activities would recover the appropriate proportion as determined by their business/non business and or partial exemption method.

Things are complicated further by the guest lists. If directors, partners or sole proprietors attend the same event as their employees, the whole cost can be treated as input tax. This is not the case though if entertainment is only provided for the business’s directors, partners or sole proprietors.

Where employees are invited to bring a guest for no charge, the VAT incurred on the guests would not be input tax. Therefore the VAT on the bill from the venue would have to be apportioned between the employees and their guests. But, if there is a charge for guests, even if it is below the actual cost of the event, HMRC will accept that all of the VAT incurred can be treated as input tax. The output tax would still have to be accounted for on the guest contributions though.

Really generous employers also need to take care when giving Christmas presents to their staff or customers because they must consider the VAT treatment of ‘business gifts’ which are technically seen as supplies for VAT purposes, meaning that output tax is due on the value of the present.

However, because there is no supply, there is no question of VAT liability where the cost of all gifts to the same recipient is less than £50 a year. Therefore, small gifts such as diaries, calendars and bottles of wine to employees or customers are not deemed supplies for VAT purposes, unless the company gives more than £50 worth to the same person.

VAT incurred on the cost would be seen as the input tax for the organisation, recoverable in accordance with the usual business/non business and partial exemption rules.

When gifts given are over the £50 value, output tax needs to be accounted for but attributable input tax could be reclaimed in full.

Outside of the VAT recovery benefits to help, particularly the smaller businesses, avoid bearing the VAT cost of a Christmas party on top of the event cost itself, I feel that there is a wider business benefit to ensuring that some sort of get together of staff happens at this time of year.

Small businesses work well with a good team spirit and the team needs to feel appreciated especially when salary increases have, for some, been non-existent over the last few years. The chance to have a good meal out and chat across the table, getting to know your team as people not just as employees is a great way to show your appreciation of their work throughout the year.

Centurion was founded in 1998, primarily to work alongside the University of Wales, Newport, since then it has grown to include six senior level VAT practitioners who have expertise in sectors including education, third sector, housing associations and manufacturing.

With offices in Bristol and Newport, the company aims to build on its existing reputation to become the largest independent VAT consultancy in Wales and the South West.