Let’s first look at the business gift rules. As detailed in the Business Promotions VAT Notice 700/7 sect 2, the business gift rules cover gifts to employees, customers or other third parties made with the purpose of promoting a business. Because of the business purpose, input tax can be recovered, but there is also a requirement to account for output tax where the value of gifts made to one person in any 12-month period exceeds £50.
Any 12-month period means any 12 month period that includes the day on which the gift is made.
The £50 value is exclusive of VAT.
The value of the hampers for calculation of output VAT for the supplier will, as a supply of delivered goods, be £55. However, the business gift rules which will apply to your client here look at the VAT Exclusive value of the goods. If all the items in the hamper were standard rated, the VAT element would be £9.17, and the VAT exclusive value in this case will be below £50 @ £45.83. We need to note that one of the elements in the hamper is olives, which as zero rated will not have a VAT element, so the net is probably going to be a little higher that that calculated, but I think it unlikely that the value of the olives will make that much difference.
If the hamper were a more expensive one, with a net value above £50, there would be a VAT cost to the client, in real terms, input VAT and output VAT at the same rate, means the cost to the client would be the gross value.
For staff entertainment, HMRC provide details in VAT Notice 700/65 section 3. Where an employer provides entertainment for the benefit of employees; for example, to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.
Expenses incurred in entertaining employees is fully recoverable as input tax, and there is no output VAT adjustment required. Therefore, the employer would indeed be better off from a VAT perspective in taking his employees out for a meal than providing them with a hamper if the net cost value per head exceeds £50.
It’s also important to note that if non employees were to attend the meal, such as spouses or partners of staff, an adjustment will be required, as input VAT recovery in relation to free hospitality provided to them will be blocked under the business entertainment rules.
https://www.gov.uk/guidance/business-promotions-and-vat-notice-7007
https://www.gov.uk/guidance/business-entertainment-and-vat-notice-70065
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