As employers gear up for the Christmas party season for the first time in two years, they need to take care to avoid a tax hangover. After last year when festive celebrations were largely impossible due to Covid, many will be looking forward to the return of the office Christmas party this year. Whilst for some it is the highlight of the working year, for others it can cause big headaches – and not just through over-indulgence in the mulled wine. Generous employers dispensing festive fun need to be aware of the VAT implications of their seasonal generosity if they want to avoid a New Year’s hangover courtesy of the VAT-man. When an employer rewards employees for their hard work through gestures such as a Christmas party, HMRC considers this to be for legitimate business purposes, and so the VAT incurred on the costs of providing that entertainment is usually recoverable (subject to any partial exemption restrictions). This differs from business entertainment, such as business meetings with customers, where VAT recovery is generally blocked. There are two exceptions to this: the first is if the party is solely for directors, partners or sole proprietors of the business (although where directors and partners of the business attend events together with their employees, HMRC accept that VAT incurred on costs is recoverable in line with the normal rules). The second exception is if employees are acting as hosts to non-employees. Some employers allow guests of employees and other non-employees to attend Christmas parties. This is a generous gesture on the part of the employer, but HMRC is rather more Scrooge-like: it would expect the business to apportion the VAT incurred on costs based on headcount, with the portion relating to entertaining non-employees being blocked from recovery under business entertainment rules. Under current VAT rules, the input tax on the total of gifts made to the same person in any 12 month period can be reclaimed, provided all gifts to that person amount to less than £50 net cost during the period. So an employer mulling whether to give their staff a £65 basket of chocolate goodies, an £85 bottle of Champagne, or a £7.99 cheese board from the local supermarket, would choose the cheese option if they wanted to avoid a VAT charge – although whether their employees might then view their boss as Scrooge is another matter! If employers are looking to spend a little more and give gifts exceeding the £50 limit per person, they must either pay output tax on the gift given away (after claiming the input tax initially under the usual VAT rules). Alternatively, you can choose not to claim the input tax in the first place, which will mean you have no obligation to pay any output tax. It’s not just the employer who needs to think about the tax implications of those Christmas gifts. Whilst gifts with a value of less than £50 are regarded as a ‘trivial benefit’ by HMRC, more expensive presents may mean there is a tax benefit to be accounted for – and an increased tax bill may just take the shine off that Christmas sparkle…