Good news first: VAT on staff entertaining is reclaimable. The input VAT block applies to entertaining people you do business with - clients, prospects, suppliers and other business contacts - not to your own employees. HMRC's guidance on reclaiming VAT lists the cost of entertaining or providing hospitality to people you do business with as one of the items you cannot reclaim, which is why your accountant is right to draw the line where they do. A Christmas party for your 12 employees therefore sits firmly on the reclaimable side. A few qualifications to keep you safe: 1. Apportion for non-employees. If anyone at the party is not an employee - a client, a supplier, partners or family members - the VAT on their share is blocked, and you should only reclaim the staff proportion. Keep it simple: work out the split on a sensible basis (for example, headcount) and reclaim only the staff element. 2. The corporation tax position follows the same divide. Client entertaining is specifically disallowed for corporation tax, while staff entertaining is an allowable business cost. So your Christmas party is deductible in the accounts, even though client entertaining would be added back. 3. Records. A VAT receipt on its own is not enough unless it is a valid VAT invoice. HMRC's guidance is explicit that you cannot reclaim VAT using an invalid invoice, a pro-forma invoice, a statement or a delivery note. The invoice must come from a VAT-registered supplier and show the details of a valid VAT invoice, including the supplier's VAT number and the VAT rate and amount charged. For a £1,200 restaurant bill, ask for a proper VAT invoice itemising the food, drinks and VAT charged. 4. A note of who attended is not strictly required by the rules, but I would keep one anyway. A short note - date, venue, cost, and the names or headcount of staff attending - makes it easy to demonstrate the event was staff entertaining rather than client entertaining if HMRC ever asks. And keep the invoice: VAT records must be kept for at least 6 years. One last check: this analysis assumes a genuine team event. If a company has only one director and no other employees, HMRC may argue there is no 'staff' to entertain. With a 12-strong team, you are clearly on solid ground - enjoy the party, and reclaim the VAT on your next VAT return.
