Neil Warren considers the VAT treatment of a range of business expenses and staff perks including entertaining gifts, staff uniforms, phone costs, car leasing and HMRC’s current policy around the costs of charging electric vehicles.
The nation is getting back to work after the coronavirus lockdowns. And in several trading sectors, competition for staff will be intense, so perks will be offered by many employers to attract and retain the best employees. I’ll consider the VAT treatment of some of these perks in this article.
Hospitality for staff
Many businesses have prospered during the lockdown, so what is the situation if the directors of a successful company decide to treat all staff to a night out at a top restaurant, including free food and drink for everyone? Spouses will also be invited and some important customers as well.
The bad news is that there is an input tax block on all costs relevant to the customers and spouses under the business entertaining rules, but the employee costs should not be a problem. This is because free supply of food and drink to staff is considered a legitimate business expense.
The exception is if the role of staff is to act as hosts for the customers, to ensure they have a good night out, in which case input tax is also blocked on their costs. But if they are able to enjoy the evening without any hosting duties, a claim on their costs is fine (see HMRC’s VAT Notice 700/65, para 3.3).
Gifts of goods and services
A gift of goods takes place when no payment is received or required from the recipient. Don’t forget that payment can be in a non-monetary form (eg, a barter arrangement).
A business providing free services does not usually have an output tax liability, but the rules are different for goods. For goods, no output tax is due if the value of the gift (including the total of all other gifts given to the same person in any 12-month period) is less than £50 and it is given for business purposes, perhaps to reward a loyal customer or high-performing member of staff. The £50 limit excludes VAT and is based on the cost of the item to the business, rather than the shop floor retail price. However, if the £50 limit is exceeded, the earlier gifts also become subject to output tax.
Example
Anne is VAT registered as a wine retailer and has decided to reward her shop manager Bill for his hard work. She gives him the following free gifts from her stock. All figures are at cost price excluding VAT:
- February 2020 - a bottle of red wine £25
- July 2020 – a bottle of white wine £20
- January 2021 – a bottle of champagne £45
The total value of gifts to Bill has exceeded £50 in the 12 months to January 2021, so Anne must account for output tax of £18 on her return that includes January 2021 (ie, £90 x 20%). She can claim input tax on the original purchase of the wine from her supplier (see HMRC’s VAT Notice 700/7, para 2.3).
Staff uniforms
Imagine the following situation: your client trades as a clothes retailer and gives all staff an allowance for free clothing. Some items will be worn on duty, but others will be used for private purposes. What is the VAT position for these free supplies of stock?
This issue was considered in the First-tier Tribunal case of French Connection Ltd [2015] UKFTT 0173 (TC). Each employee received a free quarterly clothing allowance; the taxpayer agreed that the supply was subject to output tax if the annual value of the gift exceeded £50, but claimed that the items relevant to store personnel were for a business purpose (as a uniform) so no output tax was payable.
However, the tribunal disagreed and felt that there was no difference between a non-business or business purpose for the supply. If input tax was claimed on the initial purchase of the goods, then an output tax liability existed when they were given to the employee, adjusting for the £50 business gift allowance where that limit had not been exceeded in a 12-month period.
However, there is no problem claiming input tax on a genuine staff uniform (with no corresponding output tax liability) if it identifies the company with its logo, colour or other feature and it would not be suitable clothing for the employee to wear on, say, a night out with their friends.
Mobile phone costs
The VAT rules for mobile phones supplied to employees are helpfully explained in HMRC’s VAT Notice 700, para 12.3. Input tax can be fully claimed by the employer on the payment to the phone company, but output tax is payable on any financial contributions made by the employee, perhaps by a payslip deduction. If the business allows the employee to make unlimited private calls without payment, it would need to apportion input tax to reflect the non-business use.
However, the commercial reality is that most employers allow employees to make a small number of private calls and HMRC adopts a common-sense approach at para 12.3.2 of the same notice: “HMRC realises that in practice businesses … tolerate a small amount of private calls. HMRC is prepared to treat such minimal use as being insignificant for VAT purposes and it will not prevent a business treating all the tax it incurs on calls as input tax.”
Car leasing and payroll deduction
There is a quirk with the rules for an employer leasing a car where the employees make a contribution to cover the costs of their private motoring. As long as the 50% input tax block is applied to the monthly leasing payments paid to the car company, there is no output tax to declare on the employee contributions.
Example
Marie is employed by ABC Accountants, which provides her with a company car in return for a payment of £100 per month via a payroll deduction to cover her private motoring costs. ABC leases the car from DEF Leasing for £300 + VAT each month and claims 50% of the input tax on each payment (ie, £30). See HMRC’s VAT Notice 700/64, section 4.
No output tax is due on the payments made by Marie because the input tax block applied by ABC fully deals with the VAT issues. See HMRC’s VAT Input Tax Manual, para VIT55100.
Charge-up costs for electric vehicles
If an employer claims input tax on road fuel bills where part of the fuel is used for an employee’s private travel, the easiest way to deal with the VAT challenge is to account for output tax with the scale charge system based on the CO₂ emissions of the vehicle – see HMRC’s VAT Notice 700/64, section 9. Alternatively, in cases where employees are paid a mileage allowance for business travel in their own cars of 45p per mile, input tax can be claimed on the fuel element of the mileage payment, as long as the employee retains tax invoices showing VAT has been paid on fuel purchases.
HMRC also produces quarterly fuel advisory rates for employers to reimburse employees for fuel used for business travel in their company car or for employees to repay the cost of fuel for private travel in a company car.
However, HMRC issued Revenue and Customs Brief 7/2021 on 25 May 2021, and indicated that there was no scope for an employer to claim input tax on the rate of 4p per mile that can be paid to employees for business travel in company-owned electric vehicles. This seems a strange contradiction, which will hopefully be clarified by HMRC in the coming months. After all, a business trip is a business trip whether it is powered by electric, road fuel or wind.
About the author
Neil Warren, CTA (Fellow), ATT, an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997