A gift is not just for Christmas

January 13th 2022

The cost of seasonal gifts for your business can soon add up. However, tax reliefs can reduce this considerably. When is your business entitled to claim a tax deduction for the gifts? Partner Brona MacDougall advises.

While Christmas might be the time of year you most often think about business gifts, the tax system makes no special concession for them. Instead, there are special rules for VAT and direct taxes which can be applied equally to seasonal gifts and those made at any other time of the year.

The general rule is that businesses aren’t entitled to a tax deduction for the cost of gift unless it is “wholly and exclusively” for the purpose of the business’s trade.

The cost of gifts to staff is tax deductible because it is a legitimate business expense. There’s no limit on the amount you can spend and obtain a tax deduction for as long as the reason for the expenditure meets the wholly and exclusively test. But there is a quid pro quo.

A business gift that costs more than £50 (including VAT and related costs such as delivery charges) counts as a taxable perk for the employee. This means you’ll have to pay Class 1A NI at 13.8% of the cost, not just the excess over £50. Plus, because it’s a gift you won’t want your workers to have to pay tax on it. Therefore, if the gift is taxable and you meet the cost of this it significantly raises the cost. For example, a £60 gift would cost you a minimum of £85 taking account of the tax and NI bill.

It would be advisable to limit the cost of Christmas gifts to no more than £50 per head to avoid incurring tax and NI. Note that this exemption does not apply if the gift is cash, e.g., an extra amount added to an employee’s salary. However, gift vouchers are fine.

You can reclaim VAT paid on the cost of staff gifts but must account for VAT when you make the gifts (except if the gift is as exempt or zero-rated item, e.g., food or non-alcoholic drink) if its value exceeds £50, or the total value of gifts to the same person within the previous twelve months exceeds that amount. Keeping the cost of gifts within £50 is the most tax (VAT) efficient option.

Your business is not entitled to a tax deduction for the purchase of gifts for clients regardless of their cost or value, with one exception.

The cost of a gift which displays a conspicuous advertisement is tax deductible if it costs less than £50 and is not part of a series of gifts to the same person within the same accounting period, which in total cost more than £50. However, this exception does not apply to gifts of food, drink or tobacco.

The VAT position for gifts to customers, suppliers etc. is identical to that for gifts to employees. So, you must account for VAT if the gift alone, or series of gifts together, have a value of more than £50.

General tax rules don’t permit a deduction for business gifts other than those to employees unless they include a clear advertisement for the business. VAT on the cost of a gift is reclaimable but if the value is greater than £50 (excluding VAT) you must account to HMRC for VAT as if it were a sale.

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