Employee gifts and VAT

January 9th 2021

After a tough year you might have scaled down Christmas gifts for your employees. Even so, you need to consider the VAT consequences which vary depending on the cost and type of gift. What should you be reporting on your VAT return? John Craig our VAT expert provides the answers.

The cost of employing a worker is a business expense, including benefits in kind you provide such as gifts. This means you’re entitled to reclaim the VAT you incur in providing them. But that’s not the end of the story. There are two sides to the VAT treatment. When you make a purchase you can, subject to the usual exclusions and limitations, reclaim any VAT included in the cost. When you give away the item purchased you must usually account for VAT.

Gifts are a supply
There are special rules for gifts of goods or services. These apply to employee gifts in the same way as they do for gifts to customers or suppliers. They count as a supply in the course of business and so VAT must be accounted for at the rate applicable to the item.

For example, the gift of a book is zero-rated, as is a gift of food. However, a gift of wine is standard-rated. You must therefore account for VAT on the value of the gift. The value for VAT purposes is what the goods or services cost you. Overall the VAT position is neutral.

You gave each of your staff a hamper consisting of wine, sweets and biscuits, which cost £72 (including VAT of £12) each. You can reclaim the £12 in the VAT return for the period in which you bought the hampers but must account for the same amount of VAT in the return covering the date you gave the hampers.

Because the VAT position of benefits is often neutral, as the example above shows, HMRC allows you to short cut the process of claiming and accounting for VAT by neither reclaiming nor accounting for VAT on gifts.

Gift cards
If you bought gift cards for your employees, check the VAT position. The cost of gift cards which can be redeemed for a variety of goods or services, e.g. an Amazon gift card or voucher, will not include VAT and neither do you need to account for VAT when you give them to your employees or anyone else. Conversely, the VAT position for a gift card which can only be used for a specific item or service will follow that for the goods or service for which it can be used. For example, the cost of a voucher for a beauty treatment will include VAT (unless the seller isn’t VAT registered). You can reclaim the VAT and account for it, or use HMRC’s shortcut method as described above.

There are circumstances where the VAT position isn’t neutral. This works in your favour and so you should definitely not follow the HMRC shortcut. For relatively low value and partial gifts you should instead reclaim the VAT.

Low value gifts
If the total cost of all gifts to each employee within a twelve-month period does not exceed £50 (excluding VAT) you can reclaim the VAT but aren’t required to account for it.

Partial gifts
If an employee contributes to the cost of goods or services you must account for VAT on the amount they pay you. However, because the VAT on the contribution will be less than the amount you incurred when you purchased the gift you’ll be better off if you reclaim it.

Either reclaim the VAT on the purchase then account for it on the same amount when you make the gift, or don’t reclaim the VAT and don’t account for it. However, you are better off reclaiming the VAT if the cost of gifts to the same employee is no more than £50 in a year because you’re not required to account for VAT when you make the gift.