This Practical Tax Guide examines the tax treatment of business gifts for business owners. For the tax treatment of gifts made to employees click here.
At a glance
This guide applies to "a person" as in a sole trader, a partnership or a company.
Business gifts: at a glance
The general rule is that there is no tax relief given on the cost of making business gifts, as by default they are treated as entertaining. However, there are a number of exceptions to this.
Advertising:
A person can give away:
- An item provided in its business in order to advertise to the public generally (e.g. a business sample).
- An item incorporating a conspicious advertisement provided that it costs less than £50 and is not part of a series of gifts to the same person which come to more than £50 in that accounting period. No relief is permitted for this type of item if the gift is food, drink, tobacco or an exchangeable voucher.
Where a business makes gifts in excess of £50 or makes a series of gifts to one person exceeding £50 it should account for output VAT on the value of the gifts.
Employee gifts:
A gift made by an employer to an employee is deductible in the employer's accounts, unless gifts are also provided for others and the gifts provided to the employees are incidental to those.
- VAT is reclaimable on the cost of an employee's gift.
Business gifts to charities etc
A business gift is allowable when made to:
- A charity
- The Historic Buildings and Monuments Commission for England
- The Trustees of the National Heritage Memorial Fund.
Where a gift is made out of trading stock, there is no requirement to bring in a receipt for the value of the gift.
Cash donations to charity
A cash donation is not a business gift, and so without special rules a gift of cash to a charity will not be tax deductible under first principles - not "wholly or exclusively" made for the purposes of the business.
An individual who is a UK taxpayer may make a Gift Aid declaration and then the recipient will obtain tax relief by way of a refund (providing that it has registered with HMRC for Gift Aid).
A company will obtain tax relief on a cash donation as a deduction from profits and there are similar conditions which apply as for Gift Aid.
Concession B7 (this was applicable until 9/12/2010)
A business gift is allowable when made to:
- A charity
- The Historic Buildings and Monuments Commission for England
- The Trustees of the National Heritage Memorial Fund
a gift will be tax deductible for the donor business providing that:
a) The expenditure on the gift would qualify for tax deduction under s34 ITTOIA 2005 (the business purpose "wholly and exclusively rule");
b) The gift is made for the benefit of a body or association of persons established for the educational, cultural, religious, recreational or benevolent purposes and the body or association is:
- Local in relation to the donor's business activities; and
- Not restricted to the persons connectred with the donor;
c) The expenditure is reasonably small in relation to the scale of the donor's business.
Subscriptions:
Subscriptions paid to trade associations etc are not generally regarded as gifts; they are tax deductible according to the business purpose test.
Overview and FAQs
Tax treatment for employer
Gifts to staff are allowable on the basis that they amount to "staff welfare" or remuneration, the expense is fully tax deductible for the employer's business. The tax treatment of the gift in terms of employment income depends on whether the gift is trivial, see Employee benefits: gifts.
VAT and trivial benefits
Input VAT is reclaimable by the employer on the cost of trivial benefits made to staff.
Tax-trap: If input VAT is reclaimed by a one-man owner-manager or for the cost of an event open only to the directors (so other staff are excluded), HMRC will disallow a VAT recovery on the grounds that the motive behind incurring the cost was a personal one. It is difficult to try and disprove that this is not actually the case.
Gifts to customers and suppliers
- It is necessary to consider the nature of the gift in order to determine its treatment for tax purposes.
- Where gifts are given for the purpose of entertaining they are never tax-deductible.
- A gift of a product sample is treated as product promotion and advertising merchandise.
- A gift of alcoholic drink, tobacco, food or an exchangeable voucher is not tax-deductible unless exceptionally it is a trade sample.
- Gifts which carry advertising - such as stickers, mugs, diaries, tax cards, keyrings, are generally allowable as advertising and promotion costs.
- A gift cannot exceed £50 per head.
VAT
Input VAT can be reclaimed on the cost of business gifts.
Output VAT is accounted for when business gifts are made to the same person and the total cost of all the gifts exceeds £50 in any 12-month period.
- Where the total cost of any business gifts made to the same person in any 12-month period exceeds £50 and you have been entitled to reclaim VAT, you will normally have to account for VAT on the total cost value of all the gifts.
Free food and drink
No input tax can be reclaimed on entertaining customers in the UK. Input tax is recoverable on entertaining overseas customers and your own staff.
VAT on free samples
Free trade samples are no longer treated as gifts by HMRC. This comes as a result of a recent ruling in EMI Group C-581/08 which indicates that some businesses may be due a repayment of VAT previously accounted for on samples as if they were gifts see VAT on gifts: repayment claims?
A sample has been described as:
A specimen of a product intended to promote sales of that product and which allows the characteristics and qualities of the product to be assessed without resulting in final consumption, other than where final consumption is inherent in such a promotional transaction.
Small print & links
Employee benefits:
"Trivial benefits" are not found in primary tax legislation (e.g. ITEPA 2003) as they have been included in the tax rules by Statutory Instrument.
HMRC manuals:
Annual parties and functions: EIM21835
Concession for trivial benefits and gifts: EIM21860
Tax treatment of entertaining and gifts
S34 ITTOIA 2005 - Expenses general rule
S45 ITTOIA 2005 - Business entertainment and gifts: general rule
S47 ITTOIA 2005 - Business gifts: exceptions
S1300 CTA 2009 - Business gifts: exemptions (companies) - mirrors s47 exemptions as above.
Part 6 CTA 2010 - Charitable donations relief (companies) - similar conditions with regard benefits as apply for Gift Aid
ESC B7 - Benevolent Gifts to Traders (expires 9/12/2010)
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