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 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 that carry advertising such as stickers, mugs, diaries, tax cards and keyrings are generally allowable as advertising and promotion costs.
  • The value of such a gift or series of gifts to one person cannot exceed £50 in an accounting period if it is to be allowable.

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."

Gifts to shareholders

Gifts to shareholders generally follow the normal treatment for business gifts and no tax relief would be available.

Shareholders of close companies could be subject to Income Tax on the cash equivalent of the gift or benefit as if they had received a dividend distribution.

Small print & links

Useful guides on this topic

Entertaining
What is entertaining? What is allowable? What is disallowable? 

Gifts (to staff, customers & charities)
This Practical Tax Guide looks at the tax treatment of gifts made to staff from the perspective of the employer and his business. It also includes a short section on business gifts.

Trivial benefits
What are trivial benefits? What is included? What are the caps? 

Wholly and exclusively…toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

Tax treatment of entertaining and gifts: legislation

S.34 ITTOIA 2005 - Expenses general rule
S.45 ITTOIA 2005 - Business entertainment and gifts: the general rule
S.47 ITTOIA 2005 - Business gifts: exceptions