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- Gifts
- Last Updated: 02 April 2020
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 '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. 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 free sample.
- An item incorporating a conspicuous advertisement provided that it costs less than £50 and is not part of a series of gifts to the same person that comes 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.
VAT:
- 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. If less than this, it is an outside scope supply.
- Output VAT does not need to be accounted for where a gift is a free sample of the business's product.
- In some cases, what is advertised as a free gift, will, for VAT purposes, still be a supply in return for consideration and VAT will be payable.
- In Marks and Spencer plc v HMRC [2018] TC06471, the free bottle of wine in the 'dine in for £10' offer was not actually free. It could only be obtained by paying £10 and taking the required food options. This meant there was consideration for the wine and some of the £10 had to be allocated to standard rated wine. It could not all be zero-rated food.
- See Discounts, Reward Schemes & Vouchers: VAT.
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.
- The National Endowment for Science, Technology and the Arts.
- A designated educational establishment (S.110 ITTOIA 2005 defines this).
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 of it was 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 that apply as for Gift Aid.
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 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.
- 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."
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
Employee benefits
Up to 5 April, 2016 'trivial benefits' were not found in primary tax legislation e.g. ITEPA 2003, as they were included in the tax rules by Statutory Instrument.
From 6 April 2016, the Finance Act 2016 introduced legislation relating to trivial benefits, see our subscriber guide Trivial Benefits.
HMRC manuals:
Annual parties and functions: EIM21690
Concession for trivial benefits and gifts: EIM21860
Tax treatment of entertaining and gifts
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
S.1300 CTA 2009 - Business gifts: exemptions (companies) - mirrors s.47 exemptions as above.
Part 6 CTA 2010 - Charitable donations relief (companies) - similar conditions with regard benefits as apply for Gift Aid
CTA 2010 section 1064 onwards for treatment of close company shareholder gifts as dividend distributions
ESC B7 - Benevolent Gifts to Traders expired 9/12/2010 and has been largely legislated.
