Print

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:

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.

Business gifts to charities etc

A business gift is allowable when made to:

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.

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

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.

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 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

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 

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.