In the run up to Christmas gifting time for local businesses, the rules for deciding whether a gift given in the course of business is tax deductible can be quite complex.
Business gifts generally follow the same rules for business entertaining expenditure, which means that HMRC take the view that gifts are not an allowable deduction from profit for tax purposes.
However, there are exceptions to this rule, which Jan Hall, Director at C21 Chartered Accountants in Sheffield, takes a closer look at.
Where the following exceptions apply, the expenses incurred in providing the gift are deductible from trading profits:
- the gift is of an item which it is the trader’s trade to provide, and it is given away in the ordinary course of the trade to advertise to the public
- the gift incorporates a conspicuous advertisement for the trader, although there are exclusions relating to the type of gift and the total amount per person
- the gift is provided to the employees of the trader so long as this is not incidental to gifts being provided to others
- the gift is given to charity or other specific bodies.
Jan comments “HMRC is clear that in some instances, something that appears to be a gift may actually be a part of a sale to a customer. HMRC’s manuals provide the example of a bunch of flowers presented to a customer who has just purchased a new car would effectively have been paid for by the customer – it is a part of the cost of the car. Similarly, gifts offered to customers who purchase a certain level of goods are really discounts on sale and not business gifts. Gifts of this nature are not disallowed by the legislation.”
What about VAT?
In general, VAT does not have to be accounted for on business gifts to the same person as long as the total cost of the gifts does not exceed £50 (before VAT) in any 12-month period. The definition of business gifts includes items from brochures, posters and advertising matters, gifts to trade customers, long service awards and retirement awards and goods given to customers as a ‘thank you’.
Jan adds “Where the total cost of business gifts given to the same person in any 12-month period exceeds £50, and the business was entitled to claim VAT on the purchase, then output tax must be accounted for on the total value of the gifts. It is acceptable to adopt any 12-month period that includes the day on which the gift is made.”
If you are considering business gifts as part of your Christmas client engagement strategy and are unsure of what your tax liabilities may be, contact the team at C21 Chartered Accountants on 0114 213 4730 or info@c21accountants.co.uk
