Beware tax pitfalls with business gifts

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The rules for deciding whether a gift given in the course of business is deductible are complex. The rules for business gifts generally follow those for business entertaining expenditure, which is not an allowable deduction from profit for tax purposes.

Business gifts allowable for tax

However, there are exceptions to this rule. Where the following exceptions apply, the cost of providing the gift are deductible from trading profits. These exceptions are where:

  • 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; or
  • the gift is given to charity.

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 fully allowable business deductions in your accounts.

VAT issues

VAT can cause problems with business gifts as HMRC may regard the gift as a “supply” and therefore expect you to account for 20% VAT on it.

In general, VAT does not have to be accounted for on small 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’.

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, it doesn’t have to be the tax year or your accounting year. In this unusual event, you can give the recipient a VAT certificate so they can reclaim the VAT you paid on the gift!

There is no requirement for businesses to account for VAT if the gift is a free sample given for marketing purposes and that meets the following definition set out in HMRC VAT Notice 700/7:

‘A specimen of a product which is intended to promote the sales of that product, and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions.’

This is a complex area – the full VAT Norice can be found here, but contact us if you would like advice on any aspect of business gifts.

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