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How is tax applied to business gifts?

How is tax applied to business gifts?

Sue Lucas

Business gifts are not allowed as a tax deduction against profits. The legislation treats gifts in the same way as business entertaining expenditure, which is also disallowed.

HMRC define a gift as:
“… something that is given to a person without receiving anything in exchange. It is offered voluntarily and without any expectation of a return. An example of this would be gifts provided for potential customers who take a test drive in a new car - there is no obligation to buy the car and so nothing has been given to the trader in return for the gift.
Gifts may also arise where goods or services are supplied at less than the cost to the trader. For instance, a hotel might offer meals to its suppliers at a nominal charge. Here the difference between the cost of the meal and the price paid is a non-allowable gift. By contrast, if a baker reduces the price of fresh bread at the end of the day, this is a normal commercial transaction (as the bread will be worthless by the next day) and the cost is allowed in full.”

However, HMRC will allow gifts up to a value of £50 to any one person or entity during a financial period. The rules state that the gift must be a business gift such as a calendar or diary. It should not be alcohol, food or tobacco, or any voucher that could exchange for these types of things. The business gift also needs to carry a clear visible advert for your company (such as a branded umbrella). If the gift does not show this, HMRC will treat this the same as entertaining costs which are not tax-allowable.

A business is also allowed to give samples of its products to their customers to advertise their business, provided it does not consist of food, alcohol or tobacco.  Again, the related costs will be tax deductible provided that they amount to less than £50 and do not form part of a series of gifts to the same customer which all together come to more than £50 in a financial period. 

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.  Another option is not to recover VAT on the gift cost and the business will not be required to account for output VAT. Gifts for VAT purposes can include food, drink, tobacco or an exchangeable voucher. The business does not need to account for VAT if the gift is a free sample from the business’s own line of products.

If you are seeking information on gifts for staff, you can use our blog: Christmas gifts for staff

For further advice please contact a member of our Moore (South) tax team.