Seasonal gifts – the tax small print

HMRC’s reputation as a Scrooge isn’t always justified. For example, its rules allow for a little seasonal goodwill provided you’re not too generous. How does this apply to gifts for your staff and customers?

Giving and receiving

There are two sides to the equation for tax on Christmas gifts; one for the giver and the other for the receiver. As a business owner and employer you’ll usually be the giver. So the questions for you are: can you claim a tax deduction for the cost of gifts, and will you have to account for VAT on them?

Staff gifts – direct tax deductions

Gifts to your employees are probably the easiest and most tax-friendly form of business gifts. You can claim a tax deduction from your business profits for these no matter how much they cost. However, you can land yourself with a tax and NI bill if you overdo it.

Trap. A gift that costs more than £50 (including secondary costs such as delivery charges) counts as a taxable perk for the employee. As their employer you’ll have to pay Class 1A NI at 13.8% of the full cost. Plus, if you don’t want your workers to have to foot the tax on what is meant to be a goodwill gesture, you’ll have to pay it. For example, this would result in a £60 gift costing you a minimum of £85 because of the tax and NI.

Tip. Limit the cost of Christmas gifts to no more than £50 per head. They will then be covered by the trivial benefits exemption for employees meaning that you won’t have to account for their tax or the Class 1A NI. Note. Cash gifts aren’t covered by the exemption.

Staff gifts – VAT

You can reclaim VAT on the cost of staff gifts regardless of their cost. However, you might have to account for VAT in the return period that you make the gifts because they’re treated as a supply.

Trap. You must account for VAT on a gift if its value (usually that’s equal to its cost) exceeds £50, or the total number of gifts made within a twelve-month period has a value of more than £50. Where a gift is exempt, or zero-rated, e.g. a book, you won’t have to account for VAT.

Tip. Again, keeping the cost of gifts within £50 is the most tax (VAT) efficient option.

Customer gifts – direct tax deductions

You aren’t entitled to a tax deduction for the purchase of business gifts regardless of their cost or value, but there is an exception.

Tip. The cost of a gift which has a conspicuous advertisement is tax deductible as long as it costs less than £50 and is not part of a series of gifts to the same person in the same accounting period, which in total cost more. However, this exception doesn’t apply to gifts of food, drink or tobacco.

Customer gifts – VAT

The VAT position for gifts to customers, suppliers etc. is identical to that for gifts to employees. So you must account for VAT if the gift alone, or series of gifts together, have a value of more than £50.

Christmas isn’t special. As far as HMRC is concerned there’s nothing special about Christmas gifts. The usual direct tax and VAT rules apply. Did you really expect anything different? Bah humbug!

What to do next

For further information on this and other topics then request more information or contact us at 01332-369999 or through the contact page of our website

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