03 Nov Christmas is Coming!
Here we are again, can you believe it’s time to think about buying gifts for you most valued clients and employees! But how the tax and VAT is treated depends on the value of the gift and who it’s for. Gifts can be tax efficient, but how can you make sure they are?
Giving and receiving
There are two sides to every story and Christmas gifts are no different; think about the giver and the receiver. The business owner and employer will normally be the giver so the big question for you is: can you claim a tax deduction for the cost of business gifts and will you have to account for VAT on them?
A gift for your staff – what the tax man wants
A gift to your staff is probably the easiest and most tax-friendly form of business gift. You can claim a tax deduction from your business profits for these no matter how much they cost, but you can end up with a tax and NI bill if you take it too far.
Tax Trap – if that gift that costs more than £50 (including delivery charges) it will be a taxable perk for the employee and you’ll have to pay Class 1A NI at 13.8% of the full cost. You probably won’t want your employee to foot the bill on your goodwill gesture, so you’ll have to pay it for them. Your £60 gift will cost you at least £85 because of the tax and NI.
Tax Tip – keeping the cost of non-cash Christmas gifts below £50 per employee and they will be covered by the trivial benefits exemption for employees, meaning you won’t need to account for tax or the Class 1A NI.
A gift for your staff – what the VAT man wants
You can reclaim VAT on the cost of any staff gifts, regardless of their cost, but you might need to charge VAT on the gifts because they’re treated as a supply.
Tax Trap – you must account for VAT on your return if the value of a gift to a person excluding VAT exceeds £50, or the total number of gifts made to that person within a 12-month period have a combined value excluding VAT of more than £50.
Tax Tip – again, keeping the cost of gifts excluding VAT within £50 is the most VAT efficient option.
A gift for your client – what the tax man wants
You are not entitled to a tax relief for the purchase of business gifts regardless of their cost or value, but there is an exception.
Tax Tip – the cost of a gift, which is not food, drink or tobacco, with a conspicuous advertisement for your business is tax deductible if the VAT exclusive cost is less than £50, and it is not part of a series of gifts to the same person in the same accounting period that cost more than £50.
A gift for your client – what the VAT man wants
VAT on gifts to customers 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.
Tax Tip – by concession, HMRC will allow a business to simply not reclaim the VAT it was charged on the purchase rather than charging VAT on the ‘supply’ of a gift over £50.
Tax Tip – if your business has not claimed the VAT back on these types of gifts, and you still have the original purchase invoices, then you can claim the VAT back covering the last four years. If this VAT is less than £10,000 you can adjust it on your VAT return, otherwise you will have to inform HMRC separately by making a voluntary disclosure use form VAT 652.
Christmas isn’t special
Well not to the tax man anyway! As far as HMRC is concerned there’s nothing special about Christmas gifts and the usual direct tax and VAT rules apply. Did you expect anything different? Bah humbug!
You can claim tax relief for gifts to staff but not those for customers unless they include a conspicuous advertisement and are not food, alcohol or tobacco. VAT can usually be reclaimed, but if a gift exceeds £50 in value you must also account for VAT when you give it away. Keeping gifts below £50 is generally the most tax-efficient thing to do.