January is depressing enough without finding out that the money you spent on presents for your valued customers and suppliers will not be an allowable expense when it come to your tax return.
A gift is something you offer voluntarily and without any expectation of a return. It can be something you have bought like a bottle of wine, or it could be giving away one of your own goods or services for less than they cost you. Even if suppliers have provided you with goods or a service in the past, it counts as a business gift if the item you give them is not part of that contract.
You can give something away that incorporates a “conspicuous” advert for your business but it cannot be food, drink, tobacco or a voucher exchangeable for goods AND the total value of all gifts (not just this one) to the same person in the relevant tax period* can’t be more than £50. Plus, the advert has to be on the item itself and not just the packaging.
VAT is another matter entirely and does not follow the same rules as income tax. You can reclaim the VAT on a business gift provided it costs less than £50 net of VAT. If the gift costs more than £50, you can reclaim the VAT but then you must account for the output VAT, so why would you bother? If you make several gifts to the same person and have already reclaimed some VAT (for example, because the first gift cost less than £50) but then you go over the limit later in the year, you would need to account for output VAT on all gifts.
What to take away from this:
- You will not get a tax deduction for money spent on normal gifts for suppliers or customers
- You will get a tax deduction for gifts that cost less than £50 and display a conspicuous advert for your business
- You can reclaim VAT provided the value gifts to the same person in one year is less than £50
For those of you who are employers
If you buy your employees a present at Christmas, you can reclaim the tax and the VAT. This does not include subcontractors – they are suppliers, not employees.
BUT, there are strict rules and I have listed them below. If you break these rules, the employee will be taxed and you will pay Class 1A National Insurance at 13.8% on the value of the gift. You will also have to submit P11Ds for your employees and they could end up having to file a tax return. It will cost you and them money. You will not be popular.
These are the rules:
- It must cost you £50 or less to provide.
- It cannot be in the form of cash or a voucher that can be exchanged for cash – it can be a voucher for a retailer like Amazon, M&S, John Lewis, Argos, or a supermarket.
- It must not be a reward for the employee’s work or performance.
- It cannot be part of the terms of the employee’s employment contract and it cannot be part of a salary sacrifice arrangement.
A couple of bonus points…Directors of companies with fewer than 5 shareholders have a limit of £300 per tax year for gifts made under these rules. If the gift costs more than £50, the whole of the gift fails the test, not just the excess.
What I have outlined above are called the “trivial benefits” rules. Read on if you are also thinking of having a party.
You will be entertaining your staff if you provide any of the following:
- Food and drink.
- Accommodation (for example, in a hotel).
- Theatre and concert tickets.
- Entry to sporting events and facilities.
- Entry to clubs and nightclubs.
- Use of business-owned assets, such as an apartment or a yacht (anyone got a spare Sunseeker moored on the Riviera?)
The costs incurred at staff-only events are generally allowable as a business expense for tax purposes and VAT is also recoverable. However, to ensure that your employees are not taxed on it as a benefit-in-kind and you do not end up with a Class 1A NIC bill, you need to stick to these rules:
- The cost per person must be £150 or less.
- The event must be an annual one and open to all employees.
- When you work out the cost per head, you must include all costs relating to the event inclusive of VAT (this includes transportation).
- You can include members of an employee’s family/household who attend as guests when calculating the cost per person.
- If you have employees in different locations or departments, you can have separate events but everyone must be able to attend one event.
- If there is more than one annual event, such as a summer BBQ and a Christmas party, the combined cost must not exceed £150, or the whole amount of one of the events becomes taxable.
With COVID still causing disruption, you might be thinking of having a virtual celebration again this year. HMRC confirmed at the end of 2020 that the same rules would apply to virtual and traditional parties. A few additional considerations though. You may be asked to provide proof that employees attended so you will need to keep a “register”. It is preferable for the company to pay for everything, rather than employees paying and reclaiming the expense, simply because it is easier to prove to HMRC that you have followed the rules. You could make use of the trivial benefits rules and send a voucher for employees to spend on food and drink for the event, or you could send a hamper of goodies.
If you go down the expense claim route, you will need to be ultra-diligent in your record keeping. I would suggest you keep these claims separate so that expenditure can be easily identified. Make sure that employees know upfront that they must keep every receipt and separate this claim from any others.
If you are not sure how to manage your specific situation, please get in touch.
One last thing for companies that are run by one director, or where the directors are part of the same family or household, especially those without any other employees. You can still provide staff entertainment for yourselves but you must be absolutely clear that this is for business purposes. If there is any whiff of the business paying for what could be a personal celebration – a birthday, wedding anniversary, Valentine’s Day, you will not get a taxable deduction, you will pay Class 1A NIC, and you will be taxed personally.
It is still a bit early for Christmas wishes but we can make sure you can get into the Christmas spirit knowing how to plan tax-friendly presents and parties.
* A relevant tax period is the accounting period for companies and the tax year for other businesses.
If you would like to find out how your business would benefit from having Composure as your accountant and tax advisers, please book in a call with us https://calendly.com/composure-carolynburchell/discover-call