This is a timely question, which we’ve been asked about a lot recently. You want to buy Christmas gifts for your customers and suppliers, but can you claim the gifts as a business expense?
If you’re wondering about gifts for employees, check out our blog on Trivial Benefits – which covers the rules around payments to employees of up to £50 each time.
There are 2 main tax elements to think about, when considering whether business gifts are allowable for tax.
- For VAT purposes, if it’s allowable you can claim back the VAT you’ve spent on the gift.
- For corporation tax purposes, if the expense is allowable, it means that we can use the cost to help reduce your corporation tax.
Let’s look at each tax element separately:
1. Business Gifts: VAT Element
Gifts for friends or family, or for potential customers or suppliers:
- You cannot claim back the VAT on the purchase.
- It seems bonkers that you can’t claim back the VAT on gifts for potential customers or suppliers, but HMRC still have the view that this is bribery!
Gifts for existing customers or suppliers:
- HMRC: https://www.gov.uk/guidance/business-promotions-and-vat-notice-7007
- As long as the total cost of gifts to one person is below £50 (or £60 including VAT) in any 12 month period you can claim back the VAT.
- The 12 month period starts on the day that you give the gift to the individual
- You can only claim back the input tax (VAT) if you have a valid VAT invoice.
- More on what counts as a valid VAT invoice here.
For gifts exceeding the £50 limit
- You have to declare the output VAT on your VAT return, so it’s basically easier not to claim it in the first place.
Keeping a gifts register
- If you’re going to be giving regular gifts to the same customer or supplier, and claiming VAT, it is advisable to keep a gift register.
- The gift register should show the date, person you’re gifting, what you’re gifting, the value, and VAT claimed.
2. Business Gifts: Corporation Tax Element
Business gifts aren’t allowable as a deduction for corporation tax or income tax, but the business can still pay for the gift.
When we come to work out your corporation tax or income tax, we “disallow” the cost of the business gifts, which means that we add the cost back onto your profit, before working out the tax.
However there are a few exceptions:
- If the gift has a conspicuous advertisement for your business.
- If the gift had the business logo on then this may be allowable.
- Examples of corporate gifts could be things such as:
- Mouse Mats
- Bottles of alcohol with your logo
How to record these gifts in your accounting software:
In Xero there are 2 distinct entertaining account codes:
Entertaining – 0% – this is for entertaining costs that are not allowable for tax
Include here gifts for potential customers/suppliers or for friends or family.
Also include items above the £50 limit for VAT.
Entertaining – 100% – this is for gifts and entertaining that are allowable for tax
Include here gifts below £50 plus VAT, and those gifts with an advert or logo on them
It’s not always that straight forward though!
Tax can be a complex area, and gifts and entertaining costs are always reviewed very closely by our VAT and accounting team at Kinder Pocock
If you’re not sure how to treat your gift or entertaining spend, do get in touch and we will be able to help you.