For nearly every business owner, the Holiday season is a great opportunity to reward staff for their hard work, and even customers for their loyalty and repeat business. However, Christmas gifts for clients and staff members can often be a contentious issue – tis’ the season to give indeed, but it’s not the giving that’s the issue, but rather how you’re going to handle the tax on those gifts. That part can be hard and often confusing to work out.
Can businesses claim tax relief on Christmas gifts given to clients and staff?
Now, the purchase of Christmas gifts, be it for clients or staff (or both), falls under entertainment. As a general rule of thumb, any entertainment expenses incurred by a business, including Christmas gifts, are mostly not tax-deductible. However, you’ll find that tax law has made a few exceptions where the cost of a gift would indeed be deductible.
For instance, if you’re passively advertising or marketing your brand or business through a certain gift – a company T-shirt, pens, notepads, or an umbrella with your logo – then the gift would be deductible. But anything which takes the shape of food, drink, and alcohol will not be deductible; in fact, nor will any sort of cash or voucher that you give to your employees and/or clients. Even if the above items have your company monogram or logo on them (food, drink and alcohol), they will not be deductible. There is a restriction to keep in mind though: the gift should not exceed £50, otherwise, it will be tax-deductible.
Now, with the above in mind, the rules are definitely more lax if you want to present a gift that’s made of one of your products and the item is given away during the day-to-day course of the business – for the sake of public advertisement or promotional purposes more than anything else. In that case, you could obtain a tax deduction for the cost of the gift.
So, assuming you’re in the business of marking candy and you give away a box of candy as a Christmas gift to your staff members and clients merely for promotional and advertisement purposes – and not purely as a gift to reward or show appreciation – then the gift will certainly be tax-deductible.
And while we’re on the subject, gifts given to charities for Christmas also fall under the tax-deductible category.
Are there any benefits for a business to give Christmas gifts to employees?
From the above, we can draw that any gifts given to employees for Christmas are tax-deductible, but at the same time, you must also see to it that these gifts are not excessive throughout a single tax year. If they are, then they’ll be treated as a ‘benefit in kind’, which means your employees are required to pay tax on them.
Again, the general rule of thumb to go by is this: gifts given to staff members are categorized as taxable benefits. But there is an exemption for specific kinds of gifts where the cost should not exceed £50 for each employee. To qualify for this exemption, the gift may not be given in exchange for a salary sacrifice or in exchange for any work done – even though store vouchers are acceptable, the gift cannot be cash or even a voucher, for that matter, which can be exchanged for cash or other goods. For small-medium companies which follow the typical ‘family-owned business’ structure, a total of £300 in gifts per every tax year may be given to the company director and his/her immediate family.
This can, however, greatly vary depending on the kind of ownership or stake you have in the business or what kind of business you’re running. This can especially be confusing for business owners at first and many make the mistake of giving away Christmas gifts to clients and staff, not fully understanding the tax implications or how to handle them, which can prove to be a nagging headache later on.
As such, it is best to consult a tax accountant who can steer you in the right direction before you end up learning the hard way.
Can gifts be rejected by HMRC?
HMRC can always inspect the gift you have claimed and deem it exempt if it’s questionable or trivial in nature. For example, the gift could be a trivial benefit – something which typically costs less than £50, and isn’t a part of a performance-based reward or a contractual agreement.
Other similar rejections may be in the form of money or vouchers. Therefore, it’s fair to say that the safest gifts which the HMRC won’t reject or deem trivial are foods and hampers, premium chocolates or fancy wines.
What about VAT on Christmas gifts?
On the subject of VAT, businesses can claim the input VAT on gifts given to staff members and clients only, and not those bought for themselves, their family, associates or friends. With that said though, if the cost of Christmas gifts given to an individual – be they your staff member or a client – exceeds £50 (VAT included) in a 12-month period, and you have already claimed the input VAT, then you must charge the output VAT based on the total cost of those gifts. This rules applies across the board to all categories of gifts and if you believe it will most likely apply, then you’re better off not claiming the input VAT to begin with.
To sum it all up
Christmas gifts for staff
The cost of a gift per staff member must not be higher than £50. It can also not be a cash or cash voucher, neither can it be part of their contractual terms or a reward for performance or work done. A bottle of wine or champagne or a box of chocolates, for instance, will not be taxed by HMRC.
Christmas gifts for clients
Any kind of ‘client entertaining’ is not allowable by HMRC for tax purposes. Furthermore, gifts for prospects are not allowed either. The exception here is that the gift should be small and advertises or promote the brand, such as food and drink – where the company logo and/or branding is clearly printed or displayed on the item and not just the gift wrapping. Typical examples include diaries and notepads, pens, mousepads, company t-shirts, etc.
The above information is simply to familiarise you with the subject of what’s tax-deductible when it comes to giving away Christmas gifts to clients and employees. Get in touch with a tax accountant now to understand precisely what kind of gifts are tax-deductible and how much tax you can claim on them.