Your company has had a fantastic trading year, so you’ve decided to give out special gifts to your loyal customers. Can one possibly deduct the input tax paid when buying these items, or is the situation more complicated? In such cases you need to know more about VAT on gifts to customers.
Are client gifts tax deductible while conducting business or contracting in the UK? When are business presents to clients tax deductible? Many business owners, particularly limited company contractors, have thought about purchasing client gifts like goody boxes at some point.
During the holiday season or at other times of the year, a business owner may look to purchase corporate Christmas gifts for clients and for business contacts. They might also inquire whether corporate gifts are tax deductible.
Whether corporate gifts for clients and consumers may be tax deductible depends on several factors. The basic rule is that business presents to customers are not tax deductible because they fall into the same category as entertainment expenses.
The following piece will help you make more sense of the status of VAT on gifts to customers.
Overview of Business gifts
For tax deductions on client presents in the UK, the rule of thumb typically views them as entertainment expenses. As a result, most of the time, business gifts are not deductible for tax. There are, however, certain conditions for:
- Costs of advertising in relation to clients and customers.
- Gifts to employees.
- Gifts to charities.
When we consider promotional gifts for clients, such gifts allowable for Corporation Tax could be:
- Water bottle.
- A notepad.
- USB stick.
- A calendar.
- A gift box.
- Gift baskets.
- A golf umbrella.
- Coffee mug.
- A gift set.
- Bottle opener.
Or the business can provide an item or product to advertise to the public. For example, this can be a free sample of their products.
Once again, please remember that any business gifts should include an advert for your business. It can be an indirect advertisement; you do not have to paint it all over the sky. However, your business name should be clearly visible.
What qualifies as a gift?
A business gift typically has two qualities:
- You create it while advertising your company,
- You are giving stuff to third parties, in exchange for nothing.
A corporate gift might also be something you offer your employees, like a long-service award.
There are more considerations to make, including:
- The present is not money or a gift card for money. This also can’t be a coupon that can be redeemable for money. As a result, Christmas gift cards that staff members can use at a store will be acceptable.
- There is no salary sacrifice or other arrangement in place for you to provide the gift.
- You don’t give the employee a gift in appreciation of their recent or future services. You can satisfy this criterion with a Christmas gift.
Now that you know about a gift, lets talk about VAT on gifts to customers.
All you need to know about VAT.
As a business, you might offer free samples, give out long-service awards to employees, give out “freebies” to customers in the form of branded calendars, keychains, and other goods as a way of saying “thank you” for their patronage, or you might just purchase an employee a bouquet of flowers to express your gratitude. Goodwill-building is usually a smart business move. But do you know if one can subtract the VAT when you file your VAT return?
The VAT position is simple if you buy items that are given away for non-business reasons, such as a case of champagne for friends: there is no output tax due when you give the items away, hence you cannot claim input tax on the purchase of the items.
However, you can deduct input tax from the cost of items when they are given away for commercial purposes, such as to reward clients or help a neighbourhood charity. Unless the gift’s total worth (including its VAT-exclusive value and the total value of all gifts given to the same recipient over the previous 12 months) is less than £50, output tax will be due when you make the gift.
Example of VAT on gifts to customers
As a hypothetical example, you might purchase a bouquet of flowers for an employee. Flowers were £32.50 in price. You can reclaim the input VAT on the flowers and are not required to pay the output VAT to HM Revenue & Customs if any more presents you give to the same person throughout the year don’t exceed £17.50 (i.e., up to a total of £50).
However, if you give the recipient a £20 hamper in addition to the flowers, you will go over the £50 threshold. You must pay the output tax on the entire cost of the goods as part of your VAT return if you choose to claim the input VAT you paid to buy the gifts. When the cost of business presents exceeds £50 per person per year, some companies may decide not to claim the input VAT on such costs. As a result, they would be exempt from paying production VAT on the gifts.
You do not need to recalculate your input tax or treat it as an error if you purchase items with the idea to give them away as a business present. As a result, you may claim input tax but then give them away for non-business purposes. However, when you distribute the commodities, you must take into consideration output tax depending on the cost price of the items.
HMRC permits you to deduct a business gift that you provide to one person for up to £50 in a single tax year. However, the gift must feature a promotional element for your business, such as a corporate emblem or distinctive branding, and it cannot be in the form of food, drink, or cigarettes, or of vouchers that may be redeemed for these items.
Beware: HMRC will prohibit the entire payment, not only the portion that is over £50, if the gift costs more than £50.
Other forms of gifts
There are a variety of alternative ways to reward employees and clients, like offering them entertainment services, lodging, access to events and clubs, or tickets to plays or concerts. You can reclaim VAT on these items in certain situations. The definitions of “employees,” “entertainment,” and “overseas customers” are all precise in the legislation.
The VAT Notice 700/7 contains HMRC’s instructions in case you wish to conduct extensive self-study specific to your case.
Other, less obvious “gifts” include things like free product samples offered to prospective buyers. The samples you offer are not subject to VAT if they meet the HMRC definition.
There may be times when you give something to a third party as a gift and must account for output tax even though the recipient will use the item(s) for their own business, such as selling them to their own clients. If the customer is registered for VAT, they can typically claim input tax in such circumstances, thus it makes sense for them to pay you this VAT based on the worth of your gift. In these circumstances, you cannot send them a VAT invoice; instead, you must provide them a “tax certificate” document that states: “No payment is required for these goods. On the supply, output tax on the amount of £XX.XX has been accounted for. This document will be their evidence for VAT on gifts to customers.
Gift giving to charities.
Consider that you run a furniture store. You have made the decision to donate a table and four chairs to a charity that will receive them for free (£1,000 excluding VAT). You must deduct the gift’s $200 worth of production tax if the charity intends to utilise the furniture for internal purposes. Such as, in the office’s lobby. However, your gift will be zero-rated if they plan to either sell or rent the furniture to raise money for the organisation, say in their charity store or online. You should obtain a written statement from the charity outlining their plans for the items. Preserve a copy of it as proof to support your zero-rating.
The clauses clearly mention “business” presents. They don’t cover presents that you give for personal use, in other words. On purchases of products for personal use, one cannot claim VAT as one would in case of VAT on gifts to customers.
The VAT on expenses like parking, petrol, company cars, and transportation incurred as part of regular business expenses is also subject to certain requirements.
Additionally, there are specific regulations regarding VAT on gift certificates (for a store, spa, or another sort of retailer). If you’re considering purchasing a gift certificate and have questions about VAT, check out the HMRC website and its sections regarding VAT on gifts to customers.
Can you claim VAT on gifts you give to UK clients?
You are under obligation to pay output VAT to HMRC on the cost price of the items if you recover VAT on them and use them as gifts later. Whether given for payment or not, gifts of goods are considered supplies for the purposes of the VAT. Whether it is a market rate or not, if payment is made, that is relevant the consideration for VAT reasons.
What standards are there for gifts?
A gift must have all three components—an intent to give, an acceptance of the present, and delivery—from a legal standpoint. The gift is only complete when all three components are present, at which point it cannot be revoked.
Are gifts to customers allowable?
Typically, business presents to clients are not tax-deductible costs since the law considers them entertainment expenses. However, there are some situations where a corporate gift qualifies as a tax-deductible expense, which lowers the overall tax liability.
In conclusion, make sure you comprehend the modalities while discussing whether corporate gifts are tax deductible. Even if we investigate whether client gifts are tax deductible, they are so only if you meet certain requirements. Additionally, there are distinct restrictions on gifts for business owners, customers, employees, and charities. Another one of those ambiguous situations where it’s not always apparent what you can assert. Finally, your company gifts will be tax deductible if you stay below the £50 cap and send promotional items to clients.