Accounting for gifts

Bertie considers himself a lucky man – he runs a successful business that over the years has brought him great pleasure, some fantastic friendships and has kept him comfortably well off. A generous man, Bertie likes to share the love and takes an enormous amount of pleasure in giving fabulous freebies and gifts to his staff, customers and suppliers to show them how much he appreciates them. Just to be sure he stays on the right side of the tax man, we created this little guide for him.

Trivial gifts to staff

• Bertie might buy a gift for an employee for their birthday, a set of glasses when they get married or a bunch of flowers if they are poorly. So long as the value of gifts per employee is under £50 (per tax year) these are considered trivial and are not classed as a benefit in kind.THey don’t need to be reported to HMRC
• Gifts with a cumulative value exceeding £50 (per tax year) are considered a benefit in kind and are taxed accordingly and reported on a P11D
• Gifts that are a reward for their work or performance – such as a quarter end bonus or a gift voucher for an meal out with a friend/partner/spouse are considered to be part of the employee’s salary and are taxed as income. Bertie would need to put these through payroll or report on a P11D – depending on the nature of the gift
• A seasonal gift of a bottle of wine, a small hamper or Christmas turkey would generally be allowed by HMRC. If Bertie were to give his staff a case of wine, or a single bottle of fine wine then these would be deemed excessive and would be classed as a taxable benefit in kind. On the one hand, Bertie wants to reward his employees but he doesn’t want to land them with an unexpected tax bill
• Trivial employee gifts are allowable expenses for tax so Bertie can claim the VAT back on the spend, and deduct the cost against company profits

Extravagant gifts to staff

• It’s been a particularly brilliant year for Bertie Ltd so he decides to take his team on an all expenses paid weekend way to thank his team for their hard work. The cost per head substantially exceeds the £50 per head limit on trivial gifts and the £150 threshold on staff entertainment
• Bertie wants to reward his staff but he doesn’t want to create a tax charge for them so he will enter into a PSA (PAYE Settlement Agreement) where Bertie Ltd pays the employees tax and national insurance on the benefit in kind

Gifts to clients or suppliers

• Gifts are generally not allowable as a deduction against the company’s profits, i.e. they are treated much the same as business entertaining
• Trivial gifts to anyone outside your business with a value under £50 per year is an allowed expense if the gift is branded
• Food, drink, tobacco or vouchers of any value are disallowed and treated in the same way as Business Entertainment
• Unbranded gifts with a value exceeding £50 are disallowed and treated in the same way as Business Entertainment

Branded gifts to clients or suppliers

• Bertie Ltd exhibits at a lot of trade shows and gives away a substantial number of promotional items including branded pens, coasters, USB sticks, pads, boxes of chocolates, T-Shirts and umbrellas
• The individual cost of each item is well under £50 each so even if he bundled a bunch of gifts together in a giveaway bag, the total cost of the bundle is still less than £50 per person
• Advertising, marketing and promotional materials are all allowable against trade profits and Bertie can reclaim the VAT back on his spends

Free samples

• Free samples are not really gifts, these are an advertising cost. Bertie gives away free samples of his product in order to generate an interest in the product in the hope that it will lead to a sale
• The cost of buying or manufacturing free samples is fully deductible against business profits and Bertie can reclaim the VAT back on his spends

The VAT trap on high-value gifts

• On very rare occasions, Bertie might be a little more extravagant with his business gifts. He has some very high-value customers and feels that a £40 gift does not sufficiently reward their custom
• His best customers get a case of the finest wines at Christmas costing over £200 a case, this type of cost is treated more like Customer Entertainment and not allowed against business profits
• HMRC deems non-trivial gifts to be a sale even though no money has changed hands, and so Bertie must account for the output or sales VAT on that sale. This makes the transaction VAT neutral but ensures that HMRC collects the output VAT that they would otherwise have missed out on

Business gifts to charity

A business gift is allowable when made to:

• A charity
• The Historic Buildings and Monuments Commission for England
• The Trustees of the National Heritage Memorial Fund

Third party gifts to the employee:

• Goodwill gifts (such as a bottle of wine from the employer’s client) can be received by an employee without an income tax charge where all of the following conditions are met:- the cost to the donor is less than £250 (including the cumulative cost of all gifts within the same tax year); – the gift is the goods themselves, or a voucher to acquire goods; – the donor is not connected to the employer or anyone connected with the employer; and – the gift is unsolicited and not given in return for the employee’s service.

• If these conditions are not met, the third party must provide the employee with information about the amount of the benefit, which the employee should then include as assessable income on a tax return. The third party may instead prefer to enter into a taxed award scheme which includes payment of the related tax.

Top Tips

• Create a separate gifts account code, or two  in your P&L to track business spends on gifts.
  • Corporate gifts should be posted to a separate account and grouped with entertainment
  • Staff gifts should be posted to a staff gifts account code within staff costs
• It would be sensible to keep a gifts register and ensure all staff notify you of any gifts they received from a third party connected with your business.
• Promotional items are not really a gift – these would be reported as promotional spends in the P&L and grouped with advertising and marketing costs