Business Gifts: What Limited Company Owners Need to Know
Business gifts are a common area of confusion for limited company owners.
You may want to send a thank-you gift to a customer, give samples to potential buyers, provide small branded items, or give a gift to a member of staff.
But the tax treatment depends on who receives the gift, what the gift is, why it is being given, and whether VAT has been claimed.
The starting point is simple:
Most business gifts are treated like business entertaining, which means they are not normally deductible for Corporation Tax.
However, there are important exceptions.
The general rule: business gifts are not normally allowable
For Corporation Tax purposes, the general rule is that business gifts are not deductible from company profits.
HMRC treats most business gifts in the same way as business entertaining. This means the cost is normally disallowed, even if there is a business reason for giving the gift.
For example, if your company sends a customer a hamper, bottle of wine or gift voucher as a thank-you, the cost will usually be disallowed for Corporation Tax.
This can feel surprising, especially where the gift is clearly connected to the business relationship.
But the tax rules start from the position that business gifts are not allowable unless an exception applies.
Exception 1: free samples
The first useful exception is free samples.
If your company gives away samples of its own products to advertise those products, the cost may be allowable.
For example:
a skincare company giving sample pots of its products;
a bakery giving out small samples of cakes;
a food manufacturer offering tasting samples;
or a product-based company sending small samples to potential customers.
The key point is that the item must be a sample of the product your company sells, and it must be provided to promote sales.
This is different from buying a separate gift for a customer.
Exception 2: branded advertising gifts
A gift may also be allowable if it clearly advertises the company.
This usually means the item carries the company name, logo or branding in a clear and visible way.
Examples may include:
branded pens;
branded mugs;
branded diaries;
branded calendars;
branded keyrings;
branded notebooks;
branded tax cards.
For the company to claim Corporation Tax relief, the gift must meet the conditions.
The gift must:
carry a clear advertisement for the company;
cost no more than £50 per recipient in the company’s accounting period;
not be food, drink, tobacco or an exchangeable voucher.
The £50 limit is not a general gift allowance.
It only applies where the gift qualifies as an advertising gift.
The £50 rule for branded gifts
The £50 limit is strict.
For example, if your company gives a customer a branded notebook costing £20, this may be allowable if the other conditions are met.
If the company gives that same customer further branded gifts in the same accounting period and the total cost goes over £50, the exemption may be lost.
Also, the item must not be food, drink, tobacco or an exchangeable voucher.
This means:
a branded mug may qualify;
a branded pen may qualify;
a branded notebook may qualify;
a bottle of wine will usually not qualify;
a box of chocolates will usually not qualify;
a gift voucher will usually not qualify.
Even if the bottle of wine or chocolates carry the company logo, the cost will normally still be disallowed.
Gifts to customers and suppliers
Gifts to customers and suppliers need particular care.
As a simple guide:
branded promotional items may be allowable if the rules are met;
free product samples may be allowable;
food, drink, tobacco and vouchers are normally not allowable;
gifts given for entertaining or relationship-building are usually not allowable;
expensive gifts are unlikely to qualify as advertising gifts.
This means a small branded item can be tax deductible, but a thank-you hamper or gift voucher usually will not be.
Gifts to employees
Gifts to employees are treated differently from gifts to customers.
A gift made by the company to an employee is usually deductible for Corporation Tax because it is treated as staff welfare or remuneration.
However, you also need to consider whether the employee or director has a personal tax charge.
A staff gift may be tax-free for the employee if it qualifies as a trivial benefit.
For the trivial benefits exemption to apply:
the benefit must cost £50 or less, including VAT;
it must not be cash or a cash voucher;
it must not be a reward for work or performance;
it must not be contractual.
For directors of close companies, which includes most small owner-managed companies, there is an annual cap of £300 per tax year.
Example: employee gift
A company gives an employee a £40 birthday gift voucher.
The voucher cannot be exchanged for cash.
It is not a reward for performance.
It is not part of the employee’s contract.
This may qualify as a trivial benefit.
This means there should be no Income Tax or National Insurance for the employee and no P11D reporting.
The company should normally be able to claim the cost for Corporation Tax.
Gifts to directors
Directors can also receive gifts from the company, but the rules need to be applied carefully.
If the director is an employee of the company, a small gift may qualify as a trivial benefit if all the conditions are met.
However, most small companies are close companies. This means the director will usually be subject to the £300 annual trivial benefits cap.
A director should not use gifts as a substitute for salary, dividends or bonuses.
For example, six £50 gifts during the tax year may be acceptable if they meet the trivial benefits conditions.
But regular gifts designed to reward the director for work done, or to replace pay, could create tax problems.
Gifts to shareholders
Gifts to shareholders need particular care.
If a company gives a gift to a shareholder and there is no genuine business reason, Corporation Tax relief may not be available.
In a close company, a gift or benefit provided to a shareholder could also be treated as a distribution, depending on the facts.
This is especially relevant where the shareholder is not an employee or director.
For example, if a company gives a valuable gift to a shareholder simply because they own shares, this is unlikely to be treated as an allowable business expense.
It may instead be treated as a distribution.
Gifts to charities
Charitable giving has separate rules.
A limited company may be able to claim Corporation Tax relief when it gives money, equipment, trading stock, land, property, shares or employees on secondment to charity.
This is different from ordinary business gifts to customers or suppliers.
If your company gives trading stock to a charity, special rules can apply so that the company does not need to bring in a receipt for the value of the stock.
The gift must be to a qualifying charity or relevant body.
VAT on business gifts
VAT has separate rules from Corporation Tax.
If your company is VAT registered and buys goods for business purposes, it may be able to reclaim input VAT under the normal VAT rules.
However, output VAT may need to be accounted for when gifts are given away.
The general VAT rule is that your company does not need to account for VAT on business gifts made to the same person if the total cost of gifts to that person does not exceed £50 excluding VAT in any 12-month period.
If the total cost of gifts to the same person exceeds £50 in a 12-month period, and your company was entitled to reclaim VAT, output VAT will normally need to be accounted for on the total cost of the gifts.
This means that even if input VAT is reclaimed, the VAT saving can be lost where the £50 limit is exceeded.
VAT on free samples
Free samples are treated differently for VAT.
Where your company provides genuine samples of its products free of charge for marketing purposes, VAT is not normally due on those samples.
The sample should be provided to promote sales of the product and allow the recipient to assess its characteristics or quality.
This is different from giving away finished goods as general gifts.
Be careful with “free gift” promotions
Not everything described as “free” is actually free for VAT purposes.
Sometimes a “free gift” is really part of a wider package or promotion.
For example, where a customer pays a set price for a package that includes an extra item described as “free”, VAT may still need to be considered on the whole package.
The wording used in marketing is not always the same as the VAT treatment.
The commercial reality matters.
Common mistakes limited company owners should avoid
Limited company owners should avoid:
assuming all business gifts are Corporation Tax deductible;
treating customer entertaining as advertising;
claiming food, drink or vouchers as allowable advertising gifts;
forgetting the £50 limit for branded gifts;
giving several gifts to the same customer without tracking the total;
confusing staff gifts with customer gifts;
forgetting the trivial benefits rules for directors and employees;
giving gifts to shareholders without considering whether they are distributions;
reclaiming VAT without checking whether output VAT is due;
assuming something called “free” in marketing is automatically free for VAT.
Practical record keeping
Good records are important.
For each gift, the company should keep a note of:
who received the gift;
their relationship to the company;
what the gift was;
the cost;
whether VAT was reclaimed;
whether the item carried company advertising;
whether it was a product sample;
whether it was a staff gift or customer gift;
and why the company believes the cost is allowable.
This will make it easier to support the tax treatment if HMRC ever asks questions.
External links:
Final thoughts
Business gifts are not always straightforward for limited companies.
The general rule is that gifts to customers, suppliers and business contacts are not normally deductible for Corporation Tax.
But there are exceptions for genuine free samples, branded advertising gifts, employee gifts and charitable gifts.
VAT also needs to be considered separately, especially where gifts to the same person exceed £50 in a 12-month period.
The key questions are:
Who received the gift?
What was the gift?
Was it advertising, a sample, staff welfare, charity giving or entertaining?
Did the cost exceed the relevant £50 limit?
Was VAT reclaimed, and is output VAT now due?
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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