“Christmas isn’t a season, it’s a feeling” truly said and rightly accepted. It’s time to do a little extra for someone and of course, just the right time for Christmas gifts or bonuses ?, These gifts are a great way to express your appreciation towards your employee’s hard work and your customers’ loyalty. As your most trustworthy companions, it`s our duty to remind you of the non-festive phase of Christmas Gifts in your business life: Tax Implications!
Income Tax & Corporation Tax
Employer’s point of view
Christmas Gift to existing clients/prospective customers:
The general rule is that no deduction shall be allowed in calculating the profits of the trade for expenses incurred in providing entertainment or gifts in connection with the trade. However, if the gift bears a conspicuous advertisement of the business then it is allowed to roll into the expense sheet provided:
- The gift is not food, drink, tobacco, or a token or voucher exchangeable for goods, or
- The gift doesn`t cost more than £50 along with the cost of other presents (except food, drink, tobacco, or a token or voucher exchangeable for goods) to the same recipient, in a single tax period.
If any of the above-mentioned conditions are breached then the cost of a Christmas gift shall not be allowed as a deductible expense.
The businesses should ensure that the Christmas gift shall not exceed £50 otherwise the whole amount will be disallowed and not just the amount over and above £50. Another important aspect here is to ensure that the company name/logo is on display on the gift itself and not just on the wrapping. For instance, if a baker’s shop gives away a box of cookies as a gift over Christmas to the public in general then, it shall not be an allowable expense even if it has the name/logo of the baker on it. But, if a yearly planner diary with the company name/logo is given away as a Christmas gift, then the cost of the same shall be an allowable business expense.
Gift to employees
Generally, the cost of gifts given to an employee by an employer is an allowable expense. But where gifts to employees are incidental to the provision of gifts to others, then the amount of gifts cannot be claimed as a deduction.
Employee’s point of view
The gift received by an employee from an employer during the employment contract is to be treated as a ‘benefit in kind’, which needs to be reported and taxed by the employer.
Christmas gift as a cash bonus
The amount is to be reported and taxed in such cases. Such an amount is added to the employer’s earnings and PAYE as well as Class 1 national insurance is deducted from it through payroll.
Goods as Christmas gift
If goods are goods are given away as Christmas gifts and do not fall under trivial benefits then it needs to report in form P11D and Class 1A National insurance needs to be paid on it. Goods maybe
- With the resale value: The value of goods with a resale value shall be higher of the resale value or the amount it costs to the employer.
- With no resale value: The value of goods with no resale value shall be simply the amount it costs the employer.
Value Added Tax
The VAT doesn`t apply on gifts given to the same person (employee/customer/prospective customer etc.) within 12 months period, where the total value (exclusive of VAT) of all the gifts provided in such period does not exceed £50.
However, if the business wishes to provide gifts worth more than £50 or the total amount of all the gifts within the 12 months period exceeds £50, then the VAT kicks off and needs to be accounted for as usual. So, it is safe to say that to avoid any VAT implications, businesses should make sure that the Christmas gifts cost less than £50.
If services are provided to customers for free, then no VAT is due. But if the business has bought the service and incurred VAT on it, then it is allowed to reclaim this input VAT and output tax is to be due on the services so passed on free of charge. If the business wishes to avoid this hassle, then it doesn`t need to take any input VAT in the first place.
HO! HO! HO!
I hope this piece of knowledge helps you in preparing for the tax implications of forthcoming festivities well in advance. If you still have questions or simply want to wish merry Christmas, then write to us at info@debitam.com or call us at 020 3960 5080. Happy festivities. Cheers!
