Christmas gifts - the perennial tax question

HMRC plays Scrooge

Aside from the limited exemption from the benefits in kind rules which applies for annual staff events, including but not exclusively to Christmas parties, HMRC, like Scrooge, makes no special allowances for Christmas. However, there are general rules relating to staff and other business gifts that often come into play at Christmas.

Tax relief for staff gifts

Gifts are considered to be a form of business entertainment and as such are blocked by the same tax rule. However, there’s an exception.

The cost of staff gifts is tax deductible. What’s more, unlike the aforementioned exemption for employee events, there’s no cap on the amount you can spend and obtain a tax deduction for. However, this isn’t the whole story, the gift recipient’s tax position needs to be considered.

A gift that costs you in excess of £50 (including VAT and related costs, e.g. delivery charges, is taxable as a benefit in kind on the employee receiving it. This means you’ll have to pay Class 1A NI at 13.8% (note that the increase in Class 1A to 15% won’t apply to benefits provided in 2023/24 even though it will be payable after that date). To prevent the employee having to meet the tax cost there’s a procedure which allows you to pick up the bill using a PAYE Settlement Agreement.

What about VAT?

There’s a school of thought that says you can’t reclaim VAT paid on the cost of staff gifts, but in our view that’s wrong. VAT can be reclaimed but the trouble is you must then account for VAT when you supply the gift to an employee. Assuming again that you don’t expect your employees to pick up the tax tab for a gift, you can either reclaim the VAT and account for it out of your pocket or not bother reclaiming the VAT in the first place.

You don’t have to account for VAT if the value of gifts to the same person within a twelve-month period doesn’t exceed £50.

Customer etc. gifts - tax deductions

With one exception, your business isn’t entitled to a tax deduction from its profits for the cost of gifts to customers, suppliers etc. regardless of their cost or value.

A deduction is allowed for a gift that clearly shows advertising, costs no more than £50 and is not part of a series of gifts to the same person within the same accounting period which in total cost more than £50. This exception doesn’t apply to gifts of food, drink or tobacco.

Customer etc. gifts - VAT

The VAT position for gifts to customers, suppliers etc. is the same as that for gifts to employees. Therefore, you can reclaim the VAT but if the value of all gifts made to the same person exceeds £50 in a twelve-month period, VAT must be accounted for. For practical reasons this again means your business will have to pay it.