When it comes to managing the finances of a business, understanding the intricacies of allowable expenses can make a significant impact on your taxable income. One area that often raises questions is the treatment of gifts in the UK tax system. This blog post aims to shed light on the rules and regulations surrounding business gifts, helping you navigate these waters with confidence.
What are Allowable Expenses?
Allowable expenses are costs that are incurred wholly and exclusively for the purposes of running your business. These expenses can be deducted from your business income to reduce your taxable profit, ultimately lowering your tax bill. However, not all expenses are treated equally, and gifts are subject to specific rules.
Gifts to Clients and Customers
When you’re running a business, it’s common to want to show appreciation to clients, suppliers, and employees. One way of doing this is by giving gifts. However, when it comes to UK tax, not all gifts are treated equally. Understanding the rules can help ensure that you’re not hit with unexpected tax bills.
When it comes to giving gifts to clients and customers, the UK tax system has clear guidelines:
Cost Limit: The cost of the gift per recipient must not exceed £50 in a tax year.
Branding Requirement: The gift must carry a conspicuous advertisement for your business. This means that your business logo or name should be prominently displayed on the gift.
No Food, Drink, or Tobacco: Gifts of food, drink, and tobacco are not allowable, regardless of whether they meet the other criteria.
No Vouchers: Gifts that are in the form of vouchers or tokens that can be exchanged for goods and services are also not allowable.
If the gift does not meet these criteria, it will not be considered an allowable expense, and the cost cannot be deducted from your business income for tax purposes.
- Entertainment: Taking a client out for a meal, a round of golf, or to an entertainment event is not deductible as an allowable business expense for tax purposes. Even if you discuss business during these outings, the costs aren’t allowed.
- Promotional Gifts: Gifts that advertise your business (branded with your business name) and cost £50 or less can be deducted as an allowable expense. Examples include pens, mugs, or calendars with your company logo.
- Other Gifts: Any non-promotional gift to clients costing more than £50 will disallow the first £50 as an allowable expense. This means if you buy a client a £60 wine bottle, none of this will be deductible.
Gifts to Employees
Gifts to employees are treated differently and can be considered a taxable benefit. However, there are exemptions available:
Trivial Benefits: Gifts that cost £50 or less, are not cash or cash vouchers, are not a reward for work performance, and are not included in the terms of an employee’s contract can be considered trivial benefits and are exempt from tax and National Insurance.
Examples include a bouquet of flowers, a meal out, or a small gift card.
Non-Trivial Benefits: Gifts that exceed this threshold or aren’t deemed ‘trivial’ must be reported on a P11D form, and the employer might have to pay Class 1A National Insurance on the value of the gift. The employee must declare it in his Self Assessment in the tax year that it was paid.
Annual Parties and Events: If you provide an annual party or similar event open to all employees and costing less than £150 per attendee, this is an allowable expense and is not considered a taxable benefit.
Directors of ‘close’ companies’
You can receive trivial benefits worth no more than £300 in a tax year if you’re the director of a ‘close’ company, office holder or close family.
A close company is a limited company that’s run by 5 or fewer shareholders.
Keep detailed records of all gifts given, including who they were given to, the reason for the gift, and its cost. In case of an HMRC inspection, having clear records will make the process smoother.
If you reclaim VAT on business expenses, remember that VAT can’t typically be reclaimed on gifts to clients unless they are promotional gifts (which have a clear advertisement of your business and cost £50 or less).
Navigating the tax implications of business gifts requires a careful understanding of the UK tax system’s rules and regulations. By adhering to the specified criteria, you can ensure that your business is making the most of allowable expenses, ultimately optimising your tax position.
Remember, when in doubt, it’s always a good idea to consult with a professional accountant or a tax advisor to ensure that you are complying with all tax laws and regulations. You can give us a call an we can explain any tax matters and reliefs in a plain understandable language. At Greenlight Accountancy we are here to make finances, reporting simpler for you.