Business gifts -when are gifts to clients tax deductible

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Introduction 

When you’re running your own UK contracting company or in business in general, are business gifts tax-deductible? What’s more, when are corporate gifts to business customers tax-deductible? Further, as a contractor, when are client gifts allowable for Corporation Tax? Many business owners, including limited company contractors, will consider buying gifts for clients at one time or another. This could include a gift box, gift set or a calendar for the following year. Any small business gifts for clients can be to say thank you for the work provided to them during the calendar year. As a result, the subject of when are client gifts tax-deductible (UK) and whether Christmas gifts for clients are tax-deductible are common thoughts for many business owners.

A business owner may also look to buy corporate Christmas gifts for clients. Indeed, these could be for specific business contacts during the festive season. Moreover, they may investigate buying corporate gifts (UK) or thank-you gifts for clients at other times during the year. Therefore, a business owner may ask if corporate gifts are tax-deductible and, if so, when gifts are tax-deductible (UK) to clients.

Initial thoughts 

First thoughts on business gifts 

Understanding the specific rules regarding the tax deductibility of corporate gifts for clients and customers can empower you to make informed decisions. Let’s delve into when corporate gifts to clients are tax-deductible. According to HMRC, gifts to customers generally aren’t tax deductions for contractors, as they’re considered entertainment costs. However, there are exceptions. For instance, if you’re an IT contractor, we’ll explore how these gifts are treated as part of your tax deductions. We’ll also discuss some gift ideas for a contractor limited company when they’re tax-deductible. 

Entertainment costs & other tax-deductible allowances

First, for entertaining to count as a business expense while contracting through a company, it must be for business entertainment.

Entertainment costs don’t attract tax relief for your UK contractor limited company. However, it’s more beneficial for your business to pay for these rather than out of your own pocket. If you pay for these yourself, you pay for them out of your income, which has already had tax applied to this personally. Therefore, the same concept in terms of tax treatment applies to limited company contractor gifts unless they’re in line with the guide below.

Although you may be able to claim the cost of a company gift as part of your tax deductions as a contractor in some instances, there are two other often unknown business expenses which you can claim. UK contractors and small business owners frequently miss these, and the first is Trivial Benefits. As a contractor or small business owner, another expense you can claim is the Annual Event (Christmas Party). We cover these two areas briefly later in this guide.

It’s key to note that there are separate rules for company donations. Indeed, if you’re considering this, you should look at these.

Business gifts (UK) -in general

If we investigate when contractor limited company gifts to customers are tax-deductible (UK), we generally treat these by default as entertainment costs. Therefore, when we ask if company gifts are tax-deductible, they’re usually not. However, if we investigate further when business gifts are tax-deductible (UK), there are exceptions for:

  • Advertisement costs for a contractor’s customers and clients.
  • Gifts to any employees of your business.
  • Any gifts from your company to charities.

In this guide, we’ll examine the above and determine which gifts are taxable and which aren’t.

When are client gifts tax-deductible? 

First thoughts 

When considering when you receive a business gifts tax deduction, one of the exceptions is for company gifts to clients or customers. As a limited company contractor, you may wish to send corporate client gifts at Christmas time. This could be a thoughtful gift to say thank you for the business provided during the year. Indeed, business Christmas gifts for customers should be appreciated by the receivers. In addition, any contractor gifts for customers could even lead to more work for you from them in the future.

On the other hand, you may want to send gifts at some other point during the calendar year. This could include gifts for business customers when you complete a contract or piece of work for them. The receiver will welcome such corporate thank-you gifts. Indeed, purchasing gifts for clients could strengthen the relationship and lead to possible new work.

Therefore, are corporate gifts tax-deductible at Christmas? On the other hand, are client gifts tax-deductible (UK) at another time during the year? Within the rules, can you buy small gifts for clients to say thank you for the work they provide to you? Many UK contractors and business owners choose to send corporate gifts to clients. What’s more, they often look to buy thank-you gifts for business clients at Christmas. To summarise, they’ll look for a great gift to thank the client for the work they receive as part of the business relationship.

Tax deductions for gifts to customers and clients in the UK

HMRC official guides can be found at Notice BIM45065 and VAT Notice 700/7. These give a complete overview on gifts and the VAT implications. When we consider are client gifts tax-deductible (UK), there are two areas where tax relief is available:

The first area to consider for a business gift tax deduction 

Understanding the annual gift limit

When we look at whether business gifts for clients are tax-deductible, HM Revenue & Customs (HMRC) will allow gifts up to a limit of £50 to any person in any tax year. The same applies when looking at when customer gifts are tax-deductible. The important thing to remember is the contractor gift must carry an advert for your business. It can be a conspicuous advertisement. However, your business name should be clearly visible. If the limited company contractor gifts to the person in any 12 months exceed £50, they’re treated as entertainment costs. As a result, they’ll not be part of your contractor’s tax-deductible expenses.

Tax relief won’t be given on certain types of gifts for clients, including food, drink, and tobacco. It is also not given if the gift is an exchangeable voucher, such as a gift card. Therefore, as the rules state, the contractor limited company gift must be of an advertisement nature.

Excellent company gift ideas for clients and customers

When considering the gifts allowable for Corporation Tax, we should take the time to look at corporate gift ideas for clients. As part of this, we should investigate business promotional gifts for clients. First, if we think about ideas for business gifts, we can research personalised gifts and branded Christmas gifts for clients. Indeed, you can show your company logo or business name on the promotional items. What’s more, there are plenty of different types of gift ideas for contractors to consider, and as such, your contractor gift ideas could include:

  • Gift boxes.
  • Calendars.
  • Diaries.
  • Notepads.
  • USB sticks.
  • Golf umbrellas.
  • Coffee mugs.
  • Water bottles.
  • Bottle openers.
  • Gift sets.
  • Gift baskets.

Once again, please remember that any selected customer gifts should include an advert for your business. You could also look online for a business gift company and see if they have any new ideas for gifts for this year.

The second area to consider for a business gift tax deduction

A business can provide free samples of its products to the public for advertising purposes. As a result, the cost of these free samples is tax-deductible. This is because the cost to the business of giving away its products for advertising isn’t a business entertainment expenditure.

VAT on contractor gifts to customers or clients

When a UK company makes gifts of more than £50 or makes a series of gifts to one person that exceeds £50 in total, it should account for output VAT on the value of the gifts. Output VAT doesn’t require accounting for gifts under £50. Neither should you account for this where a gift is a free sample of the company’s product. However, in some cases, VAT is still payable if a gift is in return for consideration.

Business gifts to charities

These are allowable if you make these out of your trading stock.

Cash donations to charity are generally not allowable as a gift unless made under Gift Aid and to a UK-registered charity.

Business & company gifts to employees 

First thoughts on employee gifts 

Let’s now turn to when gifts for employees are tax-deductible. Many businesses will buy corporate gifts for employees (UK) at one time or another during the year. Indeed, this could be staff Christmas presents for your employees during the festive season. As part of this, you may buy business gift vouchers or gift cards for your employees for a particular store. Therefore, when you take the time to treat your employees, are gift cards tax deductible? In addition, when a business buys gifts for staff, when are employee gifts tax-deductible?

The official rules state you can give company gifts to employees if the total cost, including VAT, doesn’t exceed £50 per employee. There are additional conditions to bear in mind for staff gifts, and these are:

  • The contractor gift to a staff member isn’t cash or a cash voucher. This cannot be a voucher that can be exchanged for cash. Therefore, Christmas vouchers for staff which they can spend in a retail store are acceptable. As a result, you could put through a gift card business expense if you buy a gift card for one of your employees.
  • You don’t provide the gift under any salary sacrifice or other arrangement.
  • You don’t provide the gift in recognition of the employee’s past or future services. Therefore, a Christmas gift will meet this requirement.

If the cost of a gift exceeds £50, the total amount is treated as a benefit in kind. Therefore, it will be taxable to both the employee and employer. As a result, the tax on gifts (UK) is at the employer and employee tax rates.

VAT on gifts to employees

The VAT is reclaimable on the cost of a gift to an employee.

The `annual event’ for employees or directors 

The `Annual Event’ is an allowance that allows you to spend up to £150 per employee. This can be spent on an event or part of a series of events.

If you exceed the £150 limit per employee, the whole amount won’t be tax-deductible.

If employees’ partners attend the event, the expenses are allowable if the total cost isn’t more than £150 per person.

You can also claim the input VAT on Annual Event costs. However, you can only claim the input tax element relating to the company employees.

Other thoughts

Tax-deductible business gifts to directors

When can a business provide gifts for company directors? Apart from the exceptions we detail above, there’s no official director’s gifts allowance. However, there’s another tax exemption for UK company directors: a director’s tax-free gift allowance, which isn’t officially described as this.

As we alluded to earlier, your company can now pay Trivial Benefits. This allowance came in on 6 April 2016 and enables `close companies’ (companies with five directors or less) to pay Trivial Benefits of up to £300 per year. The limit each time you pay a Trivial Benefit is £50. As a result, you could pay this up to six times per year.

Understanding gift tax and personal gift rules in the UK

If we consider UK gifts tax, there’s no tax due on any personal gifts you give. However, this is provided you live for seven years after you give them. That’s unless the gift is part of a trust.

There’s also an annual `gift allowance’ in the UK. While you’re alive, the `gift allowance’ is £3,000 a year. This means you can gift assets or cash, up to a value of £3,000 each tax year, without it being added to the value of your estate for Inheritance Tax purposes. Therefore, there’s no UK gift tax unless an Inheritance Tax situation arises.

HMRC’s community forums have more information from people regarding questions on this area.

Final thoughts 

To sum up, when we consider whether UK limited company contractor gifts are tax deductible, please ensure you understand the above. Nonetheless, if we investigate when are client gifts tax-deductible, these receive tax relief as long as certain conditions are met. When you buy gifts for your clients, please stay within the £50 limit. In addition, please use personalised or branded gifts for clients. You’ll receive a business gift tax deduction when you follow the rules.

Moreover, company gifts for clients, staff, and charities have different rules. The tax rules on company gifts are another grey area where it isn’t always clear what you can claim. If you stay within the £50 limit and give promotional contractor gifts to clients, contacts, etc., your business gifts are tax deductible. Finally, if you enjoyed this read, please see our guide on tax tips for contractors and small businesses for more tax-saving ideas.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Expenses, Expenses Guides /

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4 Comments

  1. Andy Lynex March 25, 2021 at 12:21 pm - Reply

    As a recruitment business we give small gifts e.g. chocolates to individuals who are not fee paying clients but we do work with i.e. those looking for a job or those who recommend a friend for a job. Would treatment of these gifts be any different to that of gifts to clients do you think?

    • scott291074 March 27, 2021 at 12:49 pm - Reply

      Hi Andy, small gifts will be fine I think.

  2. Nat July 25, 2022 at 2:50 pm - Reply

    What if you wanted to gift a self employed contractor a birthday gift (a £50 voucher say) to say thanks for the work they have done for you etc. As they are a contractor they are not technically an employee so would the above rules on employees still count?

    • Scott Moreton July 27, 2022 at 6:30 am - Reply

      Hi Nat.

      Per the article:

      HM Revenue & Customs (HMRC) will allow gifts up to a value of £50 to any person in any tax year. The gift needs to carry an advert for your business. It can be a conspicuous advertisement. However, your business name needs to be clearly visible. If the gift (or gifts) to the person in any 12 months exceed £50, they will be treated as entertaining costs and will not be tax deductible. In addition, tax relief will not be given if the type of item is food, drink, or tobacco. Neither will it be given if the gift is an exchangeable voucher, such as a gift card. Therefore, as the rules state, the gift must be of an advertising nature. When considering gift ideas, this could be a calendar, diary, coffee mug, gift baskets, or fruit baskets.

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