Tax and Christmas
“It’s the most wonderful time of the year” or so the song goes, when people are busy thinking about what gifts to get each other and possibly what they’ll receive in return. But what are the rules surrounding gifts to employees or clients? Can you claim back the VAT and tax?
In this blog we explore how gifts can be given and how to avoid excessive tax for your company or the person who receives the gift.
Giving and receiving
There are two sides to tax when it comes to Christmas gifts; one is for the giver and the other is for the receiver. The giver is your company, so is your company able to claim a tax relief for the cost, or does your company have to pay any taxes because of its generosity?
Giving to yourself or other employees – direct tax deductions
Remember that even if you’re a one man band, as a director of your Limited Company you’re also an employee, and therefore can still gift yourself at this time of year. Also if your company employs other people, then provided they receive the gift and not you, then the same rules apply.
Limit to your generosity
It’s worth remembering that if you go a little too crazy with your company gifts you could end up with a big lump of coal in your stocking, in the form of a National Insurance and tax bill. The basic limit is £50, so if you buy a gift that costs more than £50 (including any delivery charges) it will count as a taxable perk for the employee that receives it. They will have to pay Income Tax and as the employer, you’ll have to pay class 1A NI at 13.8% of the full cost, plus the tax due if you pay that on their behalf. So for example if you were to give a £60 gift it will cost you a total of £85 because of the tax and NI due.
If you limit each employee’s gift to £50 per person, it will then cover them for the trivial benefits exemption for employees (which means you don’t have to worry about their or your tax or Class 1A NI).
Remember though that cash gifts are not covered by the exemption.
You are able to reclaim the VAT incurred on purchasing the gift if you are not using the Flat Rate Scheme. You may, however, have to account for VAT in the return period in which you purchased the gifts, as they are treated as a supply, if the gifts received by the recipient are more than £50 in a year. If a gift is exempt or zero rated (i.e. a book) you will not have to account for the VAT, unless you are on the Flat Rate Scheme.
Gifts for your clients – direct tax deductions
A tax deduction above is not eligible for business gifts for your clients, but there is a similar exception. As long as the client’s gift costs less than £50 and it is not part of a series of gifts to the same person in the same accounting period (which will then exceed the £50 limit), it is tax deductible. This other exemption, however, does not apply to tobacco, food or drink.
The rules surrounding VAT on gifts for clients is the same as that for gifts for employees. Therefore you must account for VAT if the gift, or gifts (if there’s a series) have a value that exceeds £50.
HMRC – the Grinch that stole Christmas!
To HMRC, Christmas gifts do not hold any special significance, therefore the same tax and VAT rules apply. So whilst it would be nice to think that a waiver on tax and VAT for Christmas gifts would be HMRC’s gift to us, we wouldn’t hold your breath!
If you’re planning gifts for employees or clients, remember to follow the above rules to ensure you don’t receive unwanted attention from HMRC this coming New Year.
Ensure you speak to your Personal Accountant before you purchase any gifts, as they will be able to advise you on how much tax and VAT you’ll be paying.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.