Gifts for employees and clients: what the company can actually deduct

HMRC treats business gifts the same way it treats entertaining. The cost goes through your profit and loss account, then gets added back when the corporation tax is calculated, so the company pays for it out of taxed money. A gift here means you handed something over and received nothing in exchange. If what you gave was really part of a sale, or a discount on it, that is trade, and it is not caught.

There are a few genuine exceptions in HMRC’s own manual. Items carrying a clear advertisement for your business stay deductible, provided they are not food, drink, tobacco or vouchers exchangeable for goods, and provided what one person receives in a year stays within £50. Samples of what you sell, given away to the public to advertise the trade, are allowed. So are gifts to charity.

One trap worth knowing about: if you supply goods or services to a customer below what they cost you, the shortfall can be treated as a gift and added back. Selling at a loss to keep a relationship alive is a commercial choice, and it can carry a tax cost you never see on an invoice.

Employee gifts run on a different track. Under the trivial benefits rules, a gift costing £50 or less to provide carries no tax, no National Insurance and nothing to report, as long as four things hold. It cannot be cash or a cash voucher. It cannot be a reward for work done or for hitting a target. It cannot be in the employment contract or something staff have come to expect as part of their pay. And the cost has to stay within £50.

Miss one of those and the whole amount becomes taxable, not the bit above the limit. A £55 hamper is a £55 benefit.

If you are a director of a close company, meaning five or fewer shareholders, which covers almost every company we act for, your own trivial benefits are capped at £300 across the tax year. Six £50 gifts and you are done.

Gifts to staff that fall outside the exemption are still a deductible cost for the company, because they are a staff expense. They land on the employee instead, through a P11D or a PAYE Settlement Agreement where the company picks up the tax so nobody gets a surprise deduction in January.

This is the part that gets missed. If you reclaimed the VAT when you bought the goods and then gave them away, VAT has to be accounted for on the cost value. There is a let out: no VAT is due on gifts to the same person where the total cost of everything you have given them in a rolling twelve month period stays within £50 including VAT. Go past it and output VAT is due on the lot.

Two separate £50 tests, measured differently, applying to the same hamper. The corporation tax test for branded items looks at the cost of the advertisement carrying gift in a year. The VAT test looks at everything of value you gave that person across twelve months, VAT included. A client who gets branded merchandise in March and a Christmas gift in December can clear one limit and fail the other.

The practical answer is a list. One line per recipient, the date, the item, and the cost including VAT. It takes a bookkeeper minutes a month and it settles the question at year end rather than reopening it. VAT Notice 700/7 sets out the detail if you want to read it yourself.

The errors we see are predictable, and every one of them is avoidable before the money leaves the account.

• Cash and cash vouchers. A £50 note in a card is pay. It goes through payroll with tax and National Insurance on it, every time.
• Wording the gift as a reward. A card saying thanks for a strong quarter turns an exempt gift into a taxable one. Keep it a gift, not a bonus by another name.
• Repeating it until it is expected. If staff would be surprised not to receive it, and it is written into offer letters or handbooks, the exemption falls away.
• Salary sacrifice. Gifts provided by giving up salary are outside the exemption and get reported at the higher of the salary surrendered and the cost of the benefit.
• The director’s £300 cap. Easy to breach quietly across a year when nobody is counting.
• One nominal code for everything. Client gifts, staff gifts and staff entertaining coded together means somebody guesses at year end, and the guess is usually the expensive one.

None of this is complicated. It is simply decided too late, by whoever is doing the bookkeeping rather than by the director who spent the money.

Decide the budget in October, not the week before the office closes. Split it into two pots on paper from the start: one for staff, one for clients. They are taxed differently and they should be coded differently in Xero or QuickBooks, so the position is obvious when the accounts and corporation tax return are prepared.

For clients, pick branded items where the advertisement is visible on the thing itself rather than on the wrapping, and skip anything edible or drinkable if you want the deduction. For staff, keep each gift comfortably inside the limit, buy something rather than handing over a card with money in it, and keep the covering message friendly rather than performance related.

Then write down who received what. The reason is not paperwork for its own sake. A year later nobody remembers whether the same customer got a gift in March, and that single fact decides whether VAT is payable. If a family member is on the payroll, their gifts count too, which is worth knowing if you have already added a spouse for payroll reasons.