Christmas is a wonderful time of the year, plenty of goodwill and merriment. It also provides a great chance to increase staff morale and improve customer relations by taking part in the traditions of partying and gift giving.
Unfortunately. many forms of gifts and entertainment are not allowable for the purpose of claiming back VAT or as an expense to reduce income/corporation tax.
Some businesses like to treat their customers or clients by inviting them to functions or parties hosted by the business. While it is a business expense and does not have to come out your own pocket if you own a limited company, client entertainment is not tax deductible.
Gifts for customers
Like client entertainment, giving gifts to customers is also a disallowed expense, however there are some exceptions to this rule. If the gift is given as a result of a purchase, for example giving a customer a free pen with their order on an online shop. As the gift requires the customer to make an order it can be added to the cost of the sale as a discount.
You can also sell your products at a reduced rate and still claim the expense providing you still cover the cost of the product in the selling price. If the product is perishable, such as a loaf of bread, you can reduce the price further to sell it and still claim any expenses incurred as the product would be useless if not sold at that time. Giving products away as a form of advertising is also allowable.
You can provide Christmas Gifts for your customers, however to make the expense tax deductible there are a number of rules to follow. The gifts cannot be food, alcohol, tobacco or vouchers for these items. The gifts must also have a prominent advert on them to avoid being classed as entertainment. Finally there is a limit of £50 per person per year for gifts, going over this limit will make the entire expense disallowed for tax.
Entertainment for employees
Employee entertainment is an allowable business expense and you can have as many functions and parties as you like during the year. Though there is a limit of £150 per head per year and exceeding this limit can result in additional tax for employees as a ‘benefit-in-kind’. If non-employees attend the expense counts as client entertainment.
A party for just directors or partners of the business is not an allowable expense, however if they attend a party with the other employees their cost is allowable as well. Employee’s spouses are also allowable for tax deduction if they attend the parties.
The ‘cost per head’ limit of £150 also includes any overnight accommodation or expenses incurred in the provision of the entertainment, not just the party itself.
Gifts for employees
Gifts to employees are usually tax deductible, as long as the cost is reasonable (such as the £50 limit above) and the gift is not in the form of a bonus for good performance. Monetary gifts or bonuses are taxable and should be put through your payroll, as either an extra amount to wages or a benefit-in-kind.
If you give gifts to customers which are not allowable that are given to employees as well, none of the gifts will be allowable as they are all counted as client entertainment.
If you would like some additional advice or information regarding business entertainment and gifts, please do not hesitate to contact us.
This is our last blog of 2014, we will be providing more helpful advice and information next year! We hope you have a very Merry Christmas and a Happy New Year!