Your company received several cases of champagne from a grateful customer. An accompanying note said the company should share it among staff and directors. Is there tax to pay here and, if so, who is responsible for paying it?
What counts as a business gift?
HMRC interprets a gift as something that is unsolicited and given without receiving or expecting anything in return. However, in practice, as we all know, there’s no such thing as a free lunch especially when it comes to tax and NI.
Trading relationship
Where a trading relationship exists between the giver and receiver of a business gift , the basic premise is that it’s taxable. The taxable amount is not the cost to the giver, but what it’s worth to the receiver, although these two amounts are often the same. You suspected your company would be liable to corporation tax (CT) on the value of the business gift .
Who’s the gift for?
The customer’s note of thanks referred to the successful completion of a recent project. The company itself obviously can’t drink the champagne, so naturally the gift is shared between the directors and staff. The perk relates to and was derived from their employment and so would be taxable unless a special exemption applies.
Exemption conditions
Gifts from third parties to directors and employees are exempt from tax and NI even if they are linked to the job as long as:
- it didn’t originate from the employer
- neither the employer nor anyone connected with it procured the gift
- it isn’t in recognition of specific services provided to the giver by any of the employer’s workforce
- it isn’t cash or use of services provided by the giver; and
- all gifts made by the giver to the same person don’t exceed £250 in the same tax year.
Tip. Where the employee or employer has a business relationship with the person or company making the gift, they aren’t “connected” for the purposes of the exemption.
No exemption
In your situation the third condition isn’t met because the gift was in recognition of specific services, so the directors and employees must therefore pay tax on the gift.
Tip. If making a gift of goods to employees of other businesses don’t link them to a specific job or service undertaken.
Who is liable for the tax?
The company isn’t liable to CT because clearly the gift was for its directors and employees. If the employer facilitated the provision of the benefit (providing a list of names to the giver doesn’t count as facilitating) it must be included on each employee’s benefits Form P11D and the associated Class 1A NI paid. In this case, the champagne came out of the blue from a customer and so it’s the customer who bears Class 1A NI and reports the taxable amount. However, they can enter into a taxed award scheme which avoids any tax burden on the employees entirely (see The next step ).
Corporate gifts are normally taxed as part of trading income. However, if a gift is intended for the directors and employees the exemption might apply so long as it isn’t in recognition of a specific service. In this case, the gift doesn’t meet the conditions but the giver can enter into a taxed award scheme to account for the tax and NI payable.
The next step
EIM11240 – Incentive award schemes: Incentive Award Unit
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.