Is a gift made to a company taxable?

A client has a customer who is particularly impressed with the service they received. They have made a gift of several cases of expensive champagne. This was sent to the company but intended for the directors and staff. What’s the tax position?

Gift for tax purposes

In plain English, a gift is something given without payment or conditions. If there’s a quid pro quo, it’s not truly a gift. This distinction is very important for tax purposes. While true gifts aren’t taxable, in the business world they are very rare things as there’s usually an ulterior motive involved.

In our scenario, the client has been sent a number of valuable bottles of champagne in recognition of the level of service they have provided.

Existing relationship

HMRC’s view is that where a trading relationship exists between the giver and receiver of a gift, it’s taxable. The taxable amount is not the cost to the giver, but what it’s worth to the receiver, although depending on the type of gift the two might amount to the same.

Pro advice. The courts have upheld this view in the past.

In our scenario, the client had assumed that the company would be charged to corporation tax on the market value of the champagne in the financial year the gift was made. But is that the case?

Intention is crucial

Let’s suppose the gift came with a simple note of thanks which only referred to a successful project that had recently completed. Naturally, the company can’t drink champagne and so the bottles were shared between the directors and staff. This created another tax problem as, subject to the trivial benefits exemption, a gift relating to employment is a taxable perk. However, a special exemption can apply.

Conditions

Gifts from third parties to directors and employees are exempt from tax and NI even where they are linked to their job. This applies where:

• they don’t originate from their company
• neither their company nor anyone connected with it procured the gift. Where they or their company has a business relationship with the person or company making the gift, they aren’t “connected” to the directors or employees for the purposes of the exemption
• the gift isn’t in recognition of specific services provided to the donor in the course of their job
• the gift isn’t cash or use of services from the donor
• the cost of all gifts made by the donor to the same person doesn’t exceed £250 in the same tax year.

Tax consequences

The company doesn’t have to pay tax on the champagne because, clearly, it’s a gift intended for the directors and employees. However, the bad news is that the third condition above isn’t met because the gift was in recognition of specific services. The directors and employees must pay tax on the gift. If the note had merely referred to “excellent service over the years” or something similarly unspecific, the third condition could potentially be met.

Pro advice. If you get the chance, advise the third party not to link any intended gifts to specific jobs in advance of them being made. The directors and employees might then avoid a tax charge.

Where there is a trading relationship, a gift will be chargeable to corporation tax. However, in this case the gift was clearly intended for the directors and employees. Check whether the gift was made in relation to a specific service. If not, an exemption can mean the directors and employees avoid a tax bill.