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Business Doctor: Will the taxman unwrap my gifts?

DT writes: I run a recruitment business and want to buy a Christmas gift for my key clients and each of my employees, in recognition of their loyalty this year. Is there an additional tax cost I should consider?

The tax treatment will depend on the type of gift and its value, writes Jon Dawson, partner at Kingston Smith LLP. Gifts to employees will always be a tax-deductible expense for the company.

If your employees will each receive a cash bonus, this should be paid through payroll, with income tax and national insurance deducted. It will also give rise to an additional NI cost for your company.

Non-cash vouchers are treated differently, with no income tax charge for your employees — but NI contributions will be due from both the company and the employees if the voucher exceeds £50 per person.

An alternative for your employees is to provide a seasonal gift, such as a a bottle of wine or a box of chocolates, each costing under £50 including VAT. All these gifts would fall under the “trivial benefits” rules and not be taxable. If, however, you decided to provide a larger gift exceeding £50 — such as a hamper or a case of wine — this would be taxed as a benefit in kind and should be included on the employee’s P11D form to HM Revenue & Customs.

If you buy a gift for a customer, it can be tax deductible only where it is not tobacco, food or alcohol but does include an advertisement for your company. A gift of wine, for example, would be treated in the same way as entertaining expenditure.

VAT rules are slightly different. If the total value of gifts to an individual in a 12-month period is less than £50, you simply reclaim the input VAT on the purchase. If the value exceeds £50, you must also account for output VAT.

In addition, any gifts to a customer should be considered in the context of the Bribery Act 2010.