Business gifts

If you provide a gift of goods for any business purpose, perhaps to reward a hardworking employee or loyal customer, then you can claim input tax on the initial purchase of the goods. This assumes that your business does not have exempt income where an input tax restriction might apply under the rules of partial exemption.

However, when you make a gift of free goods, this creates a tax point for output tax purposes, and you must account for VAT on the value of the gift. The exception is if the value of the gift and any other gifts given to the same person during the previous twelve months is less than £50 excluding VAT. 

If you didn’t claim input tax on the purchase of the gift - perhaps because it was purchased from an unregistered supplier - there is no output tax liability when you give it away.

Example. Anne is a VAT-registered hairdresser and has given one of her customers a gift of shampoo that cost her £40 excluding VAT. She also gave the same person another bottle of shampoo six months ago that was worth £30 excluding VAT. As the value of gifts to the same person has exceeded £50 in a twelve-month period, Anne must account for output tax of £14 on her next VAT return, i.e. £70 x 20%.

Staff

Unfortunately, you cannot treat the gifts to your sales staff or employees any differently. In other words, output tax will be payable at the time they are given away if the £50 limit is exceeded. But there is a further issue to consider in cases where the staff member can make a cash payment themselves to get more goods.

Example. Salesperson Steve has sold £100,000 of goods in September so is entitled to free goods worth £500 from his employer. He has chosen a sofa worth £900 including VAT and has therefore agreed to make a cash contribution of £400 to his employer. The employer’s output tax liability is based on the full value of the goods and not just the payment received from Steve, i.e. £900 x 1/6 = £150.

You will need to ensure that your accounting system does not double pay output tax here, i.e. on the both the full value of the gift and the cash payment from the employee.

What about a gift of services?

The same rule applies to gifts of services. For example, your business has purchased a package from a local golf club that includes 18 holes of golf and a three-course meal for £500 plus VAT. You will give the package to your best performing employee. There is no problem claiming input tax on the invoice from the golf club but output tax of £100 will also be due on the onward supply to your hardworking employee.

With a gift of services, the £50 limit does not apply, that is only relevant to goods.