How can I claim back expenses when buying gifts for my clients and staff?

As a limited company director, you may want to purchase gifts for clients, suppliers, staff and even for yourself. This article considers the different tax rules that apply to the various types of entertainment expenses a limited company can legitimately pay for.
Client entertainment

Giving gifts to clients falls under HMRC’s entertainment rules. Entertainment expenses for clients typically include taking a client out for dinner or to an event such as a football match.

HMRC defines two types of entertainment: ‘business entertainment’ such as forming business connections and discussing a project; and ‘non-business entertainment’, which is typically entertainment for social reasons. It’s often best to keep the latter separate from the company to avoid any tax and National Insurance implications.

HMRC has a number of expenses that it specifically states are not allowed for Corporation Tax. Entertainment is an example of this – the cost of entertaining clients can’t be deducted from taxable profits. Generally speaking, this is also the same for VAT; if VAT is paid on an expense it can’t be reclaimed from HMRC.

However, whilst no tax relief is available, a limited company can still pay for the expense. This is better than paying out of your own pocket, which would be from post-tax income. In other words, you would have been taxed on the income withdrawn from your company which is then used to pay for a business expense.

If you’ve already paid for business entertainment out of your own pocket, your limited company can reimburse you for the costs, provided you have retained a copy of the invoice or receipt.

One point to note is that the expenses shouldn’t be ‘excessive.’ This can make it harder to justify to HMRC that they are legitimate business entertainment expenses.
Exception for small branded gifts

There is an exception to the above for small gifts as long as they don’t exceed £50 a year per client and they carry a conspicuous advert for the company. HMRC gives examples of diaries, pens and mouse mats.

Note that gifts of food, drink, tobacco and vouchers are not allowed, even if they have a company advert on.
Staff entertainment

Costs for annual functions held to treat staff such as Christmas parties and summer BBQs are covered by HMRC’s entertainment rules. It’s straightforward to claim but there are a few things to be aware of:

  • The event must be an annual event and open to all employees;
  • It can’t be a one off event, such an event to celebrate a new contract, as HMRC wouldn’t consider this to be ‘annual’
  • There is a yearly limit of £150 per person – if this is exceeded the whole amount can become taxable as a benefit in kind for the employees. If you plan on having more than one event it’s best to keep track of the per head cost per event to ensure the £150 is not exceeded over the tax year
  • If an employee takes a guest they will also have a £150 limit – in other words £300 per couple
  • The £150 is not an allowance – an event needs to happen and the exact amount claimed must be based on receipts
Staff entertainment costs are allowable expenses for Corporation Tax and the VAT paid can be reclaimed from HMRC if the company is VAT registered. It’s worth noting the VAT portion that relates to any non-employees, i.e. their guests, can’t be reclaimed from HMRC.

One-person limited companies can also utilise the staff entertainment allowance.

Trivial benefits

The second most common way of providing gifts to staff is by providing what HMRC term as ‘trivial benefits’.

Trivial benefits are exempt from reporting to HMRC. But, similarly to staff entertainment, there are few qualifying rules to be aware of:

  • Each gift can’t exceed £50 in cost
  • The gift can’t be cash or a cash voucher
  • It can’t be a reward for performance
  • It shouldn’t be in the terms of an individual’s contract

If these four conditions aren’t met then the gift becomes taxable.

Gifts can also be provided to directors but there is another overall limit to be aware of. In addition to the £50 per gift threshold, the total value of all gifts in a tax year can’t exceed £300.

Although it’s not an area we have seen much of in case law, at inniAccounts we always recommend taking care when utilising trivial benefits. For instance:

  • Don’t make purchases that total the full allowance with one transaction e.g. 6 x £50 vouchers purchased in one transaction
  • Purchase the gifts directly from the company bank account rather than paying personally and reimbursing the cost
  • Try and use them for special occasions throughout the year e.g. a birthday, Christmas or anniversary
  • Be careful with using regular subscriptions as trivial benefits. If staff have a legitimate expectation that the subscription will continue indefinitely then HMRC could view it as a contractual arrangement and therefore deem it to be falling outside of the trivial benefit rules
  • Gifts can be provided to family members not involved in the company but they would form part of the director’s yearly allowance
  • If employing a family member who is not a director, provide gifts in line with any non-family member employees. Or if there are no other employees, consider still applying the £300 limit.

Utilising staff entertainment and trivial benefits thresholds are a good way of getting a little extra out of your limited company, however there are a number of traps to avoid. If you aren’t sure about a particular transaction or event it’s best to check with your accountant in advance.

First published in ContractorUK