Specific deductions: entertainment: gifts: overview
S45 Income Tax (Trading and Other Income) Act 2005, S1298 Corporation Tax Act 2009
Treat gifts in the same way as business entertainment
Business gifts are not allowed as a deduction against profits. The legislation treats gifts in the same way as business entertaining expenditure (see BIM45010).
A gift is something that is given to a person without receiving anything in exchange. It is offered voluntarily and without any expectation of a return. An example of this would be gifts provided for potential customers who take a test drive in a new car - there is no obligation to buy the car and so nothing has been given to the trader in return for the gift.
Gifts may also arise where goods or services are supplied at less than the cost to the trader. For instance, a hotel might offer meals to its suppliers at a nominal charge. Here the difference between the cost of the meal and the price paid as a non-allowable gift. By contrast, if a baker reduces the price of fresh bread at the end of the day, this is a normal commercial transaction (as the bread will be worthless by the next day) and the cost is allowed in full.
Even if the recipient of the gift has provided a service to the trader, you should give no deduction unless it can be shown that the trader was under some contractual obligation to offer the gift. It is not unusual, for instance, for organisers of meetings or conferences to send small gifts, such as hampers or vouchers, to speakers after the event. However, if the provision of a gift was not one of the conditions upon which the speaker agreed to attend, then the gift is treated as business entertainment expenditure, and the cost disallowed.
In some instances, something that appears to be a gift may actually be a part of a sale to a customer. A bunch of flowers presented to a customer who has just purchased a new car would effectively have been paid for by the customer - it is a part of the cost of the car. Similarly, gifts offered to customers who purchase a certain level of goods are really discounts on sale and not business gifts. Gifts of this nature are not disallowed by the legislation.
The legislation only refers to expenditure incurred. A trader may supply goods at a discount but, so long as the original cost has been covered, you should not treat the profit foregone as a business gift.
Exceptions from normal rules on gifts
There are exceptions from the general rule discussed above. If any of these exceptions apply, the expenses incurred in providing the gift are deductible from trading profits. The exceptions are where:
- the gift is of an item which it is the trader’s trade to provide and it is given away in the ordinary course of the trade to advertise to the public (see BIM45071)
- the gift incorporates a conspicuous advertisement for the trader, although there are exclusions relating to the type of gift and the total amount per person (see BIM45070)
- the gift is provided to the employees of the trader so long as this is not incidental to gifts being provided to others (see BIM45074)
- the gift is given to charity or other specific bodies (see BIM45072).