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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: prizes

S46 Income Tax (Trading and Other Income) Act 2005, S1299 Corporation Tax Act 2009

Prizes for publicity/promotional purposes are normally allowable

You should not normally treat prizes given in competitions organised for publicity purposes as disallowable gifts.

It is common for a trader to advertise by means of competitions open to the public. These might take the form of a ‘test of skill’, requiring a purchase of the product, or of a ‘no purchase necessary’ prize draw. The prizes awarded in these competitions are often substantial.

If the prize comprises the trader’s own products, and the competition is open to the public generally, then the exception in S46(2) Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses or S1299(2) Corporation Tax Act 2009 for companies applies (see BIM45030). This means that the expenditure incurred will be allowed as a deduction from trading profits.

It is often the case that prizes take the form of money, holidays or other luxury goods that may be regarded as business gifts. In most instances, however, traders will ensure that they receive valuable consideration in return for the prize, most commonly in the form of a requirement for publicity on the part of the main prize-winner. This forms a commercial exchange between the trader and the winner and the prize is not a business gift (under the concept of ‘proper and sufficient quid pro quo’, see BIM45014).

Sometimes an item described as a prize is in fact an incentive for a particular level of sales or purchases. If an award is made to a trader who makes a certain level of purchases, then it is not a gift but a discount on sales, and so the cost is allowed as a normal expense of trade, although there may be a tax charge on the recipient of the ‘prize’ (see BIM45090). For sales incentive schemes see BIM45080.