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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: prizes and incentives: tax treatment of recipient

Prizes may be taxable in the hands of the recipient

Prizes, awards or other incentives provided by a trader may be taxable in the hands of the recipient. Such awards may be given in recognition of the number of sales achieved by the sales staff, or as a reward to customers placing a certain level of orders.

If the recipient of the award is a member of the trader’s own staff then a charge as employment income may arise. If there is a formal sales incentive scheme in place then the tax treatment and valuation of the award may be handled by the Incentive Award Unit (see EIM11240). For cases where there is no formal scheme, see EIM11205.

Awards and incentives may also be given to self-employed sales staff or customers. If the award is in the form of cash, then the taxable receipt is the amount of cash received. However if the award is in the form of goods or services then you will need to calculate the cash value of the gift - normally the market value (rather than the retail price) of the goods/service received.

Sometimes a cash alternative to the award is offered. In this case the taxable receipt is the greater of:

  • the cash alternative, or
  • the market value of the gift.

In exceptional instances there may be no cash value, for example if the award is a non-transferable holiday with no cash alternative. In such an event, there is no charge on a trader because the prize has no money’s worth (see Tennant v Smith [1892] 3 TC 158).

It is common for catalogue traders and other direct sales companies to enter agents into regular prize draws. Self-employed agents are taxable on the value of prizes received in these draws. However, there are many ‘agents’ who are not self-employed but are merely purchasing goods for their own use. They are not taxable on any prizes.