In the run up to the festive period, many businesses will be facing the usual tax questions associated with entertaining and providing gifts to clients.
While the corporation tax rules for client entertaining and gifts are widely known about there are differences in the rules for input VAT recoverability.
As a recap, the general rule for corporation tax purposes is that the cost of making business gifts is not an allowable expense, unless it is a gift provided to advertise to the public (e.g. a free sample) or an item that costs less than £50 which incorporates an advert for the company. Furthermore, no deduction is allowed for gifts of food, drink, tobacco or vouchers.
The VAT rules also have a £50 distinction, in which ‘business’ gifts under this amount are claimable from an input VAT perspective but gifts exceeding this (across a 12 month period per recipient) result in output tax due. Business gifts for VAT can cover a wide range of items such as umbrellas, wine and champagne, and flowers. Interestingly, however, in contrast to the corporation tax rules there is no specific carve out for food or drink. While this may be beneficial for some businesses, it does raise the rather peculiar scenario in which input tax is not reclaimable should you invite your clients to share a bottle of bubbly costing less than £50 under the client entertaining rules. However, it would be claimable if you instead ‘gifted’ the bottle to your clients and let them pour the drinks!
Anecdotal reports suggest that companies may be inappropriately ‘blocking’ VAT on certain Christmas gifts. Where this is the case procedures should be rectified going forward and the company should explore the possibility of reclaims for historical discrepancies.
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