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The tax, NI and VAT implications of gifts and vouchers
Christmas gifts and vouchers for employees and customers can have different tax, national insurance (NI) and VAT consequences depending on their value and purpose. HMRC sets specific rules for each category.
Gifts to employees
When businesses provide gifts or vouchers to employees, their tax treatment depends on whether they qualify as a ‘trivial benefit’.
Trivial benefits
A gift qualifies as a trivial benefit if it:
- costs £50 or less per employee
- isn’t cash or a cash voucher (eg retail vouchers are acceptable)
- isn’t provided as part of a contractual obligation or in recognition of performance.
If these conditions are met, the gift is exempt from tax and NI, and there’s no need to report it to HMRC. There is no limit on numbers of trivial benefits to be exempt, so a business may decide to award more than these vouchers tax free so long as each meets the trivial benefit condition. For example:
- a bottle of wine costing £30 for Christmas is treated as a trivial benefit, whereas
- a £60 gift card provided as a reward for exceptional work does not meet the conditions and will be a taxable benefit.
More detailed guidance on trivial benefits can be found within EIM21864.
Non-trivial gifts
If a gift exceeds £50 or doesn’t meet the other trivial benefit conditions:
- it is treated as a taxable benefit in kind
- tax and Class 1A National Insurance are payable
- employers must report these gifts on a P11D form or include them in a PAYE Settlement Agreement (PSA).
Gift vouchers
- cash vouchers (redeemable for cash) are treated as earnings and subject to PAYE tax and Class 1 NI
- non-cash vouchers (redeemable at specific retailers) may qualify as trivial benefits if under £50 but are otherwise taxable.
Benefits provided through a salary sacrifice scheme are subject to the rules on optional remuneration arrangements (OpRA) so do not qualify for the exemption.
Where the employer is a closed company, trivial benefits provided to a director or officeholder (or to a member of their family or household) are capped at a total cost of £300 per year (and subject to the £50 cap on each individual benefit).
Where the family or household member of a director or officeholder is also an employee of the company, they will be subject to a £300 cap in their own right.
Gifts to customers or suppliers
The tax and VAT treatment of gifts to customers depends on their nature and value.
Promotional gifts
These are generally tax-deductible if the gift’s purpose is to promote the business, provided the total value per recipient doesn’t exceed £50 per tax year. Gifts containing food, drink or tobacco are excluded unless they are branded. HMRC guidance can be found within BIM45070.
Input VAT can only be reclaimed on customer gifts if the cost per individual doesn’t exceed £50 (inclusive of VAT). If a gift exceeds £50, VAT must be accounted for as if the gift were a sale.
HMRC detailed guidance on VAT on business gifts and vouchers is provided within VAT Notice 700/7.
Gift vouchers
Cash vouchers are outside the scope of VAT, but VAT is due on the commission charged by the voucher issuer.
Single-use vouchers (redeemable for a single type of goods or service) attract VAT at the point of sale.
Multi-use vouchers (redeemable for various goods or services) attract VAT when redeemed.
Examples
- A company gives its employees £40 retail vouchers for Christmas. The vouchers qualify as trivial benefits, exempt from tax and NI. VAT is accounted for on the purchase of vouchers by the company.
- A business provides hampers worth £70 to its employees. This is a taxable benefit in kind as it exceeds £50. Input VAT can be reclaimed on the hampers, but output VAT must be charged if the gift exceeds £50.
- A company distributes branded calendars worth £35 to customers. These can be deductible as a promotional gift. Input VAT can be reclaimed since the value is under £50.
- An employer holds an annual Christmas party for all staff, at which each member of staff is also given a hamper. The total cost of the party was £8,000 inclusive of the hampers, which cost £40 each. The number of staff attending was 50. So, the total cost per person is £160 (including the hamper cost).
- The hampers are not part of the event and should be considered separately. They cannot be included in the annual function exemption. However, the hampers cost less than £50 each and as they were not given as a reward for specific service, they can qualify as trivial benefits.
- Without the hampers, the party costs £6,000 ÷ 50 = £120 per person and meets the requirements for the exemption (ie below £150 per person).
By carefully applying these rules, businesses can optimise their tax and VAT obligations while maintaining festive goodwill.
A list of other available trivial benefits is available which the businesses may explore to reward their employees without any tax implications.