The true cost of freebies

The Oscars marks the halfway point in the awards ceremony season. So by now
we’re all familiar with the ritual. The cameras are rolling, the lights are
glaring, envelopes are opened and the presenter says ‘and the winner is…’

But when the camera fixes on the faces of the three losing nominees, and we
all assume they’re doing their best to feign delight for the winner, maybe, just
maybe, they are actually quite happy – because, win or lose, nominees and
presenters will walk away with a stash of freebies worth at least $150,000

Details of the contents of the goodie bags given to celebrities at awards
ceremonies are shrouded in secrecy, but in the past they have included such
things as mobile phones, cameras, designer clothes, jewellry and even cosmetic
surgery vouchers.

For the companies that donate such prizes it makes very sound business sense.
It is the ultimate in product placement.

The publicity that results from an association with celebrities attending an
awards ceremony can be far more beneficial than advertising and much more cost
effective than paying for a celebrity endorsement. But at what cost?

Ethical headache

The free-flowing champagne at many post-award ceremony parties might well
help the rich and famous forget the ethical issues resulting from the acceptance
of gifts – whether it’s diamond encrusted bras, luxury holidays or mink

But for those not on the celebrity A-list, how do everyday businesses and
individuals deal with the moral issues arising from the giving and receiving of
business gifts? Does the acceptance of gifts leave the recipient compromised?
And how can individuals and businesses manage the risks associated with
accepting gifts?

Gift giving in the business world consolidates business relationships. It is
a long standing practice as relevant today as it ever was. But is there a limit
on what is acceptable?

Invitations to sporting events, expensive cases of wine, or luxury weekend
breaks are worth significantly more than a desk diary. The question is, do they
represent a token of gratitude for past business and an expression of hope for a
shared future, or are they something altogether more sinister?

Serious implications

The gift recipient’s business relationship with the donor may be compromised
if the generosity goes beyond the spontaneous, unexpected and proportionate.
This can have serious implications for the parties concerned. Allegations of
corruption could follow. If gift giving creates obligation or control, then it
is on dangerous ground.

The ethical issues associated with the giving and receiving of business gifts
can also impact on the obligations and duties of their employment. A director
has a fiduciary duty to act at all times in the best interest of the company and
its shareholders. The acceptance of an expensive gift from a potential supplier
or client may compromise this obligation. An employee may breach their duty of
trust, implicit in their employment contract, if they accept valuable gifts.

The problems many businesses encounter when tackling the tax implications of
gifts are as inevitable as the over-emotional acceptance speeches. Calculating
the tax consequences can be a headache for a business – be it in relation to
high value products in more glitzy party bags or more day-to-day gifts for staff
or clients.

This is because these costs can easily and mistakenly be attributed to
sponsorship and promotions by marketing departments and treated as tax-allowable

When filling out a tax return, often many months after the event, it can be
difficult to distinguish the allowable promotion expenses from the gift items
that fall foul of section 577 of the Taxes Income and Corporation Taxes Act 1988
and the broadly parallel VAT provisions.

It is critical that the marketing and tax departments liaise closely so that
the tax department can clearly identify disallowable third-party entertaining
and reportable staff entertaining, and consequently make accurate corporation
tax, VAT and employer returns each year.

Whatever the gift, careful consideration has to be given to the tax
implications and ethical issues associated with giving and receiving even the
most modest gifts to avoid becoming stars in a different type of drama.

Stephen Camm is a partner in the tax investigations team at

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