Beware bosses bearing gifts

When should you look a gift horse in the mouth? Penny Lewis explores the etiquette and rules on accepting work-related gifts

With Christmas looming a good present for employers to give to staff would be a calculator, so that they can determine how much tax to pay the Inland Revenue on gifts that they receive at work. The donation of unwanted royal trinkets to staff by Prince Charles, which they kept or sold, has put the legal status of work-related presents under the spotlight now more than ever.

One of the many interesting facts to emerge in the aftermath of the Burrell affair was the lucrative market in royal cast-offs. The practice is believed to fall within the terms of reference of the formal inquiry to be conducted with the assistance of Edmund Lawson QC. On a more general note, if your boss gives you occasional, informal tokens – particularly mundane objects with no intrinsic value but for their pedigree – do the tax authorities need to be told? And whose duty is it to disclose these gestures?

Items given to those you work with invariably come with fiscal strings attached. Jay Purang, a director of the Tax Group of accountants Numerica Group Plc, says that "the whole area of gifts is a minefield and is a prime target for the Inland Revenue, particularly on compliance visits to inspect employers' PAYE records". He warns that "failure to understand the tax rules can result in interest and penalties in addition to the tax and national insurance [NI]".

The normal rule of thumb, he explains, is that "Gifts provided to an employee 'by reason of his/her employment' are taxable." Methods of taxation "are dependent on the nature of the gift: is it cash, cash vouchers, non-cash vouchers or goods? Cash and cash-vouchers are generally taxed under PAYE at the time the gift is received. Non-cash vouchers and goods are usually taxed as emoluments or benefits in kind in the tax year in which they are provided."

Importantly, there can be tax consequences to both donor and recipient. The cost to employers of providing gifts in kind that are not capable of being turned into money, is taxed only in the hands of employees earning over £8,500 and directors. As for the employer, the value of benefits could be subject to NI contributions and must be recorded in the P11D. Where objects can be converted into money or money's worth, Purang says that if the person is earning less than £8,500 a year "the employee is taxed on the second-hand value of the gift received which is not necessarily the same in amount as the cost to the employer."

Working out if there are tax consequences when gifts are given can be difficult. Maurice Connors, accountancy head of Plexus Law, emphasises the importance of identifying the motives behind an employer's largesse because "the value of a gift from employer to employee will be taxable as a benefit in kind provided it is given to the person by reason of his or her employment. If it is given in a personal capacity, there is no tax liability." He believes that "the question to ask is whether the person would have got the gift had he not been an employee".

Picking up on the point made by Purang, Connors warns also of Capital Gains Tax (CGT) implications from the sale of presents. Accordingly, "if an employer pays £400 for a picture that he gifts to a member of staff and the latter sells it for £1,000, the taxable benefit is £400 for income-tax purposes. However, there would also be a potential capital gain of £600". Realistically, these issues only arise with valuable articles. Provided a "chattel" sells for under £6,000, Connors says it should qualify for "chattel exemption", a chattel being "a tangible moveable asset that is not a commodity or a currency and would therefore include a picture". With other sales, CGT must be paid on gains exceeding an individual's annual tax-free CGT exemption, currently £7,700.

Fortunately, the tax man gives concessions for some work-connected "gifts". This includes presents from third parties such as suppliers provided that the cumulative annual value does not exceed £150 and would cover corporate hospitality. But Connors cautions: "If the value received from any individual third party exceeds £150, it is all taxable."

Employment barrister David Reade advocates caution to avoid some gestures being misconstrued. He says it is "part of an employee's duty of fidelity to their employer not to accept and to account for any bribe they may have received. Gifts given by an employer's suppliers to secure future preference may raise particular concern. This is particularly so if they are disproportionate in value to mere gifts of gratitude for past service."

Equally relevant is whether you have legal constraints on accepting presents. Employment lawyer Matthew Tom of Tarlo Lyons points out that "Many contracts of employment or staff handbooks contain specific rules on gifts from clients, often requiring that they be declared to, and will form the property of, the employer. If declared, the gift will then form part of the income of the employer and will fall to be taxed as part of the company's profits."

Unless the contract stipulates otherwise, Tom says that "the presumption will normally be that the gift becomes the property of the person to whom it is addressed". On a practical level he doubts that the Revenue is often "concerned with small gifts, although when 'significant' – eg a crate of expensive champagne rather than inexpensive plonk – it should be officially declared and tax paid on it by each recipient".

Another vexed issue is whether something is given in a personal capacity; a question particularly relevant to office holders. Is a tray from a visiting dignitary received as custodian for one's successors or something to display in the dining-room cabinet? Tom's response is that "Gifts are rarely accepted, officially, by those in positions of public office for fear of compromising the appearance of impartiality and independence." While this is usually enforced by formal rules "a system of declaration of interests is preferred to an outright ban on receiving gifts".

With law firms and other partnerships everything is strictly speaking partnership property. The Law Society confirms, however, that professional ethics do not prevent lawyers accepting reasonable gifts. Money is different. Tom says that you know that if a client intends to make a significant gift either in their lifetime or by will they must be advised to take independent legal advice.

Other self-regulating bodies such as MPs insist on a transparent system of earnings and benefits. A register of interests provides information about financial and other benefits to an MP "that might reasonably be thought by others to influence his or her actions, speeches or votes in Parliament".

The Queen is not obliged to disclose lists of her presents, but details of significant or valuable items certainly appear to be given voluntarily. Buckingham Palace says that she publishes details of "official" gifts from foreign heads of state. An exhibition of exotic and especially interesting artefacts was exhibited over the summer. Objects with particular cultural significance may be given on permanent loan, otherwise they are likely to be placed into storage.