Christmas “gifts” for the self-employed

Christmas is coming and, like every year, businesses expenses increase, as most businesses, regardless of their size, usually organise classic dinners with their employees, give Christmas baskets – some more expensive than others – to workers and clients, and even prepare greetings cards and small gifts.

However, the good news is that some of these expenses can have tax benefits, which the self-employed can benefit from, but not all.

Like all expenses incurred by a business, these gifts also have their own tax treatment. And year after year, when Christmas arrives, all self-employed people wonder if they will be able to deduct all these Christmas extra costs in their next IVA and personal income tax returns. Both the Treasury and the courts have already interpreted how these expenses should be considered and, therefore, whether or not they are deductible.

In many cases, these gifts that have cost the self-employed person money – sometimes a lot – can also be included as an expense in the returns to reduce the tax bill. However, it must be taken into account that the treatment differs depending on the gift in question. For example, the deductibility of an expense such as a Christmas basket may depend on whether it is considered a ‘tradition’ in the company or not, depending on how many years this gift has been given.

It must also be taken into account that each tax may change the deductibility rules for the same expense. Thus, while in IVA very few of these traditional Christmas gifts would be deductible, in personal income tax and corporations, in almost all cases, they would be if certain conditions are met.

The gift par excellence on these dates is the Christmas basket, the hamper. These packages with which many self-employed people congratulate their employees, suppliers or clients on the holidays are a deductible expense. However, different experts warn that they are not just another commercial expense, and therefore, in IVA, they are in no case deductible.

A different issue is personal income tax or corporate income tax. “The expenses that the self-employed person bears for the Christmas baskets for employees are considered deductible as long as it can be demonstrated that this practice has been going on for years. Of course, they are not just any expense, they should be considered remuneration in kind, for example. which would be included in the INCOME of the self-employed person along with their salaries,” explained Pablo G. Vázquez of GVA Asesores, a tax expert specialised in deductions.

As explained by this expert, for an expense to be remuneration in kind and therefore deductible for the self-employed person or entrepreneur, the following assumptions must occur:

It has to be for private purposes.

Free or at a price lower than market value.

That it is not cash.

It must be recognised in an Agreement, Employment Contract or Collective Agreement (so that it is not understood as a mere mediation in payment).

Precisely for this fourth point, “it is important to be able to demonstrate that the expense is adapted to the uses and customs of the company, with invoices from previous years for example,” explained the tax expert from GVA advisors. Of course, since it is remuneration in kind, we must not forget that it will also have a tax impact on the declaration of the employees who receive this basket.

On the other hand, in IVA, baskets are not deductible since article 96 of the Law on this tax establishes that goods or services intended for customer service, employees or third parties cannot be deducted. In fact, in one of the Binding Consultations issued by the General Directorate of Taxes (V3818-15), it was determined that the IVA contributions incurred in the acquisition of Christmas baskets or in the company meal held with employees, would not be tax deductible, as they are goods or services acquired to serve employees.

Finally, “if the gift, in this case the lot, is with a client, it will hardly be deductible in personal income tax or IVA. It could be deductible only if it is a small gift, something of very little value. At most a bottle of wine and, if possible, screen printed with the business logo so that it is understood as a gift or free sample,” explained Pablo G. Vázquez of GVA advisors.

Christmas greetings cards can also be included as an IVA and Personal Income Tax deductible expense on the self-employed person’s invoices, as long as it can be demonstrated that it is related to the activity. Its conception is similar to that of business cards, it is an expense that is understood as advertising with a client, a supplier, and even the employees themselves, which is not a liberality, but something to maintain relationships. That makes it deductible.

However, it must be taken into account that advertising objects must visibly bear the name of the business or professional who produces or markets goods or offers certain services. Furthermore, in order to be IVA deductible, its cost cannot exceed 200 euro per year per recipient.

When it comes to a celebration such as a Christmas meal, according to the Value Added Tax Law (LIVA), self-employed and professionals cannot deduct the amount paid for the purchase or acquisition of goods and services that are not directly linked to economic activity, so in principle these expenses are IVA deductible.

Although in Companies and – by extension, also in Personal Income Tax – the law says that liberalities, that is, those expenses that are not related to the activity of the company are not deductible either, the rule marks an exception. These liberalities do not include expenses generated by commercial activities and public relations with the company’s clients or suppliers, nor those expenses linked to the company’s personnel or those generated as a result of the promotion of the sale of goods and the provision of services, as long as they conform to uses and customs.

In other words, the typical Christmas lunch or dinner, as long as there is an invoice to prove it and the generic deductibility requirements are met, “will be deductible in INCOME or Companies. Even more so with the latest ruling of the Supreme Court, which considered meals with clients are a deductible representation expense in these taxes, contrary to the denials that the Tax Agency had been making,” said Pablo G. Vázquez, from GVA advisors.

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