Points make Prizes!

When you’re running a competition to help promote the business, you need to be aware of the implications on the tax, be careful of what prizes you give.

Promotion
Often a business will advertise via competitions open to the public, these come in various shapes and sizes, but the core of the competition is always the same – promotion. Of course, the prize for winning these competitions can be quite substantial, however the Taxman might not allow a tax deduction for the cost of the prize, unless you’re careful.

The Prize
If the prize comprises of your own, everyday products, or even a new line of products you’re trying to pitch, and the competition is open to the public in general, then the exception in s.577(10) Income Corporation Taxes Act 1988 applies and the tax expenditure incurred will not be disallowed.

Unfortunately, if the prizes are money, holidays, luxury goods or other items that you wouldn’t normally have, these would be classed as disallowable business gifts. Thus, meaning a tax bill with increased taxable profits.

Challenged!
The taxman may challenge you about this, but your argument is simple, you’ve received valuable consideration in return for the prize, in the form of a requirement for publicity on part of the main prize-winner. This will then form a commercial exchange between you and the winner, thus the prize is no longer a business gift but a deductible expense against your profits. Basically, the prize-winner is promoting your business and that expense is deductible.

Avoidance
You can also avoid it been classed as a gift by offering the prize as an incentive for a particular level of sales or purchases. This way it’s a discount on sales and the cost is allowed as a normal expense of trade. Such a prize could come with a tax charge, however, this too can be avoided – if the prize has no cash value (e.g. a non-transferable holiday with no cash alternative) then the prize has no monetary value and thus there can be no tax bill for the winner.