What are the rules on gifts and entertaining for small businesses?

Understanding why gift and entertainment rules matter for small businesses

Gifts and entertaining can be a powerful way for small businesses to build relationships, thank clients, and create goodwill with suppliers and partners. A lunch that turns into a new contract, a modest holiday hamper that keeps you front of mind, or tickets to an industry event that deepen trust can all feel like normal relationship-building. The problem is that the same activities can also create real legal, ethical, and tax risks if they cross certain lines. Even when intentions are good, gifts and hospitality can be perceived as attempts to influence decisions, secure preferential treatment, or bypass fair procurement rules.

For small businesses, the stakes can be surprisingly high. A single questionable gift can trigger reputational damage, an audit, a contract dispute, or an investigation, particularly when you deal with regulated industries, government bodies, charities, education, healthcare, or larger corporates with strict compliance frameworks. The safest approach is to treat gifts and entertainment as an area where you need clear boundaries, documentation, and consistency. That does not mean you have to eliminate hospitality; it means you need rules that keep it appropriate, transparent, and defensible.

This article explains practical rules and best practices that small businesses can apply. Because “rules” can vary by country, industry, and contract terms, the focus here is on common principles that help you stay compliant and avoid problems, while still allowing normal relationship-building.

Define what counts as a “gift” and what counts as “entertainment”

Before you can set rules, you need clear definitions. A gift is generally something of value given without the recipient paying fair market value. Gifts can be physical items (wine, flowers, gift baskets), vouchers and gift cards, discounts not offered to the public, free services, charitable donations made at someone’s request, or even providing a benefit to a family member.

Entertainment or hospitality usually involves hosting someone and paying for experiences such as meals, drinks, events, tickets, travel, accommodation, or leisure activities. It can also include “facilitation” expenses like paying for taxis, airport transfers, or upgrades, depending on context.

Some items sit in a grey area. For example, a product sample could be a legitimate marketing cost, but it may also be a gift if it is excessive, unrelated to evaluation, or given at a sensitive time. Likewise, a business conference might be legitimate, but if it includes lavish leisure activities or includes spouses, it may look like entertainment intended to influence decisions.

The three core principles: legitimacy, proportionality, and transparency

Most gift and entertainment policies boil down to three principles that are easy to remember and apply.

Legitimacy: There should be a clear and honest business purpose. Ask: What is the business reason for this? Is it connected to a legitimate meeting, relationship-building activity, or marketing objective? Would you feel comfortable explaining it to a client, your accountant, your staff, or a regulator?

Proportionality: It should be reasonable in value and scale for the relationship, the setting, and local norms. A modest meal after a meeting is usually proportional; a luxury weekend away rarely is. Proportionality also includes frequency: repeated small gifts can add up and create the impression of influence.

Transparency: It should be open, recorded, and not disguised. Cash gifts, secret benefits, or “off the books” perks are high-risk. Transparency also means respecting the recipient’s own policies. Many organisations, especially larger corporates and government bodies, have rules on what staff may accept; your offer should not put them in a difficult position.

Know the different rule sets that can apply at the same time

Small business owners often assume the only “rules” are tax rules. In reality, several rule sets can apply simultaneously. It helps to think in layers:

1) Law and regulation: Anti-bribery and corruption laws typically cover offering, promising, giving, requesting, or receiving something of value to improperly influence someone. These laws can apply even if you do not succeed, and even if the value seems small, if the intent is improper. Some countries have strict rules about foreign public officials and corporate liability.

2) Contract and client policies: Many clients include clauses that restrict gifts and hospitality. Violating these can lead to loss of contract, clawbacks, or being barred from future tenders.

3) Ethical expectations and professional standards: Some industries have codes of conduct, especially healthcare, finance, education, construction, and procurement-heavy sectors.

4) Tax and accounting rules: Even if something is lawful and ethical, it may not be fully deductible, and you still need receipts and proper classification in your accounts.

5) Your internal policy: You should have your own documented approach so staff know what is acceptable and you can show consistency.

Anti-bribery basics: avoid intent, timing, and targeting risks

The biggest risk with gifts and entertaining is that they can be interpreted as bribery or as creating an improper advantage. You do not need dramatic movie-style envelopes of cash for trouble to start. The risk often shows up in three areas: intent, timing, and targeting.

Intent: If the purpose is to influence a decision improperly, it is high risk. That includes trying to secure a contract, speed up approvals, bypass procedures, or obtain confidential information. Even if you call it “hospitality,” if the intent is to sway someone’s judgment, you are in dangerous territory.

Timing: Gifts or hospitality offered during tender processes, contract renewals, regulatory inspections, dispute negotiations, or invoice disputes are higher risk. Even a modest gift can look suspicious if it coincides with a decision point.

Targeting: Offering gifts to people with decision-making authority, procurement roles, or regulatory powers is higher risk than giving a modest branded item to a broader team at a public event. Public officials generally trigger stricter concerns than private-sector recipients, even for small amounts.

A practical rule: if you would be embarrassed to have the gift described in an email thread or on a public register, it probably is not worth the risk.

Special caution: government, public sector, and regulated settings

If your small business sells to government bodies, local authorities, public schools, public hospitals, or any organisation where staff are considered public officials, you should treat gifts and hospitality with extra caution. Many public-sector codes severely limit what staff may accept, and the bar for “improper influence” is typically lower.

Similarly, regulated settings like healthcare and finance often have industry rules that limit promotional gifts and hospitality. In these sectors, a “normal” hospitality gesture in another industry may be prohibited or heavily restricted. When in doubt, ask for the recipient’s policy in writing or choose a low-risk alternative such as modest refreshments at a meeting.

Set value thresholds that match your business

One of the most practical ways to create clear rules is to set value thresholds. The exact numbers depend on your location, industry, and client base, but the structure is broadly similar across many policies.

Low-value, generally acceptable: Modest branded items, small seasonal tokens, or simple refreshments that are customary and not tied to a decision. Examples might include company notebooks, modest chocolates, or coffee during a meeting.

Moderate-value, needs approval: Meals at a restaurant, event tickets of moderate price, or gifts that are not routine. These should require manager or owner approval, documentation, and a clear business purpose.

High-value, generally prohibited: Luxury items, large gift cards, lavish travel, accommodation, or anything that would be perceived as extravagant, especially if offered to decision-makers.

Even with thresholds, remember the “aggregation problem.” A series of £40 gifts every month is not the same as a one-off £40 gift. Your policy should consider annual limits per recipient or per organisation and include a frequency cap.

Cash and cash equivalents: the simplest rule is “don’t”

Many organisations prohibit cash, and regulators tend to view it as a red flag. Gift cards and vouchers can also be treated like cash equivalents because they are easily converted into personal benefit. If your business wants to show appreciation, choose non-cash items with a clear business rationale, modest value, and appropriate branding or connection to the relationship.

If gift cards are common in your industry, set strict conditions: low value, no timing near decisions, recorded properly, and never to public officials or procurement staff. But in many cases, a safer option is to provide hospitality in a group setting (such as a modest meal) rather than a transferable cash equivalent.

Entertainment rules: business purpose, attendees, and “reasonable” hospitality

Entertainment is often more sensitive than physical gifts because it can be higher value and more personal. The key questions are: Is there a genuine business purpose? Who attended? Was it reasonable? And is the setting appropriate?

Business purpose: The event should relate to a meeting, relationship development, or legitimate networking. Pure leisure with no business context is risky.

Attendees: Keep the guest list appropriate. Inviting spouses or family members usually increases risk because it looks personal rather than business-related. If spouses are included, you need a strong and defensible reason, and you may need to treat the spouse portion as non-business expenditure.

Reasonableness: The venue and cost should match the context. A simple meal at a mid-range restaurant is easier to justify than a luxury venue with high alcohol spend. Heavy alcohol is often a red flag, both ethically and for tax reporting.

Appropriateness: Avoid entertainment that could be seen as offensive, discriminatory, or likely to cause reputational harm. Even if legal, certain venues or activities can undermine trust and create workplace issues.

Travel and accommodation: treat as high-risk by default

Paying for someone’s travel or accommodation is often treated as a high-risk form of hospitality because it is expensive and personal. There are legitimate cases, such as bringing a client to your premises for training or a factory visit, but it should be tightly controlled.

If you fund travel or accommodation, apply strict safeguards: document the business purpose, use reasonable travel class and hotels, avoid leisure add-ons, do not pay for family members, and ensure it is permitted by the recipient’s employer. Consider splitting costs so each side pays its own travel, or structure visits as open events where costs are standardised and transparent.

Discounts, rebates, and free services: gifts in disguise

Not all gifts look like gifts. Preferential discounts, rebates, “consulting” arrangements, or free services can be used to transfer value. Even if you intend them as marketing or goodwill gestures, they can create risk if they are selective, undocumented, or linked to decisions.

A safe approach is to ensure discounts and rebates are offered through documented pricing policies, made available on equal terms to similar customers, and recorded clearly in invoices and contracts. If you provide free services, treat them like samples or promotions: specify scope, duration, business purpose, and who authorised them.

Charitable donations and sponsorships: goodwill that can still be risky

Charitable giving is generally positive, but it can be misused if donations are made to a charity connected to a decision-maker, especially if requested during a procurement process. Sponsorships can also be problematic if they are essentially payments for access or influence rather than genuine community support.

If you donate or sponsor, keep it transparent: donate to reputable organisations, avoid tying donations to business decisions, document approvals, and consider whether the recipient has a personal connection. Many businesses adopt a rule that charitable donations are not made at the request of clients who are actively involved in a tender or regulatory decision.

Handling gifts you receive: protect your business from conflicts of interest

Gift and entertainment rules are not only about what you give. If you and your staff receive gifts from suppliers or partners, you can create conflicts of interest. This can lead to poor procurement decisions, inflated costs, quality issues, or reputational damage.

Good practice includes: requiring staff to report gifts above a low threshold, limiting what can be accepted, and discouraging personal benefits from suppliers. In very small teams, it can feel awkward to formalise this, but it protects both relationships and decision-making. If you are selecting suppliers, a transparent rule such as “we don’t accept personal gifts; please send any tokens to the office for shared enjoyment” can reduce pressure and keep things fair.

Create a simple written policy, even if you have only a few employees

You do not need a 40-page compliance manual. A one- to two-page policy can cover the essentials and can be shared with employees, contractors, and sometimes clients. A simple policy helps because it:

1) sets expectations and reduces awkwardness,

2) provides consistency (important if you are challenged),

3) creates an approval trail, and

4) supports accurate accounting and tax reporting.

Your policy can include: definitions, examples of acceptable and prohibited items, value and frequency limits, approval levels, record-keeping requirements, special rules for public officials, and consequences for breaches.

Approval and escalation: who can say “yes”

Small businesses often rely on informal decision-making, but gifts and entertaining benefit from a simple approval structure. For example:

Self-approved: low-value items and modest refreshments, within limits.

Manager/owner approval: meals above a set amount, event tickets, or any hospitality involving procurement staff or decision points.

Always escalate: anything involving public officials, travel and accommodation, cash equivalents, or anything that feels unusual.

Make it clear that “when in doubt, ask” is not a sign of weakness. It is a safeguard. The goal is to prevent one well-meaning employee from making a gesture that causes trouble later.

Record-keeping: your best defence is a clear log

Good records serve two purposes. First, they support your accounting and tax reporting. Second, they protect you if someone questions your intent. A simple gifts and hospitality register can be a spreadsheet with a few key fields:

Date, recipient name and organisation, role (if known), description of the gift or event, estimated value, business purpose, who approved it, and whether it was offered, accepted, or declined.

For entertainment, also record attendees, the venue, and the nature of the discussion. Keep receipts and invoices. If you give something without a receipt (for example, you created a gift basket yourself), record how you estimated the value.

Consistency matters. A register that only includes some gifts looks suspicious. Make it routine: if it qualifies, it goes in the log.

Tax and accounting: deductibility and classification (general guidance)

Tax treatment of gifts and entertainment varies by jurisdiction, and rules change over time. However, there are some recurring themes that small businesses should keep in mind.

Not all hospitality is deductible: Many tax systems restrict deductions for entertainment, particularly when it is considered personal or lavish. Some allow deductions for meals if there is a clear business purpose and the expense is reasonable; others limit it.

Gifts may have limits: Some jurisdictions cap deductible gift amounts per recipient, exclude certain types of gifts (like cash equivalents), or require branding for promotional items.

Employee vs client expenses: Staff entertaining staff can be treated differently from client entertaining. Similarly, staff events can have separate rules for payroll reporting, benefits, or fringe benefits taxation.

VAT/sales tax implications: Input tax recovery on entertainment can be restricted, and the rules can differ between employee subsistence, client hospitality, and promotional samples.

In practice, the safest approach is to: classify expenses correctly, keep detailed receipts, document business purpose, and ask your accountant to confirm how your local rules apply. Avoid pushing the boundaries. A deduction is never worth the risk of an investigation or penalties.

Avoid common problem scenarios

Small businesses tend to run into trouble in predictable situations. Building rules around these can prevent most issues.

Scenario 1: Tender or procurement decision underway

When a client is evaluating suppliers, even normal hospitality can be perceived as influence. A safe rule is to pause non-essential gifts and entertainment during active tenders, contract renewals, or major negotiations, unless it is part of a transparent, pre-scheduled industry event open to all.

Scenario 2: A client asks for something “personal”

If someone hints they want an expensive gift, a cash equivalent, or personal benefit, treat it as a major red flag. Decline politely and document the interaction. If needed, escalate internally and reconsider the relationship.

Scenario 3: “We always do it this way”

Industry norms can be outdated or risky. Your policy should be based on what is defensible, not what others claim to do. If a competitor is behaving badly, matching them increases your risk, not your competitiveness.

Scenario 4: Gifts to “gatekeepers”

It can feel harmless to give a gift to an assistant, receptionist, or junior staff member who helps coordinate meetings. But repeated gifts can still be problematic, and some organisations forbid staff from accepting anything. Keep such tokens minimal, infrequent, and transparent.

Scenario 5: Lavish celebration after a deal closes

Post-contract hospitality can still be risky if it appears to reward an individual for awarding business. A safer approach is a modest team meal with multiple attendees or a formal client event aligned with business objectives rather than personal rewards.

How to politely decline or set boundaries without harming relationships

Many people worry that strict rules will make them seem unfriendly. In reality, clarity often improves relationships because it removes ambiguity and pressure. You can decline gifts or propose alternatives in a way that feels professional and considerate.

Here are a few approaches you can adapt:

Reference policy: “Thank you, that’s very kind. We have a policy that limits gifts, so I can’t accept this, but I really appreciate the gesture.”

Suggest a shared option: “If you’d like, please send something small to the office that the team can share.”

Offer a business alternative: “Instead of gifts, we’d love a testimonial or case study if you’re happy with the work.”

Redirect to charity (carefully): “We don’t accept gifts, but if you’d like to mark the occasion, consider donating to a charity of your choice.”

When you are the one offering hospitality, you can also ask for permission: “We’d like to take you to lunch to discuss the project. Are you allowed to accept?” That simple question shows respect and reduces risk.

Training your team: small habits that prevent big problems

You do not need formal compliance training videos. You need shared understanding and a few habits:

Teach staff to recognise red flags (cash requests, secretive benefits, timing around decisions).

Encourage staff to ask before acting. Make it psychologically safe to check.

Use a simple checklist: business purpose, value, timing, recipient role, and record-keeping.

Remind staff that your reputation is part of your product. Clients and partners notice how you behave, especially when you win or lose business.

Gifts and entertaining across cultures: be respectful without crossing lines

In some cultures, gift-giving is a meaningful sign of respect, and refusing can feel rude. Small businesses working internationally should balance cultural sensitivity with compliance.

Practical options include: choosing modest, symbolic gifts; giving items to the organisation rather than an individual; using branded company gifts; presenting gifts publicly; and ensuring gifts are not tied to any decision. If a gift is offered to you in a culture where refusal is offensive, you may accept it on behalf of the business and record it, then decide whether to share it internally, donate it, or return it later with thanks.

When you operate internationally, also be mindful that local customs do not override anti-bribery laws that may apply to you. If your business is subject to strict anti-corruption obligations, treat unfamiliar situations as “ask first” moments.

Dealing with sensitive recipients: procurement, auditors, and regulators

Some roles are inherently sensitive. Procurement professionals are expected to make impartial decisions, auditors are expected to remain independent, and regulators have enforcement power. Even small gifts can create the appearance of compromised judgment.

A strong small-business policy typically prohibits gifts to auditors, regulators, and similar roles outright, and places strict limits on anything offered to procurement. If you need to host an auditor or inspector, keep hospitality minimal, such as providing basic refreshments on-site, and avoid anything that looks like an inducement.

Building your “reasonable person” test

When rules feel complicated, use a simple test: what would a reasonable person think if they saw this in context? Imagine the details in an email, on an invoice, or explained in a meeting. Would it look like normal business courtesy, or would it look like an attempt to gain favour?

Also consider a “mirror test”: if a competitor offered the same gift to your employee, would you be comfortable? If not, your offer may be inappropriate.

Practical examples: acceptable vs risky vs prohibited

Generally acceptable (with records): modest branded merchandise at a trade show; coffee and sandwiches during a working meeting; a small seasonal token sent to an office address; a reasonably priced lunch with clear business discussion and multiple attendees.

Risky (needs careful review/approval): event tickets for a decision-maker; expensive bottles of alcohol; repeated gifts to the same person; hospitality during an active tender; travel costs for a client visit; high-end dining with heavy alcohol; gifts delivered to a home address rather than an office.

Generally prohibited: cash payments; high-value gift cards; luxury holidays; hospitality tied to contract awards; gifts to public officials without explicit permitted pathways; secret discounts or side agreements; anything designed to bypass a recipient’s employer rules.

What to do if you think a rule has been broken

Mistakes happen. The way you respond matters. If you believe a gift or entertainment expense crossed a line:

Stop further spending immediately and escalate internally.

Document what happened while details are fresh: who, what, when, why, and how it was approved.

Consider whether you need to disclose to a client or supplier, especially if their policy was violated.

Seek professional advice if there is any risk of legal breach or if public officials are involved.

Review and update your policy and training to prevent repeats.

Building a policy template in plain language

If you want a simple starting point, your policy can be written in everyday language. You can include sections like:

Purpose: We build relationships ethically and transparently.

Scope: Applies to all employees, contractors, and representatives.

Definitions: What counts as gifts, hospitality, and cash equivalents.

Rules: No cash; limits on value and frequency; no gifts during tenders; extra caution with public officials.

Approvals: Who approves what; how to escalate.

Recording: All gifts/hospitality above a small amount must be logged with receipts and business purpose.

Consequences: Breaches may lead to disciplinary action or termination of supplier relationships.

Questions: A clear contact person (often the owner or finance lead).

Conclusion: keep it modest, consistent, and defensible

For small businesses, the most effective “rules on gifts and entertaining” are not complicated. They are about staying within a safe zone: modest value, real business purpose, sensible timing, respect for the recipient’s rules, and clean documentation. When you apply those principles consistently, you protect your reputation, reduce legal and tax risk, and still allow for the human side of business relationships.

If you want to take one action today, create a simple written policy and a basic register. The combination of clear limits and routine record-keeping will handle most situations, and it will make the rare difficult situation much easier to manage.