VAT on Business Gifts and Free Samples
Giving away promotional items can be an effective way to reward customers, introduce a new product or raise awareness of a business.
However, “free” does not always mean free of VAT consequences.
The VAT treatment depends on whether the item is a genuine business gift, a qualifying sample or simply goods being given away without payment.
The basic VAT position on free gifts
Where a VAT-registered business buys goods and recovers the input VAT, it may later need to account for output VAT if those goods are given away.
This prevents a business from reclaiming VAT on an item that ultimately leaves the business without being sold.
However, an important exception applies to qualifying business gifts.
What is a business gift?
A business gift is broadly an item given away for business promotion where the business was entitled to recover the input VAT.
The definition can cover a wide range of items, including:
- promotional merchandise;
- customer thank-you gifts;
- retirement or long-service gifts;
- prizes;
- items given to trade customers; and
- some executive gifts.
The item does not necessarily need to display the business’s logo.
The £50 limit
A business does not normally need to account for VAT on qualifying business gifts where the total cost of gifts made to the same person does not exceed £50 in any 12-month period.
The limit is cumulative.
This means that several gifts costing less than £50 each may still create a VAT liability if their combined cost to the same person exceeds £50 during the relevant 12 months.
Where the limit is exceeded, the source article states that VAT may need to be accounted for on the total cost value of the gifts, rather than merely the amount over £50.
Example
A business gives a customer:
- a £30 hamper in December; and
- a £25 bottle of spirits the following June.
The total cost of gifts to that person is £55 within 12 months.
Assuming the business reclaimed the input VAT and the gifts fall within the business gift rules, the £50 exemption may no longer be available.
This is why businesses should track gifts by recipient rather than reviewing each gift in isolation.
What about gifts to employees?
The VAT rules should be considered separately from the employment tax rules.
A gift to an employee might create:
- a benefit-in-kind issue;
- a PAYE Settlement Agreement consideration;
- a trivial benefits question; and
- a VAT issue.
An item can be treated favourably under one set of rules but not another, so businesses should not assume that satisfying the trivial benefits rules automatically resolves the VAT position.
Free samples
Genuine free samples are not normally subject to output VAT.
For VAT purposes, the sample must enable the potential customer to assess the characteristics and quality of the product.
The amount supplied should therefore be no more than is reasonably necessary for that purpose.
For example, a single bottle supplied by a wine importer may be capable of being a sample. A case of 12 bottles is much less likely to qualify because the quantity goes beyond what is needed to test the product.
Not every free item is a sample
An item is not automatically a sample simply because the business labels it as one.
A full-size product may qualify where that is genuinely necessary to assess it, but the purpose and quantity are important.
The source article also notes that a finished product from a discontinued line would not ordinarily become a sample merely because it is being given away.
Keep suitable records
Businesses giving away gifts or samples should retain records showing:
- the item supplied;
- its cost;
- the recipient;
- the date it was provided;
- the business reason;
- whether input VAT was reclaimed;
- cumulative gifts to that recipient over 12 months; and
- why an item was treated as a sample.
These records will make it far easier to support the VAT treatment if HMRC asks questions later.
Promotional generosity can still create a tax bill
Customer gifts and product samples are useful marketing tools, but small details can make a major difference to the VAT treatment.
At williams lester accountants, we can help you review promotional spending, identify when output VAT may be due and make sure gifts, samples and employee rewards are recorded correctly.