With Christmas approaching, businesses will be giving business gifts to valued customers and suppliers. But how much VAT can be claimed back on their purchase?
Wine for Christmas
For example, a regional firm of accountants decides to give each of their valued clients two bottles of wine worth £40 plus VAT of £8.00. In addition, carriage of the wine to the clients will be £9.50 each. The total cost of supplying the free gift will therefore be £55.50.
The accountancy practice is expecting to give away 500 gifts to its clients, so the total VAT would be £4,000.
The first point is that a business is entitled to recover all the VAT on a business gift at the time of purchase. However, above a certain limit, the business has to account for output VAT equal to the cost of the goods to it (i.e., equal to the input tax reclaimed, at the time the gift is given away). By concession, HMRC will allow a business to simply not reclaim the VAT it was charged on the purchase.
There have been a number of changes in the monetary limits for recovering VAT on ‘free gifts’ over the years. Before 1995, the limit was £10; it then went up to £15 and was increased to £50 in the Chancellor’s Budget of March 2001.
If the cost of the goods exceeds the current monetary limit of £50, and there is a reasonable time between purchasing the free gifts and giving them away, a business can obtain a cashflow advantage by claiming the VAT back at the time and account for the output tax later.
Small Tokens
To take advantage of these rules, the gifts must not be part of a series of gifts to the same person where the total value of all the gifts in any 12 month period is less than £50 excluding VAT. Unlike direct taxes, a business does not need to have any form of promotional advertising on the gift (e.g., a pen with the company name on it) in order to make a deduction of the input tax.
My suggestion is that the accountancy practice in the above example should recover all the VAT on the purchase of the promotional gifts at the time of their purchase, and because the value of each individual gift is less than £50, they need not account for any output VAT when the gifts are sent to new customers. This would save them £4,000.
If a business has not claimed the VAT back on these types of gifts, and it still has the original purchase invoices, it can claim the VAT back covering the previous four years. If the amount is less than £10,000, a business can adjust it on its next VAT return; if the claim exceeds £10,000, it will have to make a separate disclosure to HMRC using the form VAT.
The £50 limit for the cost of the goods is VAT exclusive and does not include any administrative costs, including post and packaging. In the above example, the cost price of the goods was £40, not £55.50 as this includes VAT and carriage.
Other Gifts, etc.
The rule relating to free gifts not only relates to promotional items but also, among others, to:
- ‘executivepresents’;
- long service awards;
- retirement gifts;
- items distributed to trade customers;
- prizes from amusement machines, etc.;
- prizes in betting,gamingand lotteries;
- Christmas gifts; and
- goods supplied to employees under attendance or safety at work schemes.
Practical Tip
If a business purchases gifts and the VAT exclusive value of those gifts is less than £50 to any individual in any 12-month period, it can recover the VAT and is not required to account for any output tax when the gift is given away.