Many businesses give gifts to customers and staff, or to promote their business. The rule relating to free gifts not only relates to promotional items and Christmas gifts but also (among others) to:
- ‘executive presents’;
- long service awards;
- retirement gifts;
- items distributed to trade customers;
- prizes from amusement machines, etc.;
- prizes in betting gaming and lotteries;
- Christmas gifts; and
- goods supplied to employees under attendance or safety at work schemes.
Check the Small Print!
To take advantage of these rules, the gifts must not be part of a series of gifts to the same person where the total cost of the goods in any 12-month period is more than £50, exclusive of VAT. Unlike direct taxes, a business is not required 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.
Take the example of a pharmaceutical company that wants to give its customers a case of wine worth £30 plus VAT of £6. In addition, carriage of the wine to the customers will be £9.50. The total cost of supplying the free gift will therefore be £45.50. The company is expecting to give away 1,000 cases with a total VAT cost of £6,000.
The £50 limit for the cost of the goods does not include any administrative costs, including post and packaging. In this example, the cost price of the goods was £30, not £45.50 as this includes VAT and carriage.
The first point to consider is that a business is entitled to recover all the VAT on a business gift at the time of purchase. However, above the £50 limit, the business must 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.
If the cost of the goods exceeds the current monetary limit, and there is a reasonable time between purchasing the free gifts and giving them away, a business should claim the VAT back and take advantage of the cash flow benefit.
In my example, the pharmaceutical company could recover all the VAT on the purchase of the promotional gifts at the time of purchase, and because the value of each individual gift was less than £50, they need not account for any output VAT when the gifts were sent to customers. This will save them up to £6,000.
Looking Back…
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, it can adjust for it on its next VAT return, otherwise, it will have to inform HMRC separately by making a voluntary disclosure using the form VAT 652.
If a business provides a service to a customer free of charge, there is usually no supply, so no VAT is due. If it has bought in the supply of services, any VAT incurred is input tax and therefore may be reclaimable subject to the normal rules. In that case, output tax is due on the services it passes on free of charge.
If the business simply pays for a third party to provide services to someone else, any VAT incurred is not deductible by the business as input tax since the supply is not to the business.
Practical Tip
Businesses can recover the VAT on business gifts that they purchase, but if the cost to any individual in a 12-month period is more than £50 VAT exclusive, an equal amount of output VAT has to be accounted for.