Nothing in life is free!
When a business gives goods away, it is tempting to think that, if nothing was paid by the recipient, then 20% of nothing is nothing and no VAT needs to be accounted for. Consequently VAT systems would not identify “free” supplies separately for VAT purposes.
However, gifts of goods for no consideration are taxable supplies for VAT purposes. Even though a taxpayer receives nothing in return for the gift, VAT must still be paid to HMRC. There are exceptions to this rule, but they are limited.
Gifts arise in all kinds of businesses. A common scenario involves corporate gifts to important clients (or trusted tax advisers!), but there are also less obvious instances where goods are provided for free. Taxpayers such as manufacturers and retailers should consider carefully their position on free samples. Competition prizes are usually treated as gifts. The award of a medal is another example of goods provided for no consideration.
This was the issue in Scottish Football League v Revenue and Customer Commissioners ( UKFTT 295 (TC), published on 8 April 2013). The league was a VAT registered business which presented medals to its division champions at the end of each football season. The Tribunal considered that the medals were worth £450 each, were part of the assets of the taxpayer’s business and were given away. The Tribunal had little option but to confirm HMRC’s view that the taxpayer should account for VAT on the value of the medals, which totalled approximately £27,000.
Best practice is to ensure that the records system picks up on supplies made for no consideration, so these can be examined separately. It is possible to relieve the VAT payable on gifts in many cases. For example, there are de minimis limits, though these are low and becoming less relevant as they are not increased annually. There are also exceptions established in case law which could be considered, such as the promotional music recordings ruled on by the European Court of Justice in EMI Group Ltd (C-581-08).
For further information on the VAT issues and solutions for business gifts, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.