Let’s take the example of a pharmaceutical company that wants to give its customers a case of wine worth £30 plus VAT of £6.00. 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 first point to consider is that a business is entitled to recover all of 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 him, 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. The current monetary limit for recovering VAT on ’free gifts’ is £50 exclusive of VAT.
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, claim the VAT back and take advantage of the cash flow benefit.
In our example, the pharmaceutical company could recover all of 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 could save them up to £6,000.
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;
• prises in betting gaming and lotteries;
• Christmas gifts; and
• goods supplied to employees under attendance or safety at work schemes.
To take advantage of these rules the gifts must not be part of a series of gifts to the same person where the total costs of the goods in any 12 month period is more than £50.
The £50 limit for the cost of the goods is VAT exclusive and 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.
Practical Tip
If your business has not claimed the VAT back on these types of gifts, and you still have the original purchase invoices, then you can claim the VAT back covering the last four years. If the amount is less than £10,000 you can adjust it on your VAT return, otherwise you will have to inform HMRC separately by making a voluntary disclosure use form VAT 652.
Andrew Needham
