Doolittle & Dally Accountants decides to give each of their valued clients a case of six bottles of wine worth £40 plus VAT of £6.00 (it’s before Christmas so the VAT rate is still 15%). In addition, carriage of the wine to the clients will be £9.50 for each case. The total cost of supplying the free gift will therefore be £55.50.
Doolittle & Dally is expecting to give away 500 gifts to its clients, so the total VAT would be £3,000.
Is There a Limit?
The first point 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.
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 budget of March 2001.
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.
What Should You Do?
Our advice is that Doolittle & Dally 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 new customers. This would save them £3,000.
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, you do not have 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.
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 period from 1 April 2006 (increasing to a fixed four year period from 1 April 2010). If the amount is less than £10,000 you can adjust it on your next VAT return, otherwise you will have to inform HMRC separately by making a voluntary disclosure.
The £50 limit for the cost of the goods is VAT exclusive and does not include any administrative costs, including post and packaging. In our example, the cost price of the goods was £40, not £55.50 as this includes VAT and carriage.
The rule relating to free gifts not only relates to promotional items 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.
So don’t miss out!