Hidden VAT costs and common errors with business promotions
We cover the VAT implications on popular schemes which businesses need to be aware of.
When it comes to business promotions the focus is usually on how best to increase brand awareness, generate new business or looking at ways you can reward your staff. Often the VAT implications are not considered until it is often too late to correct the position without incurring additional costs or involving HMRC.
We have recently seen examples of clients not fully realising the VAT impact of providing gifts to employees, leaving them scrambling to put in place the correct processes to resolve supply chain issues to avoid extra costs. It is a common area where hidden or unexpected VAT costs arise, which may make your business promotions costlier than expected.
To help you we’ve provided our thoughts below on some of the most popular schemes we see.
Goods given for free
If goods are provided for free in the course of promoting your business and you are entitled to recover the input tax on the purchase of those goods, output tax generally has to be accounted for on the cost of those goods. ‘For free’ means that you do not receive any monetary or non-monetary payment in exchange for the goods.
Exceptions to the general rule
Business gifts
These can include goods given to customers, retirement gifts and long service awards. They might cover a wide variety of items, from relatively cheap pens through to more expensive items such as watches.
If the total value of goods given to single person in a 12-month rolling period does not exceed £50 (excluding VAT) there is no need to account for output tax. However, if the value of goods does exceed £50 the output tax is due. It is commonly misunderstood that the output tax is due only on the excess above £50, but output tax is actually due on the total of all gifts provided.
It becomes trickier if the gift(s) given exceed £50 and they have several different VAT rates. For example a hamper made up of food, drink and small household items might need the value apportioned across the standard and zero rates of VAT.
If you give goods to family members or friends, HMRC sees this as goods being used for a non-business purpose and any VAT incurred on the purchase of them should not be recovered. Alternatively, if you have recovered input tax then you should account for output tax of the same value.
Further complications arise when you need to import gifts into the UK, as this may give rise to import VAT and duty costs. If the goods are not used as part of an onward taxable supply relating to the economic activity of the business, import VAT recovery will be difficult if not impossible. If you then give them away and they are valued above the £50 threshold above, if the import VAT was recovered you will have to account for output tax. In practice, it might be simpler to avoid recovering the import VAT in the first place.
Samples
Free samples provided for marketing purposes are generally not liable to VAT but, as usually is the case with VAT, there are exceptions to this. If the samples are of discontinued items or if the quantity provided is more than what is needed to ‘assess’ the product, output tax will be due to HMRC. For example, a case of wine is normally considered excessive as one bottle should be enough to ‘assess’ the product.
If you are provided with samples and you are a VAT registered business, if they are sold by you for consideration rather than “sampled” then output tax will be due at the appropriate rate of VAT.
Gifts of services
If a service is bought in and then used to provide a service free of charge to a customer, any input tax charged may be reclaimed subject to the usual VAT recovery rules. However, output tax will also be due on the value of those services provided for free (as a deemed supply).
Similarly, output VAT will also be due if the services are used privately or are made available for private use and the input tax incurred on the purchase is recovered.
It is important to note that a deemed supply will not arise (and therefore output tax will not be due) when the business isn’t entitled to recover the input tax.
Business entertainment
We commonly see errors in relation to business entertainment – specifically where input tax is recovered when it should not be. The specifics can be tricky, but there is a broad split- in approach between employees and non-employees (although there are always exceptions).
If entertainment is provided to individuals that are not employees of your business (including clients and prospective clients) and you do not charge the individuals for the entertainment, the input tax incurred on the costs is not recoverable. Therefore, any input tax incurred in relation to entertainment provided to clients or prospective clients will not be recoverable. An exception to this is where business entertainment is provided to overseas customers.
Entertainment can be hospitality of any kind – the most common examples are food and drink, but it also covers the provision of accommodation and entry to shows and events. Employees includes directors and partners, but doesn’t cover former employees, shareholders who aren’t also employees and job applicants.
HMRC doesn’t view these events as necessary for a business to make its supplies, so if input tax is recovered a corresponding output tax (private use) charge will be due.
The VAT position becomes more complicated where entertainment is provided to both employees and non-employees, for example if employees and their family members are invited to an event, as the input tax will need to be apportioned to determine the recoverable portion. Any apportionments must be fair and reasonable, and records should be held to substantiate the input tax recovery position.
Vouchers
While the VAT treatment of vouchers changed as of 1 January 2019, this is still an area that frequently causes issues and we have seen complications over the years.
As a supply of services, and not goods, the £50 business gift exemption will not apply when vouchers are given away for free.
The VAT treatment of vouchers is now determined by the type of voucher provided.
| Type of vouchers | Definition | When is VAT due? |
| Single-purpose voucher |
Vouchers:
If the voucher can be used to purchase goods/services in more than one country, then it cannot be a single purpose voucher. |
VAT should be accounted for at the rate appropriate to the goods/services being purchased. VAT is due upon sale of the voucher, and the place of supply is determined at this time. |
| Multi-purpose voucher | All vouchers that don’t fall within the definition of a single-purpose voucher. | VAT should be accounted for at the relevant rate when the voucher is redeemed. |
For those businesses that give away vouchers to clients or employees free of charge, it is important to consider the input tax recovery position as this is not always straightforward. The vouchers need to be used for a ‘business purpose’ to permit input tax recovery.
This has been tested frequently in the courts, and the cases below give some indication as to how this should be interpreted.
Associated Newspapers Limited gave away vouchers free of charge to customers that had subscribed to their publications for a minimum period. As the vouchers were given away as part of a business promotion scheme intended to attract new customers, it was held that the vouchers were used for a business purpose and input tax recovery was allowed.
In the recent case of GE Aircraft Engine Services Ltd, the company gave away vouchers free of charge to its employees as part of its employee recognition scheme. As this scheme was designed to award high performing employees, the court held that the award of the vouchers was for business purposes and the company could recover the input tax incurred. However this case was quite fact specific and in relation to a period before the UK rules changed. Please refer to our article for further details on this case.
HMRC regularly review the position on business promotions, whether this be the provision of goods or services, as part of its wider enquiries and they would expect businesses to be able to substantiate any input tax claims and apportionments made. An understanding of the VAT implications of any promotions you may make will ensure that you are fully aware of the cost involved in doing so, whether you are providing goods, services or both.
For further information, please contact Robert Marchant or your usual Crowe contact.
This article was first published on South East Business.
