VAT on Business Promotions and Free Gifts

# VAT on Business Promotions and Free Gifts

If you run promotional campaigns, give away free samples, or provide gifts to customers or staff, you need to understand when VAT is due. In many cases, HMRC treats free items as taxable supplies even when no money changes hands. This article explains when you must account for output tax on promotional schemes, business gifts, and competitions.

Business Gifts

What counts as a business gift

A business gift is something you give away to promote your business where you could reclaim the VAT on its purchase as input tax. The term "gift" means a voluntary and unconditional transfer of goods for no payment or other consideration.

Business gifts include:

• Promotional items like brochures, posters and branded merchandise
• Executive presents to clients
• Long service awards and retirement gifts
• Goods supplied to employees under attendance or safety schemes
• Items distributed to trade customers
• Thank you gifts to customers
• Prize goods in free competitions and lotteries

The £50 threshold

You do not need to account for output tax on business gifts to the same person if the total cost of all gifts you give them does not exceed £50 (excluding VAT) in any 12-month period. You can use any 12-month period that includes the day you make the gift.

Once the total cost of gifts to the same person exceeds £50 in a 12-month period, you must account for output tax on the total cost value of all the gifts, provided you were entitled to claim input tax on their purchase.

Providing evidence for business recipients

If you make a gift on which VAT is due to someone who will use it for business purposes, they can recover the VAT as input tax if they are VAT registered. You cannot issue a standard VAT invoice, but you can use your normal invoicing documentation with this statement:

"Tax Certificate — No payment is necessary for these goods. Output tax of £XX.XX (insert amount) has been accounted for on the supply."

Free Gifts for No Consideration

If you give away goods and receive no payment or other consideration, and you were entitled to recover VAT on them as input tax, you must account for VAT on their cost value. The only exception is if they qualify as business gifts under the £50 threshold explained above.

Private use gifts

If you give goods to relatives or friends for personal (non-business) purposes, and those goods were not purchased for business use, they are not business assets. You cannot reclaim input tax on their purchase in the first place.

However, if you claimed input tax on goods that you later divert to private use and give away, you must account for output tax to the same amount.

Samples

If you give away free samples of your products to promote your business, the VAT treatment depends on whether you receive anything in return. Where samples are genuinely given away for free with no strings attached, you must account for output tax on their cost value unless the business gift £50 threshold applies.

Gifts Through Intermediaries

You may provide gifts to the general public through an intermediary, such as a manufacturer supplying goods to a retailer for the retailer to give away in store. You do not need to account for VAT on these gifts provided:

• Neither you nor the intermediary charge for them
• The goods are given to promote your business
• The customer does not have to do anything in return
• The goods remain your property until given to the final customer
• Any unused goods are returned to you or destroyed
• The £50 threshold per recipient is not exceeded

Gifts to Charities

Goods you donate to a charity (or to a taxable person who has covenanted all profits from a subsequent sale to charity) may be zero-rated, provided the charity or taxable person sells, lets or exports them.

Disposal of Obsolete Stock

The disposal of obsolete stock follows the same VAT rules as business gifts. If you give away obsolete stock and were entitled to recover input tax on it, you must account for output tax unless the £50 business gift threshold applies.

Sporting and Entertainment Events

If you organise an awards ceremony where prizes or trophies are awarded and attendees pay an admission fee, giving the prize is not a deemed supply requiring you to account for output tax. This is because part of the admission fee is considered payment for the trophies, and VAT will have been accounted for on that supply, provided:

• You only organise an event at which trophies are given away
• There is no other associated competition or event
• You charge for admission to see the presentation

Promotional Schemes and Vouchers

VAT treatment of promotional schemes involving vouchers, coupons, cashback offers and loyalty rewards depends on the specific structure of each scheme. The rules changed on 1 January 2019 for vouchers, and different treatments apply depending on whether goods or services are offered as part of a single supply or multiple supplies.

Due to the complexity of these arrangements, you should seek specific advice on your promotional scheme structure to ensure correct VAT treatment.

What This Means for Your Business

When planning promotional campaigns or giving business gifts:

1. Track the total cost of gifts to each person over a rolling 12-month period

2. Account for output tax once the £50 threshold is exceeded

3. Keep records of who receives gifts and their cost value

4. Remember that "free" does not always mean VAT-free from HMRC's perspective

5. Consider the VAT cost when budgeting for promotional activities

Sources

• Business promotions and VAT (Notice 700/7)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.