Free sample or gift?
Giving away samples of your goods or offering free services is a way to attract new customers and to keep those you have. But the trouble with free samples, is that the associated VAT rules are tricky. When must you account for VAT on samples and when can you avoid it? Our VAT expert Kenny Logan from our Edinburgh Office explains below.
Free sample equals no supply
One of the fundamental rules of VAT is that it only applies where a person registered or required to be registered for VAT supplies goods or services in return for consideration, usually in the form of money but it can be something else which has value. This is a two-way transaction. In contrast, a sample of goods or services that you normally sell that is genuinely free involves no consideration and therefore VAT does not apply.
A free sample is distinguished from a gift, for which there are special rules. For example, an item of discontinued stock will not usually qualify as a sample because it cannot promote sales of that item. It is therefore a gift, and the special VAT rules apply.
Limited quantity
A free sample is something you give away to customers or potential customers, but you shouldn’t overdo these. If you give away excessive samples to the same customer, HMRC might consider that you’ve made a business gift and you may fall into the trap above, meaning that you might have to account for VAT on the value of the items.
EXAMPLE
A brewery runs tours of its production site and serves samples of beers at the end of each tour to encourage the visitors to buy from their on-site shop. The beer given away is a free sample. Conversely, if the visitors are invited to drink as much as they like for free after a tour this would count as a business gift. Whether or not this would result in a VAT bill for the brewery again depends on the business gift rules.
Recovering VAT on free samples
Normally, when you make a supply of goods or services you can reclaim any VAT you incur on purchases you made for the purpose of making the supply. Remember, however, that a supply for VAT purposes only occurs where consideration is given in return for goods or services. By its nature a free sample doesn’t involve consideration. HMRC may argue that providing a free sample is not a business activity at all and so any VAT incurred in providing it can’t be reclaimed.
What counts as business activity?
HMRC’s view is that two circumstances must exist for a free sample to count as a business activity and thus any associated VAT incurred in providing it is reclaimable.
These are:
- The activity results in a supply of goods or services for consideration.
and - The supply is made for the purpose of obtaining income.
In practice, HMRC take the view that a business which provides free samples as a marketing tool is doing so to generate sales. This means there’s a “direct and immediate” link between an expense and VATable supplies. In turn, this means HMRC must accept that the VAT on the expenses can be reclaimed.
IN SUMMARY
VAT is not payable on free samples that you give to your customers to promote sales. If the sample is of goods, they must be of items that you currently sell. Gifts of old stock count as business gifts for which there are special rules which may result in you having to account for VAT. You can usually reclaim any VAT incurred on the cost of samples.
Contact the JRW Hogg & Thorburn team to discuss this further and any other related questions you may have.
