I have a client who proposes to give away a promotional gift to prospective customers. The gift is free to the customer but the customer is then invited to make a donation to a registered charity (the client's chosen charity). Will the gift and the donation be linked to form a taxable supply for VAT purposes, or will the gift and the separate donation be outside the scope of VAT?
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It depends!
If the promotional gift is entirely that, and the recipient is entitled NOT to give a financial donation, then the gift is outside the scope of VAT, subject to the £50 limit. Similarly, the financial donation will be exactly that.
If, however, the terms of the promotional gift are such that the financial gift is obligatory, then it is a taxable supply.
Probably not
If the customer isn't under any obligation it isn't consideration for any actual supply.
There may be a deemed supply though, if the cost of the gifts exceeds £50 per customer in any twelve month period.
EDIT: Beaten by the fast-fingered Les!
Gift
Presumably HMRC mean that £50 x 20% = £10, output tax due on gift of value of £50.
Business gift legislation is in VAT Act 1994, Sch 4, para 2.
On the issue of whether the arrangement is a genuine gift, or payment for goods, then you should check HMRC online guidance at VATSC03000.
EDIT: (Just beaten Steve by a short head!)
The problem...
... in pointing you to something in the VAT regs, is that there's nowhere where it categorically doesn't say what Les and I have said. It's not said throughout the law.
The best I can do is VATSC30500. See the meaning of in return for the supply.