Hello, I am a tax law student currently revising for my upcoming exam.
I have gone through a past paper with a rather difficult question (due to the ongoing pandemic I'm unable to get in touch with the professor).
The question in brief:
A company makes supplies of health supplements and vitamins to the public which are standard-rated. The company decides that it wishes to supply customers who place an order with a free Magazine that features products and nutritional information.
You are the VAT advisor required to advise the company on whether they should treat both the magazine and supplements as a single supply or a mixed supply. Discuss the benefits and drawbacks of both.
I assume magazines (0%) and vitamins (20%), if both supplies incurred the same rate of VAT then the question is redundant.
The conclusion will ultimately be that HMRC will take the view that the magazine is ancillary to the principal supply of vitamins, provides a better means of enjoying the main product and therefore both should be taxed as one single supply.
Input Tax Recovery:
I assume that the main benefit of making two supplies is that the company will recover the input VAT in producing the magazine and won't have to charge output, meaning the company's overall output tax will be lower using apportionment say 90/6.
If a single supply is declared then although the company would recover input tax on the magazine they would also have to charge output tax on the magazine and the vitamins so 100/6.
A further issue presents itself if we assume there are two supploes, the magazine is supplied for 'free' , under Art 16, PVD - disposal free of charge is regarded as for consideration.
^ that still checks out, our magazine will be a taxable supply recovering input tax and output at 0%.
However, I understand that there is a provision in UK law for gifts to the value of less than £50 supplied to individuals which puts them outside the scope of VAT...
That's where my confusion comes along...
If I give away free magazines to the value of less than £50 can I recover the input tax? Will HMRC try to claw back? Must I pay output tax on the cost price? Are they even a gift? How do corporations such as Tesco and Argos account for VAT on their magazines and catalogues?
I apologise for the long winded question.
I have spoken to HMRC and two tax advisors who are flabbergasted...