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Input/output on disposals over and under £50

Input and output on 'free' magazines

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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.

My understanding...

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...

 

 

Replies (5)

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By Missing in action
26th May 2021 22:55

No, they're not a gift. They're part of your supply for consideration, irrespective of whether you label them as 'free' for promotional purposes.

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Replying to Missing in action:
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By Tax law student
26th May 2021 23:21

Thank you! I think I'm beginning to catch on...

In the past hour I looked at the M&S bottle of wine case - https://www.rossmartin.co.uk/vat/vat-cases/3420-free-wine-not-free-for-vat

I'm still a little confused on the input tax recovery of free gifts made under £50. The case doesn't touch on input recovery.

Radical scenario...

If I were a wine business disposing of wine, just giving bottles away for 'business purposes', no other supplies being made. If the value of wine is over £50 I must charge output tax at cost price, effectively netting any input tax I recovered.

However, if the value of wine I'm disposing of as a gift is less than £50 then I am able to recover the input tax but wouldn't have to account for the output tax?

Surely I am going wrong somewhere

When Tesco give away free magazines, Argos give out their catalogue...

Are they effectively giving out gifts recovering input tax and paying no output tax?

Thanks (0)
Replying to Tax law student:
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By Missing in action
26th May 2021 23:49

In your radical scenario, you're not making any taxable supplies at all so have no entitlement to recover any input tax.

I'm not sure an Argos or Tesco catalogue is much of a gift - what benefit does the recipient derive from it? I'm tempted to view these items more as a marketing cost, akin to flyers i.e. a business overhead, with entitlement to VAT recovery dictated by the supplies to which the marketing relates.

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VAT
By Jason Croke
27th May 2021 08:07

Have a look at this case, Sky TV, some years ago they gave a printed magazine away as part of your TV subscription, it was not optional but its sole purpose was to make a portion of the TV subscription zero rated, they failed of course.....and the more current case is Telewest.
https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/va...

With Marks & Spencer, they tried to argue the wine in their famous Dine in for £10 deal, was free whereas the tribunal rightly concluded that the wine was not free, but was part of a conditional arrangement whereby you had to buy the food items to get the wine. I found it an odd argument from M&S because if the wine was given away for free, then that is non-business and you can't reclaim VAT on non-business activity.

I don't think either of these cases are related to business gifts per se, they are very much mixed/single supply cases. Business gifts is often seen when a retailer has a promotion to give away a free something for their 1millionth customer, or giveaways for new store opening.

With the example of Argos or Tesco giving away magazines, I would argue they are promotional/advertising and are part of the business activities of selling food/stuff. remember, to reclaim VAT you have to be making VATable sales, HMRC would say the link between purchases and taxable sales have to be directly linked.

If you were a charity for say cancer, printing and distributing magazines for free, there would be no input tax recovery because that is not a business activity, the charity isn't charging anyone anything, they offer a free magazine and free advice and they are funded by grants and donations.

However, if the charity was offering something taxable like hiring of meeting rooms and they dropped an advert into their own magazine to promote the meeting space, then there is an argument to link the free magazine with the making of taxable supplies and thus reclaim all the VAT associated with the magazine....although printed matter is zero rated and so no VAT to reclaim anyway....but the principal is the same.

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VAT
By Jason Croke
27th May 2021 08:11

I love VAT because it is all about the law and not much about the numbers. Because it is about the law then there is often interpretation and nuance and often you can have similar cases that end up with different outcomes at Tribunal (self build DIY claims for example) and that is what makes VAT both frustrating and awesome.

Assume you are familiar with this excellent (and free) resource on VAT cases
https://www.bailii.org/uk/cases/UKFTT/TC/

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