VAT on product samples and free gifts

If your e-commerce business has flourished to the point of being VAT registered, you may find some of the more unusual items your business receives hard to account for.

The VAT on product samples and free gifts must be treated accordingly, so here is some guidance on how to do so.

VAT needn’t be a hassle; once you understand the guidance you will feel confident in the knowledge that your VAT returns accurately portray your business transactions.

Gifts and free samples can be given at various points in an e-commerce business’ growth cycle in the form of influencer marketing, customer appreciation, or promotion to stockists, but whether you are trying to attract some initial attention, or trying to expand your consumer base, the advice remains the same.

It is important that you pay the correct amount of VAT and that everything is accounted and paid for. Here is everything you need to know about the VAT treatment of samples and free gifts.

What constitutes a gift?

A gift is any item given to someone with no payment, either monetarily or otherwise, received. The purpose of the gift can be varied. To be classified as a gift, it must be a definite, voluntary and unconditional transfer of the goods, as described by HMRC.

A business gift is given in the course of conducting your e-commerce business and includes service gifts, prizes, and gifts for staff (within reason) and presents for trade customers.

Business gifts can also include but are not limited to long service awards, retirement gifts, ‘thank you’ gifts, and goods supplied to employees under attendance or safety at work schemes.

VAT on free gifts

If the gift costs you less than £50, then no VAT needs to be accounted for. Once over the threshold, it must be factored into your returns. This also applies if multiple gifts are given to the same person or business over a 12-month period. For example, a monthly £5 gift (including VAT) to an employee would breach this threshold in 10 months and therefore need to be included for VAT purposes. You must also include VAT if you were entitled to claim VAT on the purchase of the gift.

If you purchase gifts for non-business use, these are outside of the scope of your business and must not be included on either side of your VAT return. If the gift is not purchased for a business purpose it is not a business asset and any VAT incurred is not reclaimable.

Although you may be required to pay VAT on gifts you receive or give to employees, suppliers, and customers. You can claim back VAT on some business expenses that meet the HMRC criteria.

There are additional rules for gifts given to charities and other non-profits, which you can read about in the full HMRC guidance.

What constitutes a sample?

Samples are given for the purpose of inducing a sale, either directly or indirectly, and as such must be given to a promoter of the sale or a potential customer.

HMRC defines a sample as “a specimen of a product which is intended to promote the sales of that product and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions”.

Samples must be clearly labelled as such. All of us have come across a sample with “Sample only. Not for Resale” stamped on it, and you must follow suit.

An item doesn’t count as a sample if you have discontinued the line. By definition, a sample is given to promote a potential sale which is not possible if the line of product is no longer available.

Additionally, giving more in a sample than is strictly necessary to test the product will void it’s 0 per cent VAT status. For example, giving one pair of tights to a promoter is a sample; giving a pack of ten is a gift.

VAT on samples

If your sample is within the defined guidelines, then there is no VAT on samples. Free samples provided to individuals for marketing purposes also require zero VAT action.

Ensure you follow the guidelines to a tee to avoid an unexpected VAT adjustment.

VAT on gifts and samples

VAT on gifts and samples is straightforward once you understand the definitions. If it qualifies as a sample, it is VAT free. If it is a gift, then it is dependent on whether you paid VAT and the value of the gift.

Can I reclaim VAT on gifts and samples?

VAT is recoverable on business gifts. Output tax does not need to be considered as long as the gift(s) value does not exceed the £50 threshold. In some cases, such as gifts to the general public, charities, or as a business promotion, the VAT treatment may differ.

VAT has many complex rules (and the new MTD requirements), and we want to make sure you use them to your benefit. In addition to VAT on gifts and samples, there are different rules and requirements for VAT on a variety of other business expenses.

As e-commerce specialists, we know exactly what you can claim, and what you can’t.

If you want help with VAT on product samples and free gifts or other VAT queries for your e-commerce business get in touch today. We always recommend speaking with a specialised and expert accountant to make sure you get it right.

The best time to start is now.