This Brief is relevant to VAT registered businesses that give away samples of their products.
The UK's restriction of allowing only one sample to be supplied to one person free of VAT has been removed. This follows the decision of the European Court of Justice (ECJ), in the case of EMI (C-581/08) on 30 September 2010.
Businesses can make a claim to HM Revenue & Customs (HMRC) for VAT incorrectly accounted for on supplies of samples. This Brief provides details of how to do so.
Both EU and UK legislation require that, when goods on which input tax has been reclaimed are disposed of for no consideration, VAT normally becomes due. However, this does not apply to 'gifts of small value' and 'samples', which in the UK under the VAT Act 1994 are defined as follows:
The ECJ agreed that the UK does have the right to apply the £50 limit to 'gifts of small value' and is entitled to set a cumulative limit.
It also stated that, where 'gifts of small value' are specifically given by a VAT registered business to different individuals, who have the same employer, those gifts should not be treated as provided to one taxable person.
As the Court agreed with UK legislation with regard to business gifts, the policy concerning these will remain unchanged.
The Court disagreed with UK policy and law concerning VAT and samples. It stated that the UK's blanket restriction of relief to the first sample given away was not compatible with the EU Principal VAT Directive. It also stated that the criteria should not be restricted to samples given to existing, or potential customers, and may cover supplies to other parties who have an ability to influence future sales of that product (for example, through scientific testing/analysis, marketing activity, or via media reviews etc). However, the Court accepted that the rules on samples need to be construed narrowly, and defined them as follows:
The Court defined 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'. HMRC will apply this definition.
An example of an item that would not qualify as a sample is a finished item taken from a discontinued line. Although intended to demonstrate the type and standard of a particular range, it could not promote sales of that product line since it was no longer available.
Another example would be a product provided in quantities greater than necessary for its characteristics and qualities to be assessed. If a waiter in a restaurant pours a small glass of wine as a 'taster', this would qualify as a sample, but if the restaurant provides a regular customer with a bottle of wine, this would not meet the 'samples' criteria.
Following the decision in the ECJ, HMRC policy concerning VAT and samples has changed. Where businesses provide samples (as defined above) of their products free of charge to individuals for marketing purposes, none of the samples are liable to VAT.
The Finance Bill 2011 will contain a clause to remove the restriction that only one 'sample' of each product supplied to another person can be disregarded for VAT purposes.
The ECJ ruling means that some samples, treated as taxable supplies under UK law, should not have been taxed. Consequently, there is a right (limited by 'capping' legislation) to recover overpaid VAT. Similarly, taxpayers may now rely on the terms of this ruling when preparing VAT returns.
In the majority of cases, where VAT has been accounted for on 'samples' (as defined above) under the existing UK legislation, that is, where more than one example of a particular product was supplied to the same person, it is anticipated that an overpayment of VAT will have occurred.
Where a business wishes to make a claim to HMRC (under section 80 of the VAT Act 1994) for repayment of VAT incorrectly accounted for in respect of supplies of samples, they may do so, subject to the conditions set out in Notice 700/45 How to correct VAT errors and make adjustments or claims.
All claims will be subject to the four-year time limit in section 80(4) of the VAT Act 1994 and to the set-off provisions in section 81 of the VAT Act and section 130 of the Finance Act 2008.
There may be direct tax implications where amounts of over-declared output tax are repaid to businesses and your attention is drawn to Revenue & Customs Brief 14/09.
HMRC may reject all or part of a claim if repayment would unjustly enrich the claimant.
More details on making claims and 'unjust enrichment' can be found in VAT Notice 700/45 How to correct VAT errors and make adjustments or claims.
For further information and advice, please contact the Helpline on 0845 010 9000.