VAT – Business Gifts and Samples

What are the rules?

If a business provides goods free of charge to any person and the cost of the goods to the business is under £50 in any rolling 12 month period, the supply is not subject to VAT. If the cost of the goods in 12 months exceeds £50, output VAT needs to be paid by the business on the full cost of the goods.

Under different provisions, if goods are supplied as a sample, no VAT need be charged regardless of the cost of the goods. That is, samples with a cost value of over £50 can be provided without any VAT charge arising.

HMRC consider a sample to be when they are provided free of charge and are supplied for a genuine business purpose as an illustrative or typical example of a product.

When the gift or sample rules may not apply

The issue facing marketing or advertising companies is that by increasingly using social media influencers, the supply of goods to the influencer is not considered by HMRC to be either a supply of gifts or samples.

This is as HMRC does not consider the goods are being provided free of charge to the influencers. Rather, it takes the view that the influencers are supplying services in the form of marketing, promotional or advertising services in respect of the products (or the brand). The value of this service is the notional value of the goods being supplied and VAT should be accounted for on this amount by the supplier of the goods.

The counter argument to this position could be that the influencer is being supplied the goods to ‘allow the characteristics and qualities of that product to be assessed’ – part of the definition of a sample. However, in the absence of any formal agreement – which in many cases does not exist between the supplier and the influencer – this can be difficult to evidence or support. HMRC can argue that the influencer has no expertise in assessing the characteristics or qualities of a specific product. In this case, the benefit of the influencer exists in its online or social media reach and exposure and this is the primary benefit of the arrangement to the supplier.

The alternative of formalising the arrangements between the business and the influencer may only strengthen HMRC’s position. Contracts will often detail the services to be provided by each party to the other and make clear that a ‘barter’ transaction is taking place between the two. This can raise complexities around the valuation of the influencer’ supplies and how much VAT the business needs to account for. It can also create issues for the influencer around VAT registration if the value of their services exceeds the VAT registration threshold (£85,000 in 2024).

Other issues

The supply of products to non-UK resident influencers will not be subject to VAT as the goods are sent out of the UK. However, businesses will also need to be aware that they still need to consider the value of the services being received in return as VAT needs to be accounted for on these services under the ‘reverse charge’ adjustment.

Summary

This is an area in which HMRC are increasingly active. Marketing companies which issue goods as gifts or samples should be aware of the basic rules applying to these supplies. Additionally, however, as marketing strategies increasingly include the role of social media influencers these basic rules are becoming less relevant. Instead, marketing and advertising companies are being caught by complicated VAT rules regarding barter and valuation issues.

The valuation of these supplies can be difficult to agree with HMRC and we are able to help clients to understand the rules as they apply to their arrangements and enter into discussions with HMRC on their behalf where required.

If you would like to discuss the rules around gifts or samples or the more complicated issues around barter transactions, please contact Dougie Todd, Partner and Co-head of our VAT team who would be happy to speak to you.