You may consider advertising and promotion etc to be business costs and therefore you can reclaim VAT on these costs. However, HMRC may consider this to be a gift, and so want output VAT on those gifts. Therefore, be careful and don't get caught out by HMRC's Business Gift rules.
For VAT purposes, an item is a gift where the donor is not obliged to give it and the recipient is not obliged to do or give anything in return.
Business gifts can cover a whole host of items, such as:
Samples
Items given to trade customers
Goods given to customers as a ‘thank you’
Flowers
Golfing umbrellas
Promotional diaries and calendars
Wine and chocolates.
VAT registered businesses reclaim input VAT on their expenses. This includes the purchase of goods and services
VAT registered businesses pay output VAT on their sales, of goods and services. Even though gifts are not sold, a business may need to pay output VAT on the value of those gifts.
VAT can be reclaimed on purchases of business gifts and output VAT does not need to be paid over to HMRC on those gifts, as long as the total value of all gifts to the same person in any given 12-month period does not exceed £50 pa (excluding VAT).
If the £50 annual limit is exceeded, and input tax is reclaimed on the initial purchase, VAT must be paid over on your VAT return on the value of the gift i.e. probably on its original cost.
Where the cost to the business of gifts made to the same person in a twelve-month period exceeds £50, output tax is payable on the total value of all such gifts. (*) Person is not restricted to a natural living person. It would include a business, company, organisation or charity.
Rather than reclaiming VAT on gifts and then repaying it as output VAT, especially where the gift(s) costs over £50 in a year to a single person, a business may decide not to reclaim the initial input VAT on the purchase of the goods or services gifted. Accordingly, it would not need to pay output VAT on the gift(s).
If you provide a service to a customer free of charge there is usually no supply, so no output VAT is due. However, if you bought in and paid for the supplied service, any VAT incurred is Input VAT and therefore may be reclaimed subject to the normal rules. In this case, Output VAT is payable on the services that you gift free of charge.
Goods that a business gives to a charity, who has promised that all the profits on their subsequent sale, may be zero-rated, provided the charity to whom you have donated the goods sells them. It is most probable that the charity would pay VAT on their sale price to HMRC. When a business zero rates their gifts, output VAT is payable at 0% rather than 20%. The effect of this is that no output VAT is payable on the value of the gifts.
An example
Good Employer Limited makes small business gifts to its employees during the year. It including a posh box of chocolates at Easter (costing £15), flowers on their birthday (costing £20) and a Christmas hamper (costing £40). Whilst all of the gifts individually cost less than £50, the total cost of all gifts to each employee exceed £50. The employer must therefore pay output VAT on the total costs to H M Revenue & Customs. Alternatively, Good Employer Limited could not claim the initial input VAT on their original purchase.
The business gift rules also apply to:
Long service awards and retirement gifts
Staff gifts
Goods or services given as rewards
Prizes for competitions
Gift to a relative or friend
If the goods purchased by the business were not to be used for business purposes, e.g. for private use, they are not business assets and any VAT incurred on their purchase is not reclaimable as input tax in the first place. If input tax has been claimed on goods that are diverted to private use and given away, output tax must be accounted for to the same amount and by the same business that claimed the input tax.
Gift vouchers have specific VAT rules and are treated differently to other gifts.
Where a business organises an awards ceremony at which prizes or trophies are awarded and the attendees must pay an admission fee, then the giving of the prize or trophy is not a deemed supply and accordingly no output VAT is payable on the value of the gifts. This is because part of the admission fee is regarded as being payment for the trophies and VAT will have been accounted for on tickets and entrance charges.
The above is a just a summary of the main rules. For more information you should review Business promotions (VAT Notice 700/7).