Your business buys and sells goods and it’s company policy to give some free items to staff. You also personally take some stock for yourself and your family. You amend your stock records for these but what should you do with the VAT? Kenny Logan from our Edinburgh office advises below.
There may be occasions when you give free stock to your staff that is surplus to your business requirements. For example, the items are obsolete, damaged or out of date and cannot be sold to your customers. You might argue that these items would have been binned if they had not been given away, but does this avoid a VAT problem?
The legislation states that there is a deemed supply taking place “where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as to no longer form part of those assets.”
In other words, they are given away freely, but is this supply subject to VAT?
If you give away goods to any person for business purposes (including staff, suppliers, customers, and subcontractors) then no VAT is payable if the value of the goods given in any rolling 12-month period is less than £50 excluding VAT.
However, if your business has low staff turnover, and you give regular gifts, then output tax will almost certainly be payable on all gifts because the £50 threshold will be exceeded.
You can claim input tax on the purchase of the goods because you are giving them away for a business purpose, i.e., to reward staff, customers, suppliers and so on. It is output tax where you will have a potential problem.
To account for VAT, you could make a journal entry into your ledger, perhaps at the end of each month to reflect the free stock you have given away and where VAT is due.
There will be no output tax to pay if the stock you give away is zero-rated, e.g. children’s clothing. You can also reduce the value of the gift to less than cost price to reflect any damage, obsolescence, wear and tear and so forth.
You and your family
If you are a sole trader, partnership, or a member of a limited liability partnership, you should reduce the input tax you claim for any goods that you personally take out of the business. This is because the goods are classed as being for private/non-business purposes. If you have already claimed input tax in a previous period because you did not know that you would take them out at the time. You must declare output tax on the next return after you take them out.
The same rule about non-business use applies to stock given to your family, friends and relatives, meaning that input tax cannot be claimed.
If the annual value of gifts given to any member of staff exceeds £50, you must account for output tax based on the original cost price. For stock given to you and your family, you cannot claim input tax on the purchase of the goods because it is a non-business expense.
Our expert team are happy to discuss this and other related VAT queries you many have, please contact us.