VAT ON DISCOUNTS: Special rules apply to ‘supplies‘ when charging sales tax on barters, part-exchanges, and set-offs.
Those who are running a VAT business must still account for the tax on goods that they give away, offset, or exchange.
In some cases, the business might also acquire goods or services through similar types of trading transactions.
The VAT rules on discounts and free goods relate most to ‘tax points’. For business accounting purposes a tax point is the actual ‘time of supply’.
In simple terms a tax point occurs any time a business VAT transaction takes place. That is important if you make any barters, part-exchanges, or contra deals.
There may be times when the business receives goods from customers in return for supplying them with goods or services. The VAT rules for these types of ‘exchange’ will depend on the nature of the transaction.
The tables below show how to use the right tax point and ensure each transaction goes on the correct VAT Return.
HMRC VAT on Discounts
| Type of Business Transaction or Offer | Charging Value Added Tax Rules |
|---|---|
| Discounts | VAT gets charged on the discounted price (not the full ‘pre discount’ price) |
| Gifts | VAT gets charged on the full value of the gift (some exceptions apply) |
| Multi Buys | VAT gets charged on the combined price if all items have the same VAT rate. VAT gets ‘apportioned’ as mixed-rate goods if not. |
| Money-off coupons, vouchers, etc. | No VAT will be due if given away free at the time of a purchase. VAT is due on the price charged if not. |
| Face value vouchers used for more than one type of goods or service | No VAT is due if sold at (or below) their monetary value |
| Link-save offers (e.g. buy one get one free or discounted) | VAT gets apportioned as mixed-rate goods (check rules on multiple supplies) |
| Redeemed face value vouchers | VAT gets charged on the full value of the transaction |
| Redeemed face value vouchers sold at a discount | VAT gets charged on the discounted value of the transaction |
VAT Exemptions for Gifts (link-save offers)
The UK VAT rates do not apply on gifts given to the same person. In this case no Value Added Tax is due if the total value is less than £50 in any 12 month period.
But, this is a time to charge VAT on invoices for the combined value of link-save items where the incentive product:
- Has a resale value less than £1.
- Has a sale value less than £5.
- Cost you less than 20% of the total of other items in the same offer.
- Does not get sold at a separate price from the main product.
HMRC VAT on Free Goods and Services
As a rule, you will not have to pay VAT on most free samples providing they meet certain conditions.
| Type of Supplies | No VAT Due if it Meets these Specific Conditions |
|---|---|
| Free Samples | Used for the purpose of marketing and given in a quantity that lets potential customers test the product |
| Free Loans of Business Assets | The cost of hiring the asset gets included in something else that you sell to the customer |
| Free Gifts | The total cost of all gifts to the same person in a 12 month period is less than £50 |
| Free Services | You do not receive any payment or goods or services in return |