Drinks firms could reap VAT bonus after ECJ ruling

Producers of wines, spirits and other drinks who give away promotional samples are set to benefit following a landmark ruling in a case between Her Majesty’s Revenue and Customs and the EMI Group.

Any business which produces goods that it gives away as free samples for promotional purposes now stands to gain from a VAT refund.

The forthcoming change in VAT law is expected to be worth thousands or even millions of pounds for some businesses in the wines, spirits and drinks sectors. However, the industry has been warned that with each day of delay, the value of the refund will fall.
 
“Many producers make goods that they routinely give to clients or potential customers as free samples, perhaps to promote a new product or revitalise an existing one,” said Hannah Dobson, VAT director at Smith & Williamson, the accountancy and financial services group.

“These organisations may have been paying UK VAT for years on the value of such ‘freebies’, and this treatment has now been determined as incorrect.”
 
“It’s important to note that retrospective VAT claims are capped at four years, so businesses should lodge their VAT claim as soon as possible to maximise the pay-back,” warned Dobson.
 
This opportunity to recoup tax follows a landmark judgment on 30 September by the European Court of Justice (ECJ) in favour of EMI’s challenge to the UK VAT rules.

EMI is a business which gives away a number of CD samples to promote its music artists. It had accounted for VAT on such samples, but subsequently formed the opinion that UK law was incompatible with EU law, and as such any samples given away should be VAT-free.

The ECJ agreed with EMI’s opinion, but it has left the door open for the UK to make certain requirements of samples before they can avoid being subject to VAT.

These requirements could include measures to prevent their re-sale, for example, by stamping the item with ‘sample or ‘not for resale’, as most businesses that give away samples do anyway.
 
“In my view, the ECJ’s interpretation of VAT law is completely logical,” said Dobson.

“Wine, spirits and drink manufacturers up and down the country have regularly given away promotional products.

“Although no money is received for such promotional goods, the donor business has previously had to pay VAT on the value of the items, putting them heavily out of pocket.”
 
The first promotional sample given to a particular individual or an employee within a business has been exempt from VAT for some time. However, subsequent samples going to the same individual or business have given rise to a VAT charge to be paid by the donor. This will now change as a result of the ECJ ruling.
 
As part of this case, the ECJ also opined on UK rules in relation to gifts. Currently, the UK requires VAT to be accounted for on business gifts exceeding £50 in value, including where gifts are given to the same person and the cumulative value exceeds £50.  
 
“Whilst ECJ has confirmed this treatment to be correct, it went on to determine that where business gifts are given to individuals employed by the same organisation, the employer is not the recipient for the purpose of the ‘cumulative value’ test,” explained Dobson.

“In other words, if you have given away a number of business gifts to employees of the same organisation and been required to account for VAT on them, you should urgently consider seeking further advice to confirm whether a refund of such VAT, retrospectively for a period of up to 4 years, is available.”

Alan Lodge, 06.10.2010