What is the VAT treatment of free samples?

What is a sample?

Many customers like to test or examine goods before they buy them. This is the key feature of a sample, i.e. it is not intended to be sold but will encourage sales of that particular line. No VAT is payable on goods you supply as genuine free samples.

Example. A finished item taken from a discontinued line would not qualify as a sample. This is because it cannot promote future sales because it is no longer being manufactured. In such cases, you must declare VAT to HMRC on the market value of the item in question (at the time you give it to your customer) because it is not a sample.

The market value for VAT purposes will take account of depreciation and obsolescence, so you might decide that it has a nil value, with no output tax liability. If there is a value, issue a VAT-only invoice to your customer if they are VAT registered and can claim input tax.

Quantity is relevant

A free sample is intended to be a “tester” for your customers, with the aim of promoting future sales of your goods. If you give away too much stock, HMRC could apply the business gift rules and assess output tax based on the market value of the goods.

Example. If a restaurant waiter pours a small glass of wine to a customer as a taster, this would qualify as a free sample but if a regular customer is given a free bottle of wine, this would be a gift rather than a sample.

A common sense approach is needed and HMRC is unlikely to be too concerned about low-value stock items given away to your customers as samples or testers.

What about sale or return?

In the case of samples, your customer takes ownership of the goods as soon as they receive them from you. But for goods held on a sale or return basis, you will retain ownership until a buyer is found. VAT will only be charged when your customer adopts them.

An important rule of a sale or return agreement is that your customer must have the right to return them to you, either at any time or on a date or dates specified in your agreement.

If your customer does not have a right of return, this usually means they have taken ownership of the goods upon delivery, so normal tax point rules will apply, i.e. VAT is due at the time you deliver them or the invoice or payment date if that is within 14 days of the delivery date.

Tax points

You must account for output tax on any goods that you have supplied on a sale or return basis if they remain unsold after twelve months and are still held by your customer. If a sale or return agreement is for less than twelve months, output tax will be due at the end of the quoted time period.

It makes sense to specify the maximum twelve-month period in your agreement.