Giving away business goods on which you reclaimed VAT is normally a supply, so output tax is due on their cost. There are exceptions: business gifts costing no more than £50 in total to the same person in any 12 month period, genuine samples, and, from 1 April 2026, qualifying donations of low value items to charity. Free services are usually not a supply at all.

Why does giving something away create VAT?

Paragraph 5(1) of Schedule 4 to the VAT Act 1994 says that when goods forming part of the assets of a business are transferred or disposed of so that they no longer form part of those assets, that is a supply of goods, whether or not anything is paid. The point is to stop a business recovering input tax on goods and then passing them on tax free. Paragraph 5(5) limits the charge to cases where the business, or a predecessor, was entitled to input tax credit on the goods.

So if you bought the goods without being able to reclaim VAT, giving them away creates no output tax. If you could reclaim it, output tax is due even if you forgot to claim, as HMRC notes in VATSC03310, because the input tax could still be claimed later.

How does the £50 business gift limit work?

Paragraph 5(2)(a) takes a business gift out of the charge if its cost, together with the cost of any other business gifts made to the same person in the same year, was not more than £50. Paragraph 5(2ZA) defines the terms.

  • A business gift is a gift of goods made in the course or furtherance of the business.
  • Cost means the cost to the donor of acquiring or producing the goods. VAT Notice 700/7 paragraph 2.3 confirms the £50 is measured excluding VAT.
  • The same year means any period of 12 months that includes the day the gift is made, so you can test against any rolling 12 months that contains the gift.

If the total for one person goes over £50 in the period, Notice 700/7 says output tax is normally due on the total cost of all the gifts to that person, not just the excess. Since 1 October 2003 there has been no separate series or succession rule, only the annual monetary limit (VATSC03323). Following the EMI case (C-581/08), HMRC accepts that gifts to different individuals who share an employer are not treated as gifts to one person (VATSC03350).

The limit can be changed by Treasury order under paragraph 5(7), but not below £10.

How does the limit work for Christmas client gifts?

Illustration only. A VAT registered firm buys bottles of wine for £35 each plus VAT and reclaims the input tax. It gives one to each of 40 clients in December. In the previous June it gave one of those clients, Ms A, a branded jacket that cost £25. For 39 clients the total in any 12 month period is £35, so no output tax arises. For Ms A, the total cost in the 12 months including December is £60, which exceeds £50, so output tax is due on £60 at the standard rate: £12. The deemed supply is valued under Schedule 6 paragraph 6 at what it would cost to buy identical goods at the time of the gift, so if prices had risen, the value would follow.

VAT recovery is a separate question from income tax and Corporation Tax deductibility, which have their own £50 test in section 47 ITTOIA 2005 and exclude food, drink, tobacco and vouchers. That is covered in business entertainment and client gifts.

What counts as a sample?

Paragraph 5(2)(b) excludes the provision of a sample of goods free of charge. HMRC applies the definition from the EMI judgment: a specimen of a product intended to promote its sales, which allows its characteristics and qualities to be assessed without resulting in final consumption, other than where final consumption is inherent in the promotion. The CJEU held that the UK’s old rule allowing only the first sample was incompatible with EU law, and that samples can go to people who influence sales, such as reviewers or testers, not only to customers (VATSC03350).

HMRC gives two examples of items that are not samples. A finished item from a discontinued line cannot promote sales of a product that is no longer available. A quantity greater than needed to assess the product is not a sample: a taster glass of wine in a restaurant qualifies, but a bottle given to a regular customer does not, and a wine importer sending a case of 12 to a prospective buyer goes beyond a sample. Samples passed to the public through a retailer are covered provided neither party charges, the samples remain yours until handed over, and unused stock is returned or destroyed (VAT Notice 700 paragraph 8.8.2).

What is the new rule for donations to charity?

Finance Act 2026 section 83 added paragraph 5(2)(c) and paragraph 5A to Schedule 4 for donations made on or after 1 April 2026. A qualifying charitable donation is not a supply. It is a donation of an item to a charity, for the charity’s non business use or for onward donation, where the item’s value does not exceed £200 for household appliances, furniture, flooring, computers, mobile phones and tablets, and £100 for anything else. Value is the lower of the donor’s cost and the current cost of an identical or similar item, excluding VAT. Tobacco, vaping products and dutiable alcohol are excluded, as are donations that would be zero rated anyway.

That zero rating still exists separately: Notice 700/7 paragraph 2.7 says goods given to a charity may be zero rated where the charity sells, lets or exports them. For the direct tax side, see company donations to charity.

When is a free item not a gift at all?

A gift must be a definite, voluntary and unconditional transfer with nothing in return. If the recipient has to do something, such as attend a sales presentation, buy something or bring customers, the item is supplied for non monetary consideration and VAT is due on its value, not under the gift rules. HMRC cites Mitrolone Ltd, where gifts were offered for attending a presentation, and Granada Group plc, where free meals were given to coach drivers who brought passengers (VATSC03324). Rewards to self employed salespeople for hitting targets are also supplies for consideration, valued at the full monetary value of the reward. Free items tied to a purchase are covered in promotional offers and VAT.

What about free services, staff gifts and stock written off?

  • A free service is usually not a supply. But if you bought the service in and reclaimed the VAT, Notice 700/7 paragraph 3.1 says output tax is due when you pass it on free.
  • Gifts to staff such as long service awards, retirement gifts and safety scheme prizes are business gifts and fall within the £50 rule. Goods taken for personal use or given to family are not business gifts, and any input tax claimed must be matched by output tax (Notice 700/7 paragraph 2.5).
  • Point of sale material given to retailers, such as display stands and posters, carries no VAT (paragraph 2.12).
  • Goods withdrawn from sale at the end of their economic life, for example past their use by date or damaged, and donated or destroyed, are not treated as a supply (paragraph 2.14).

Can the recipient reclaim VAT on a gift?

A business that receives a taxable gift and uses it in its business can reclaim the VAT if it holds suitable evidence. You cannot issue a VAT invoice for a gift, but Notice 700/7 paragraph 2.4 allows you to use your normal documents with a tax certificate stating that no payment is necessary and showing the output tax accounted for.

What mistakes come up most often?

  • Testing the £50 limit gift by gift instead of cumulatively per recipient over 12 months.
  • Charging output tax only on the excess over £50, instead of on the full cost.
  • Treating conditional “free gifts” as business gifts.
  • Forgetting that services bought in and passed on free create output tax.
  • Applying the charity relief to donations made before 1 April 2026, or to excluded items such as alcohol.
  • Assuming that because a gift is VAT free it is also deductible for direct tax. The rules are different; see also VAT on business entertainment.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.