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02 October 2000
We act for a company which supplies office stationery products. The sales are made over the telephone. As an incentive to the employee of a customer to place an order, an item is offered to the employee to the value of approximately 5 per cent of the sales value of the order. The items offered can be anything, including videos, decanters, TVs, etc. They are not stock items and are mostly bought in specifically for the particular order depending on the employee's choice.
We act for a company which supplies office stationery products. The sales are made over the telephone. As an incentive to the employee of a customer to place an order, an item is offered to the employee to the value of approximately 5 per cent of the sales value of the order. The items offered can be anything, including videos, decanters, TVs, etc. They are not stock items and are mostly bought in specifically for the particular order depending on the employee's choice.
The employer who is buying the office supplies may or may not know that his employees are receiving these incentives.
The questions are:
(1) Are these incentives allowable for corporation tax as incentives or disallowable as gifts?
(2) Can the input VAT be reclaimed?
(3) Is there a National Insurance liability arising on benefits to employees?
(4) Would a taxed award scheme need to be operated by the client?
There are many businesses which give free gifts to customers depending on the size of order, but our concern here is because the gift is made to the employee placing the order, not to the customer. Useful comments would be appreciated.
(Query T15,684) Whisky Galore.
Replies:
It is implicit in the query that the customers concerned are unaware that their employees are receiving these incentives. If so, the obligation for reporting their provision falls squarely on 'Whisky Galore's' client. Accordingly, the latter should ensure that all items provided are reported on forms P9D/P11D and that written details of each gift are provided to the recipient no later than 6 July following the end of the tax year in which provided. Naturally the employee will be aware that he or she has received a gift, but not necessarily that it may be taxable!
Extra-statutory Concession A70 may be of assistance where the total cost of all gifts made to a particular employee is less than £150 (inclusive of VAT) during the tax year concerned. If not, a taxed award scheme could be used to avoid giving the recipients of the incentives a nasty tax bill at the end of the year as this would enable 'Whisky Galore's' client to meet the individuals' tax liabilities. National Insurance contributions are unlikely to be a problem as the type of gifts mentioned in the query are likely to benefit from the exclusion for payments in kind under Regulation 19(1)(d) of the Social Security (Contributions) Regulations 1979 (SI 1979 No 591).
Input VAT should be reclaimable on the basis that the gifts are a genuine business expense. The deduction for corporation tax purposes is less certain. If Extra-statutory Concession A70 applies, then what is being provided is a gift made otherwise than in recognition of particular services in the course of the employment. As such, the gift will be disallowed under section 577(8), Taxes Act 1988. However, if the cost of the gift has to be reported on forms P9D/P11D or otherwise dealt with through a taxed award scheme then the expense is part of the client's wages costs and should be allowable in full. — Rokerman.
The client can recover the VAT on the goods which it gives to the staff of customers, but it will not do it any good! The input tax is recoverable because the goods are purchased for business purposes. However, output tax is then due on the cost of each gift if it exceeds £15 or on whatever the value if two items are given to the same person thus amounting to a series of succession to that person. Although Customs have always said that they do not regard annual gifts as amounting to a series or succession, they have just lost a case in which the tribunal said that a course prospectus dispatched to a mailing list once a year was a succession of gifts, if not a series!
The law is in paragraph 5 of Schedule 4 and paragraph 6 of Schedule 6 to the VAT Act 1994. VAT Notice 700/7/94 'Business Promotion Schemes' covers various situations. Paragraph 21 appears to be the relevant one, but note that the £10 value has been increased to £15.
The notice explains that, if extra goods are sold for an inclusive price, the latter can be apportioned but that is usually only relevant where the incentive is of goods usable in the recipient business. Customs say in paragraph 9 of the notice that goods for a trader's personal use must be invoiced separately and that the VAT thereon is not recoverable. Moreover, the inclusive price possibility cannot exist where the offer is to the individual employee.
Thus, the client is going to suffer the VAT on all gifts costing more than £15 and on all of those where more than one item is given to the same individual during the year. Customs could conceivably use the case concerning course prospectuses to revise their policy on annual gifts but, if they do, I suspect that it will only be in those circumstances where a fixed mailing list makes the annual repetition easy to identify.
The client will probably find it easier to not recover the input tax on the purchase invoices rather than to have to account for the output tax as each item is given away. — A St J Price.
'Whisky Galore' should advise his client that he is committing a criminal offence, for which a prison sentence may be imposed, by bribing the employees of his customers by offering them inducements to buy his goods. An employee who accepts gifts from a salesman without the knowledge of his employer is in breach of his duty to his employer and his contract of employment for which he may be dismissed without notice. All gifts and secret profits must be accounted for to the employer.
The courts would presume that the person making the gifts would be seeking to influence the employee to make a purchase which may not be in his employer's interest to acquire. Otherwise why would he be offering the secret inducement?
'Whisky Galore' is under a professional obligation to tell the directors of his client that they are committing a criminal act and that they should seek legal advice on their position. — JPC.
Editorial note. Other readers have pointed out that the items in question cannot be gifts, as they are given in exchange for an order. Accordingly allowance for corporation tax purposes should follow. Additionally, taxed award schemes relate to benefits provided to employees of the person operating the scheme and not to employees of third parties.
Consideration needs to be given as to how these transactions are reported to the Inland Revenue, in view of corporation tax self assessment, self assessment and pay-as-you-earn and benefits procedures.
The employer who is buying the office supplies may or may not know that his employees are receiving these incentives.
The questions are:
(1) Are these incentives allowable for corporation tax as incentives or disallowable as gifts?
(2) Can the input VAT be reclaimed?
(3) Is there a National Insurance liability arising on benefits to employees?
(4) Would a taxed award scheme need to be operated by the client?
There are many businesses which give free gifts to customers depending on the size of order, but our concern here is because the gift is made to the employee placing the order, not to the customer. Useful comments would be appreciated.
(Query T15,684) Whisky Galore.
Replies:
It is implicit in the query that the customers concerned are unaware that their employees are receiving these incentives. If so, the obligation for reporting their provision falls squarely on 'Whisky Galore's' client. Accordingly, the latter should ensure that all items provided are reported on forms P9D/P11D and that written details of each gift are provided to the recipient no later than 6 July following the end of the tax year in which provided. Naturally the employee will be aware that he or she has received a gift, but not necessarily that it may be taxable!
Extra-statutory Concession A70 may be of assistance where the total cost of all gifts made to a particular employee is less than £150 (inclusive of VAT) during the tax year concerned. If not, a taxed award scheme could be used to avoid giving the recipients of the incentives a nasty tax bill at the end of the year as this would enable 'Whisky Galore's' client to meet the individuals' tax liabilities. National Insurance contributions are unlikely to be a problem as the type of gifts mentioned in the query are likely to benefit from the exclusion for payments in kind under Regulation 19(1)(d) of the Social Security (Contributions) Regulations 1979 (SI 1979 No 591).
Input VAT should be reclaimable on the basis that the gifts are a genuine business expense. The deduction for corporation tax purposes is less certain. If Extra-statutory Concession A70 applies, then what is being provided is a gift made otherwise than in recognition of particular services in the course of the employment. As such, the gift will be disallowed under section 577(8), Taxes Act 1988. However, if the cost of the gift has to be reported on forms P9D/P11D or otherwise dealt with through a taxed award scheme then the expense is part of the client's wages costs and should be allowable in full. — Rokerman.
The client can recover the VAT on the goods which it gives to the staff of customers, but it will not do it any good! The input tax is recoverable because the goods are purchased for business purposes. However, output tax is then due on the cost of each gift if it exceeds £15 or on whatever the value if two items are given to the same person thus amounting to a series of succession to that person. Although Customs have always said that they do not regard annual gifts as amounting to a series or succession, they have just lost a case in which the tribunal said that a course prospectus dispatched to a mailing list once a year was a succession of gifts, if not a series!
The law is in paragraph 5 of Schedule 4 and paragraph 6 of Schedule 6 to the VAT Act 1994. VAT Notice 700/7/94 'Business Promotion Schemes' covers various situations. Paragraph 21 appears to be the relevant one, but note that the £10 value has been increased to £15.
The notice explains that, if extra goods are sold for an inclusive price, the latter can be apportioned but that is usually only relevant where the incentive is of goods usable in the recipient business. Customs say in paragraph 9 of the notice that goods for a trader's personal use must be invoiced separately and that the VAT thereon is not recoverable. Moreover, the inclusive price possibility cannot exist where the offer is to the individual employee.
Thus, the client is going to suffer the VAT on all gifts costing more than £15 and on all of those where more than one item is given to the same individual during the year. Customs could conceivably use the case concerning course prospectuses to revise their policy on annual gifts but, if they do, I suspect that it will only be in those circumstances where a fixed mailing list makes the annual repetition easy to identify.
The client will probably find it easier to not recover the input tax on the purchase invoices rather than to have to account for the output tax as each item is given away. — A St J Price.
'Whisky Galore' should advise his client that he is committing a criminal offence, for which a prison sentence may be imposed, by bribing the employees of his customers by offering them inducements to buy his goods. An employee who accepts gifts from a salesman without the knowledge of his employer is in breach of his duty to his employer and his contract of employment for which he may be dismissed without notice. All gifts and secret profits must be accounted for to the employer.
The courts would presume that the person making the gifts would be seeking to influence the employee to make a purchase which may not be in his employer's interest to acquire. Otherwise why would he be offering the secret inducement?
'Whisky Galore' is under a professional obligation to tell the directors of his client that they are committing a criminal act and that they should seek legal advice on their position. — JPC.
Editorial note. Other readers have pointed out that the items in question cannot be gifts, as they are given in exchange for an order. Accordingly allowance for corporation tax purposes should follow. Additionally, taxed award schemes relate to benefits provided to employees of the person operating the scheme and not to employees of third parties.
Consideration needs to be given as to how these transactions are reported to the Inland Revenue, in view of corporation tax self assessment, self assessment and pay-as-you-earn and benefits procedures.
