Term
Gratuitous supply
Supplying goods or services for nothing in return, such as a gift, a sample or private use of company assets. For VAT it is often treated as a supply for consideration if input tax was deducted on the purchase.
Updated
What it means
A gratuitous supply is the provision of goods or services for which the supplier receives nothing. Typical examples are a gift to a business partner, a sample for a customer, goods given free to an employee, or private use of company assets by a director or sole trader.
For VAT the key question is whether the company deducted input tax on the purchase. If it did, handing the goods over free of charge is usually treated as a supply for consideration and output tax is due on it. The logic is simple: goods that end up in private consumption should not escape tax.
The law has exceptions. No tax is due on promotional items up to a statutory value or on samples. Services, such as private use of a company car, are handled differently, according to the extent of private use and how the deduction was claimed.
How it works in practice
At year end the most frequent question is Christmas gifts. We distinguish branded gifts within the limit, which are promotional items, from more expensive gifts such as wine or electronics. For the latter either no deduction is claimed on purchase or output tax is paid when they are handed over.
For income tax a gratuitous supply is a separate question. A gift to a business partner is usually a non-deductible expense, and hospitality falls under entertainment costs. For branded promotional items, deductibility depends on their promotional character.
If a company gives something free to an employee, the employee usually receives a benefit in kind that is subject to tax and contributions. So for every such supply we check both sides at once: VAT and income tax for the company, and taxation for the recipient.
What to watch out for
A common mistake is thinking a gift has no tax consequences because nothing is paid for it. Tax auditors look precisely at items such as gift hampers, alcohol or electronics where a deduction was claimed but VAT on the handover is missing.
Be careful too with sales at a token price, such as a car sold to the director for one euro. Even if that is not a gratuitous supply, between related parties the taxable amount is adjusted to the usual market price and the company pays the tax on the difference.
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