Thanks to an appeal judgement in Luxembourg, it looks as if UK marketers have for years been account for VAT on some types of promotional sample and gift when they didnt need to. Refund applicants please form an orderly queue, report Erika Jupe and Tom Pygall.
Who: EMI Group Ltd v HMRC (Case C-581/08)
Where: The Court of Justice of the European Union (formerly the European Court of Justice)
When: October 2010
Law stated as at: 29 October 2010
The recent judgment of the Court of Justice of the European Union ("CJEU") in the case of EMI Group Ltd v HMRC concerns the UK VAT treatment of sample goods and business gifts given free of charge.
The point at issue was whether EMI did in fact have to account for VAT on free copies of music recordings distributed by it for marketing purposes.
EMI's practice in accounting for VAT in this regard was fully in line with UK law, but the CJEU has ruled in favour of EMI and held that VAT should not necessarily be accounted for on sample goods and business gifts (although restrictions can be applied to ensure the exemption is not open to abuse).
Definition of "sample" clarified
The CJEU has also clarified the definition of the term ‘sample’ to mean a specimen of a product that is intended to promote the sale of that product. Importantly, the CJEU has also recognised that the sample may be the same as the finished product and it may be necessary for a number of samples to be distributed to the same recipient.
For example in EMI’s case, music promoters who received multiple sample CDs from EMI distributed these to their contacts in the music industry and the media. The CJEU suggested that to avoid the risk of samples getting into the supply chain, Member States may require those distributing samples to take precautions such as mandatory labelling.
Multiple gifts treatment also not necessarily correct
The CJEU also held that Member States may fix a ceiling for the value of small value gifts and so based on this, the UK’s annual limit of £50 for gifts is compatible with EU VAT law. However, national legislation must not take the default position that multiple gifts being given to different individuals with the same employer should be regarded as all made to the employer and not the employees. The CJEU held that the UK's presumption that all such gifts were made to the employer was not sustainable and each case must turn on its own facts.
Why this matters: This is an important case that will affect any business which distributes or wishes to distribute ‘samples’ or ‘gifts of small value’.
All taxpayers who have previously accounted for VAT in relation to samples based on a UK requirement which has now been pronounced to be incompatible with EU law should take advice as they may be able to change their approach going forward and also obtain a refund from HMRC.
Erika Jupe and Tom Pygall