My limited company client’s normal business activity is the design, build and installation of seasonal in-store displays for retailers. They are unable to work in this field because of the Covid-19 restrictions. They are considering using their staff and resources, with support from crowd funding, to manufacture visors which would be gifted to the NHS. The visors will show the company logo. Will VAT need to be accounted for on the crowd-funded income? Will there be any input tax restriction in relation to the costs of producing the gifted items? The company has also applied for a Covid-19 business support grant; how should they treat this income if they get it?
VAT Act 1994. Section 4, is the legislation which provides the points to be consider in deciding whether a transaction falls within the scope of VAT,
“4(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
4(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”
Section 5 goes on to provide that for there to be a supply of goods or services, there needs to be “consideration”. This can be in the form of money or indeed barter where the customer itself supplies goods or services to the supplier as payment.
In this case my client has two forms of income to consider: the crowdfunding and the Covid-19 Grant. In both instances my client is receiving income but in neither case is there a supply of goods or services to the person making the payment; neither the grant nor the crowdfunding income is within the scope of VAT. Please see last week’s VQOTW for more on the receipt of grants and when they may be consideration for a supply.
The visors produced will be donated to the NHS. It is possible to see the costs incurred in producing the visors in 2 different ways: –
The first is that the costs incurred have no business purpose. Strictly speaking entitlement to VAT recovery depends on the application of that cost to a taxable business purpose; thus, non-business activity could be seen to restrict recovery of input tax on both the directly related costs, and a proportion of overheads.
The second, and arguably more reasonable, way to see this is that the equipment is being given away as business gifts. The business logo is being shown on the visor, and while not the primary rider, this will show the business in a good light. Under business gift rules, input tax is recoverable in full, and if the total cost to the supplier of all the gifts to one person does not exceed £50 in any 12-month period there is no requirement to account for output tax. Output tax on the cost value of the gifts will be required to be accounted for if the cost of gifts to one person does exceed £50 in any 12-month period. See VAT Notice 700/7: Business Promotions, section 2 for full details. However, providing the NHS with a tax certificate (similar to a VAT invoice) may enable that VAT to be recovered by the NHS (700/7 paragraph 2.4).
HMRC have not, to date , provided any guidance on PPE products being given away in such circumstances, but it seems likely that they will take a pragmatic view of the recovery of related input tax.
If the NHS was receiving donated funds, and then purchasing the items using those funds, the supply of the goods would be zero rated under Schedule 8, Group 15, Item 5. Similarly, if my client personally raised the funds and then purchased the goods from the company to donate to the NHS the sale by the company to your client would be zero rated. Notice 701/6 provides detail on the supply of equipment for medical use and paid for by a charity or using donated funds.