VAT CASES - 07.10.2021

Giving away free stock: business activity or not?

The case. The taxpayer (TDS) submitted a repayment return for August 2017, an amount of £17,730, which was queried by HMRC. The officer disallowed input tax claimed on the importation of doors for this and other periods, issuing a total assessment of £80,096.

TDS gave the doors away to connected companies that had “Just Doors” in their title. Some of these companies were VAT registered but most were not. The companies sold them to final customers. HMRC said that TDS had no business activity of buying and selling doors and could not claim input tax. The main reason why TDS was registered for VAT was because it rented out commercial properties.

The law. Input tax can only be claimed on an expense if it relates to a business activity and, more precisely, a taxable business activity. There should a be a direct link between an input and a taxable output.

The decision. TDS argued that input tax could be claimed on the doors but acknowledged that output tax would be due on the value of those given away. If this argument was accepted, HMRC would not be able to reissue a new assessment for output tax rather than input tax errors because it would be time-barred. The judge noted that “TDS bought doors and gave them away” , so there was no business activity to support a claim for input tax. The appeal was dismissed.

Key points.You cannot be “in business” if you give away stock. There must be sales of the goods in question. If the company had sold the doors to the connected parties for a token price, e.g. £5 plus VAT, it would have still been subject to an output tax assessment at open market value under the valuation legislation because the sales were to a connected party that could not claim input tax.