When unused stock, material and equipment is out of date and no longer needed you offer it to you workers for free. You’ve never worried about VAT as the items given are worthless. Might this land you in trouble with HMRC?

VAT – a retrospective

Your new bookkeeper has carried out a review of past records and is concerned about the transfer of company-owned equipment to subcontractors. She thought the company ought to be accounting for VAT on an amount equal to the cost of the equipment. This would mean going back over the previous four years’ records and possibly coughing up extra VAT to HMRC.

Which value?

Naturally our subscriber wasn’t pleased at the prospect, especially as in his mind the equipment he transferred had no value to his business, although on consideration he accepted that it might not be worthless to the subcontractors involved. So should the VAT liability be based on: (1) the original cost; (2) the value to his business (zero); or (3) the value to the subcontractor (unknown)?

Value of supplies

The answer is the third option, i.e. the value to the subcontractor. More precisely, the amount someone would expect to pay for the equipment in its condition at the time it was transferred to them. However, there is an exception to this rule. Where the recipient of the item gives “consideration” for it, the VAT is based on the amount of consideration.

What is consideration?

Consideration can be anything with value. Obviously cash or something that can be used instead of cash, e.g. a voucher, has a monetary value. In the case of vouchers or tokens it’s usually the face value. However, an exchange of goods or services is also consideration for VAT purposes, e.g. if the subcontractor agreed to do some extra work for our subscriber. HMRC’s view is that the value of goods or services given as consideration is that placed on it by the recipient.

Tip. Where cash etc. alone is given as consideration VAT only has to be accounted for on that amount. If in doubt over the value of an item make a modest charge for it. This avoids the tricky problem of valuation. There’s also an alternative.

Low value items

As long as our subscriber is comfortable that the value of the equipment he’s giving away, added to the value of all other items given to the same subcontractor in the preceding twelve months, is no more than £50 (excl. VAT), it can be treated as a VAT-free business gift.

To review or not

Our subscriber had to decide whether to review earlier years’ records. He believed that none of the equipment had a sale/purchase value of more than £30 at most and the chances of more than one item being given to the same subcontractor within a twelve-month period was negligible. He is therefore regarding the items as business gifts which means he won’t have to worry about VAT. Naturally he has asked his new bookkeeper to keep an eye out in future so he isn’t caught out.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.