VAT Supplies for No Consideration: What You Need to Know

Value Added Tax, commonly known as VAT, is a part of everyday business transactions. However, not all supplies are straightforward, and the landscape gets complicated when dealing with VAT supplies for no consideration. This concept seems counter-intuitive because, in most cases, ‘supply’ generally involves a transaction for some kind of ‘consideration,’ whether in the form of money or in-kind.

But did you know that UK VAT law includes provisions for transactions made without consideration? These are considered supplies for VAT purposes. In this article, we’ll delve into these less talked about, yet critical areas of VAT compliance, guided by the information from HM Revenue and Customs (HMRC).

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What is Consideration?

Although the VAT Act 1994 doesn’t provide a legal definition for ‘consideration,’ HMRC refers to a definition from the EC 2nd VAT Directive Annex A13. It defines “consideration” as everything received in return for the supply of goods or services, including incidental expenses like packing, transport, and insurance. However, it should be noted that this directive is no longer in force after Brexit, but the conceptual framework remains.

Supplies for No Consideration: The Exceptions

1. Permanent Transfer/Disposal of Business Assets

If a business permanently transfers or disposes of its assets, the transaction is treated as a supply for VAT purposes. For example, if you give away a business laptop to an employee, this counts as a supply and is VAT applicable.

2. Temporary Application of Business Assets to Non-Business Use

When a business uses its assets for non-business activities temporarily, it constitutes a supply for VAT purposes. Suppose your business owns a vehicle primarily used for business tasks but occasionally gets used for private purposes. In that case, that non-business usage is subject to VAT.

3. Self-Supply of Goods or Services

When a business uses its own resources to generate goods or services, this ‘self-supply’ is considered a supply for VAT purposes. For instance, a construction company building its own office must account for VAT on the self-supplied labor and materials.

4. Retention of Business Assets After VAT Deregistration

If a business retains its assets after deregistering for VAT, this also constitutes a supply for VAT purposes. VAT will be calculated based on the market value of the assets at the time of deregistration.

5. Non-Business Use of Services with Recovered Input Tax

If services are put to private or other non-business use where input tax had previously been recovered, it is deemed a supply for VAT purposes.

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