Landmark ECJ ruling on VAT for promotional samples

The European Court of Justice (ECJ) has ruled that the UK VAT rules regarding samples are too strict. The case was brought by EMI, which argued that the UK legislation which required it to account for VAT on the majority of promotional CDs given to “pluggers” was not in accordance with EU law. Following the Opinion given by its Advocate General, the ECJ has now ruled in favour of the taxpayer regarding the provision of samples.

Jonathan Legg, Tax Partner at Mishcon de Reya, commented:

"Those in the music industry – and indeed in other industries – have been eagerly awaiting this judgement. The European Court has unequivocally stated that the UK rules subjecting all but the first of a batch of identical samples to VAT are unlawful. 

Companies in a similar position to EMI should therefore consider putting in VAT reclaims now for overpaid VAT on the provision of samples – it is possible to go back and make reclaims for the past four years. The case will also be of interest to those outside the music industry – basically any business which has previously been accounting for VAT on the supply of samples should consider whether to make a VAT reclaim.”

Background

The case was brought by EMI, whose business model includes distributing free copies of music (eg promotional CDs) to various “pluggers” in order to promote newly released music. EMI contends that this activity is necessary for its business, enabling it to assess the commercial quality of a recording as well as its viability in the market place.

The current UK VAT rules currently provide that where a person is given a number of identical samples, VAT must be accounted for on all the samples apart from the first one.

In EMI’s case, HM Revenue & Customs therefore argued that VAT had to be accounted for on CDs given to the various “pluggers”. EMI argued that the UK rules are not in accordance with EU law.

The judgment

The ECJ has ruled that the UK rules regarding samples are not in accordance with EU law.  That is, the UK legislation subjecting all but the first of a number of samples to VAT was unlawful. The correct approach is to consider whether the goods are truly samples – and the court set out the principles which are to be followed in carrying out this exercise.

The case also concerned the UK rules about the provision of “business gifts”, which currently provide that VAT must be accounted for if the number of gifts to a particular person in any given year exceed £50. On this point, the court held that the UK rules were in accordance with EU law.

What should I do now?

If you have accounted for VAT on the provision of samples, then you should consider whether to submit a claim with HMRC.   Given the four year cap on VAT repayments, it is obviously crucial that any claim is made as soon as possible. We can help you through this process, including assisting on the calculation of any overpaid tax through to submitting any claims.

Please speak to your usual contact at Mishcon de Reya or speak to Jonathan Legg on 020 7440 7092 for further assistance.