7.4.7 Case 7

A car dealer offers a free DVD to a potential customer who is prepared to do a test drive.

If the purchase price of the DVD is less than € 15, the car dealer can deduct the input VAT and the supply does not result in any output VAT payable. If the purchase price of the DVD is € 15 or more, the car dealer can still deduct the input VAT but the free supply results in a deemed supply subject to 19% VAT, for which the taxable base is the purchase price of the car dealer.

This is dealt with under the business gift rules.1 Where the dealer is entitled to claim input VAT on the purchase of the DVD and the cost of the DVD is more than £ 50, output tax is normally due on the cost value.

The DVD is not supplied for free. The willingness to do a test drive is the consideration for the supply of the DVD. Output VAT is payable by the car dealer on the cost value.2

The DVD will be regarded as a business gift. In principle and to some extent, there are arguments that the VAT could be deductible regardless of the value since the delivery of the DVD in advance is a way to develop contacts with potential clients and improve the business activity as a whole.