7.4.4 Case 4

A hospital purchases medicines from a wholesaler. The wholesaler offers the hospital a printer for free when the purchases of the hospital exceed a preagreed quantity. The hospital takes the printer into use in its offices.

The wholesaler is not allowed to deduct the input VAT on the purchase of the printer, since the hospital would not be allowed to deduct the input VAT if it had purchased the printer itself. This is under an old Decree (Besluit uitsluiting aftrek omzetbelasting 1968), which can still be applied under the transitional arrangement of art. 176 VAT-directive.

If this old Decree were not applicable, it is not certain whether a deemed supply would take place since it is questionable whether the wholesaler uses the printer ‘for purposes other than those of his business’. If, however, a deemed supply takes place just because the printer is disposed of free of charge, the result would not be ‘in conformity with Elida Gibbs’. As the hospital cannot deduct the VAT on the purchase of the medicines, eventually VAT would be payable on a larger amount than the hospital actually paid to the wholesaler. This can be avoided by qualifying the gift as a rebate in kind, which allows the wholesaler a reduction on the VAT paid on the original selling price of the medicines.

This would be regarded by HMRC as the provision of a business gift. The wholesaler would therefore in principle be entitled to input tax deduction on the purchase of the printer but would have to account for output tax on the provision of the business gift if the gift was more than £50 or otherwise triggered a liability to account for output tax under the UK business gift rules. There are some issues as to whether this is truly a gift if the wholesaler is under a contractual obligation to provide the printer – such that the consideration received covers both the provision of the medicines and the provision of the printer.

There is no clear solution yet. There is a public ruling dating from 1984 according to which a rebate in kind does not alter the tax base of the previous supplies. This was long before the ECJ’s decisions in Kuwait Petrol, Elida Gibbs and Commission vs. Germany. According to the Kuwait Petrol judgment, the consideration paid for the medicines may include a conditional payment for the goods subsequently provided (requalification of consideration, this is, as such, recognised, see A 25 (5) n° 2 last sentence UStR). There is, however, no guidance yet on such ‘split payments’.

If there is no such agreement to requalify the payments, the tax base for the medicines does not alter, and the supply of the printer is a supply without consideration, a deemed supply takes place which triggers VAT.

The printer will be regarded as a business gift and therefore the deduction of the input VAT is not allowed since the value of the printer will exceed € 60, VAT included.