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HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
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Special valuation provisions: treatment of gifts, prizes and reward goods

Many traders involved in direct selling operate some form of sales promotion or incentive scheme. These normally provide for gifts or rewards to representatives, salesmen or hostesses in return for rendering certain services, reaching specified sales targets or meeting some other obligation. These rewards have been supplied in return for a non-monetary consideration in the form of services. For example, there are several common methods by which hostesses may be rewarded:

  1. Goods equal in value to a percentage of the total sales at the party may be chosen by the hostess free of charge, any balance in excess of the reward being paid in full.
  2. An option is given to the hostess to take a cash commission which may be applied to the purchase of goods at a discount up to a limit related to the sales achieved.
  3. The hostess may purchase an unlimited amount of goods at a discount (using her own money) as a reward for her services (this is usually subject to a minimum level of sales at the party).
  4. A reward of goods free of charge or at a discount or special price in return for the booking at the party of further parties whether at the hostess’s home or elsewhere.

Or a combination of any of the above.

This list is not exhaustive but the essential characteristic is that the hostess is given or is allowed to buy at a discount or special price, goods in recognition of the services she provides in arranging the party, inviting guests and providing refreshments. Similar arrangements can exist in respect of distributors and demonstrators.

In these cases, VAT is to be calculated under the provisions of VAT Act 1994 section 19(3), i.e. the amount that would have been given in money had the non-monetary consideration not taken its place. You can find out more about this in VATVAL06000.