"We give away free shakers, sample sachets and creator boxes all year. How should all of that show up in the accounts?" It is one of the most common questions I get from supplement founders, and the honest answer is that most of your free gifts are not really gifts at all. An item supplied as part of a paid promotion forms part of that sale, so its cost comes out of your margin and no extra VAT changes hands. A qualifying sample is treated separately. Any other unconditional no-strings giveaway may be a business gift, where the VAT £50 rule applies if you were entitled to recover the input VAT, and for corporation tax £50 is only one condition of the small advertising gift exception. Split it correctly and the accounting is simple. Split it wrongly and you either hand HMRC VAT you never owed or lose tax relief you were entitled to.
Here's the Short Version
- A free gift shipped with a paid order is part of that sale. The customer paid for the bundle, so output VAT goes on what they paid, the gift's cost sits in cost of sales, and the input VAT on buying it is recoverable
- HMRC's own view is that gifts offered to customers who buy a certain level of goods are really discounts on sale, not business gifts, so no gift limits bite on gift-with-purchase
- Free samples sent to prospects, creators and press are marketing spend, written off as they go out. Genuine samples carry no output VAT at all
- The VAT £50 rule: once gifts to one person pass £50 excluding VAT in any 12 months, and you were entitled to recover the input VAT, output VAT is due on the full cost of all gifts to that person, not just the amount over the line
- Corporation tax works differently: own-product giveaways are deductible to advertise, and for other gifts the £50 limit sits inside the small advertising gift exception, per recipient per accounting period. Miss it and the whole cost is disallowed, unless another exception applies
- In the illustrative example below, a £1m brand's gifting programme runs to about £33,000 a year, and where you book each piece changes what your margin is telling you
Where Each Free Gift Actually Lands
Founders tend to lump every giveaway into one "marketing" pot and move on. That habit causes most of the mistakes in this area, because free gifts split into several situations, and each one has its own accounting and its own tax treatment. For this post, it is useful to separate the five common situations in the table below.
| Situation | Where the cost goes | What to watch |
|---|---|---|
| Gift shipped with a paid order | Cost of sales, as the related order ships | No extra output VAT; reclaim the input VAT |
| Sample sent to prospects, creators or press | Marketing, in the month it goes out | Must meet the sample definition, so not a full case |
| Creator or press box, with no strings | Marketing, in the month it goes out | £50 VAT ceiling per person, across any 12 months |
| Creator box supplied under a posting obligation | Marketing at fair value, with revenue for the goods and the box cost released from stock | Barter: output VAT on the monetary equivalent |
| Branded merch for trade contacts | Marketing, in the month it goes out | Both £50 rules; the advert must be on the item itself |
The Gift You Sold Rather Than Gave
Start with the biggest bucket for a supplement brand: the free gift that ships with a paid order. A travel pouch on every order over £30. A shaker with the starter bundle. A free sachet pack inside each subscription box. The promo banner calls it free, but the customer paid for the bundle as a whole, and both the VAT rules and HMRC treat it that way.
For VAT, offers like these are single price promotions, the same family as the free footstool with a sofa and the buy one get one free. VAT Notice 700/7 treats the promotion as a supply of all the goods for the price the customer actually paid. Output VAT goes on that price, there is no separate charge on the free item, and the input VAT you paid when you bought the gift stock is recoverable as normal. Nothing about the word free changes your VAT. If a promotion ever mixes VAT rates, say supplements bundled with zero rated food, you have to apportion, but a standard rated supplement range keeps it simple.
For corporation tax, HMRC's manual is even more direct: gifts offered to customers who purchase a certain level of goods are "really discounts on sale and not business gifts". That one sentence means the entire apparatus of gift rules and £50 limits does not apply to gift-with-purchase. The cost is part of your normal cost of sales and stays fully deductible.
The accounting choice that matters is where you put it in the P&L. Our view is that the gift's cost belongs in cost of sales, and it should be recognised in the period in which the related sale is recognised. For fulfilled orders, that normally means the month the order ships, not necessarily the month the order is placed. Not because a rule forces the line, but because gross margin is the number you make decisions with, and this cost is part of fulfilling the sale. Book it to marketing instead and your gross margin flatters you, and you make range and pricing decisions on a number that is too good to be true. We set out the full P&L logic in our post on how a 7 figure supplement brand should structure their P&L.
One more reason to keep the cost visible: if the pouch costs £1.20 and ships only on orders over £30, it is 4% of the £30 threshold and less than 4% of the value of every qualifying order above £30, sitting quietly inside your margin. It only pays for itself if the promotion genuinely adds profit, so assess it with an incrementality test, such as a controlled holdout or a like for like comparison before and after, and weigh the incremental gross profit from basket size, conversion and retention against the gift and fulfilment cost. Comparing average order value between qualifying and non-qualifying orders is not causal, because the £30 threshold creates that difference by design. That is a marketing question, but the accounts are where you find the answer.
Free Samples Play by Different Rules
Samples are where the treatment changes character. VAT Notice 700/7 defines a sample as a specimen of a product intended to promote its sales, which lets the product's characteristics and qualities be assessed without final consumption, except where consumption is inherent in the promotion. That final-consumption exception can cover consumables, so supplement sachets and tasters can qualify when they are supplied to promote sales and the quantity is no more than is needed for assessment.
Meet that definition and no VAT is due on the giveaway at all. You keep the input VAT recovery, and nothing new goes on your return. What drops you out of sample treatment: a discontinued line, because you cannot promote something the customer can no longer buy, and quantities beyond what is needed to assess the product. HMRC's own example is a wine importer sending a bottle to a potential client, where a case of 12 is too much to be a sample. For a supplement brand, the equivalent red flag is posting 20 tubs to the same person. At that point it is not a sample, it is a gift, and gifts have a ceiling.
The VAT ceiling is £50 per person in any 12-month period, measured by total cost excluding VAT. At £50 or less, no output tax is due. If the total exceeds £50, and you were entitled to recover the input VAT on the gifts, account for output tax on the total cost value of all the gifts to that person, not just the excess. Here is the trap in numbers. You send a creator three gift boxes across the year at £18 cost each. The total is £54, over the line by £4. The output VAT is not 20% of the £4 excess, it is 20% of the full £54: £10.80. Small on one creator, but it runs across every name on your gifting list, and in our experience it is rarely tracked per person.
Creators need one more thought, because it can change what the box legally is. If a creator is required to post in return for the products, the posting service is non-monetary consideration for your supply, and you must account for output VAT on the monetary equivalent of that consideration, subject to the normal VAT rules. On the books, record the creator service as marketing at fair value, record revenue for the goods supplied in exchange, and release the box's carrying amount from stock to cost of sales. If there is no reciprocal obligation, test the contents under the sample rules first, and anything that is not a qualifying sample is a business gift, where the £50 rule applies if you were entitled to recover the input VAT. Put the arrangement in writing either way, so there is never a question about which one it was.
The Two £50 Rules, Side by Side
This is the part founders mix up most, so keep the two apart in your head. The VAT business gift rule and the corporation tax gift conditions have different windows and different consequences, and the same gift can pass one while failing the other.
| Point | VAT | Corporation tax |
|---|---|---|
| The limit | £50 per person, excluding VAT | £50 per person |
| The window | Any 12-month period | The company's accounting period |
| If you go over | Output VAT on the full cost of the gifts to that person | The whole cost loses its deduction |
| Own product giveaways | Outside VAT if they meet the sample definition | Deductible when given to advertise |
| Branded gifts | Still counted for the £50 test | Deductible only if the advert is on the item, it costs £50 or less and it is not food, drink, tobacco, or a token or voucher exchangeable for goods |
Work through the corporation tax side properly, because it is stricter than most people expect. The general rule disallows business gifts. A gift of an item that the company is in business to provide is deductible when it is given away in the ordinary course of business to advertise to the public generally, which covers sample sachets and own-product giveaways. HMRC says competition prizes offered for publicity are normally allowable, but the reason depends on the facts, so own-product prizes and prizes given under a genuine publicity obligation need to be looked at on their own terms.
For the small advertising gift exception, the gift must incorporate a conspicuous advertisement for you, with the advertisement on the item itself and not only the wrapping. The exception does not cover food, drink, tobacco, or a token or voucher exchangeable for goods. The total cost of the non-excluded gifts to the same person in the same accounting period must not exceed £50. If it exceeds £50, none of those gifts qualifies under this exception, so the whole cost is disallowed unless another exception applies. Ten grand of gift spend that misses the rules becomes £1,900 to £2,500 of extra corporation tax, depending on your rate, for items you already paid for.
What a Gifting Programme Costs: The Numbers
Here is an illustrative example with synthetic numbers, built to show the shape, not anyone's actual programme. A supplement brand turning over £1m, with 40,000 orders a year at £25 net. Its gifting programme for the year: a travel pouch costing £1.20 excluding VAT, going out on the 24,000 orders over £30; a sample sachet pack at £0.38, going to 4,000 customers and prospects; and 150 creator boxes at £18 each.
| Item | Unit cost | Units a year | Annual cost |
|---|---|---|---|
| Travel pouch with orders over £30 | £1.20 | 24,000 | £28,800 |
| Sample sachet packs | £0.38 | 4,000 | £1,520 |
| Creator boxes | £18.00 | 150 | £2,700 |
| Total gifting cost | £33,020 |
Three numbers in that table matter more than the total. First, £28,800 of it is gift-with-purchase, so it belongs in cost of sales. If the underlying cost base runs at 28% of revenue, the pouches take it to 30.9%, and that is the margin number the business is actually delivering. Second, the pouches carry £0.24 of VAT each, so £5,760 of input VAT sits recoverable on those purchases across the year. If you want the full recovery rules, we walked through them in our guide to claiming VAT back in the UK, and the same logic applies to gift stock.
Third, the timing. If the brand buys a year of pouches in January at £1.20 each excluding VAT, it commits £28,800 of net inventory cost up front. Any VAT cash payment is separate, and depends on the purchase and import arrangements: if 20% VAT is paid at that point, the cash outflow is £34,560 and £5,760 is recoverable input VAT. And if the whole cost hits the P&L at purchase, January carries a cost the whole year's sales created. Hold the pouches as stock, because that is what they are until the day they ship, and release about £2,400 into cost of sales each month as orders go out. The same principle covers sachet packs and creator boxes: expense them when they leave the building, not when the pallet arrives. And if those pouches are imported, the landed cost model applies to them exactly as it does to your main stock, because freight and duty on gift stock are part of its cost too.
The Monthly Routine That Keeps It Clean
You do not need new software for any of this. You need three habits.
One: track gifts per person, not per campaign. Both £50 rules are per recipient, so a campaign-level report can never tell you if you are over. Keep a simple tab with a line per gift: recipient, date, item, cost. Add two running columns, one for the rolling 12 months, which is your VAT test, and one for the current accounting period, which is your corporation tax test. When a name approaches £50 on either column, check before the next box goes out. This tracker is also the first thing you would pull if HMRC ever asked how the treatment was arrived at.
Two: release gift stock monthly, and write off what dies. Gift-with-purchase cost released to cost of sales is qualifying orders shipped, multiplied by gifts per order, multiplied by the inventory cost per gift. Samples and no-strings creator boxes go to marketing in the month they are dispatched. A pouch sitting at the 3PL is stock on the balance sheet, so it belongs in your stock counts like any other SKU, and it does not belong in this month's P&L just because the invoice arrived. At the end of a campaign, write down anything that will never ship. Dead promo stock is dead money. If you want the full month-end discipline, we laid it out in our 12 step monthly accounting checklist for DTC brands.
Three: handle a promised gift properly. If a customer earns a free shaker on a future order, assess whether the option gives them a material right they would not receive without the first order. If it does, treat the option as a separate performance obligation, allocate part of the first order's transaction price to it, recognise that amount as a contract liability (deferred income, in plain English), and recognise the revenue when the shaker is supplied or the option expires. It looks like a rounding error on one order and becomes a real balance once thousands are outstanding, so review it at each month end.
FAQ
How do I account for free gifts given with customer orders?
As part of the sale, not as marketing. The customer paid for the bundle, so the gift's cost goes to cost of sales as the related sale is recognised, normally the month the order ships, and the input VAT on buying it is recoverable. There is no extra output VAT on the gift itself. HMRC treats gifts tied to a purchase level as discounts on sale, so the business gift limits never come into it.
Do I have to charge VAT on free samples and gifts?
Genuine samples that fit the VAT Notice 700/7 definition carry no VAT. For everything else, add up the cost, excluding VAT, of gifts to each person across any 12-month period. At £50 or less there is no output tax to account for. Once you are over, and you were entitled to recover the input VAT, output VAT is due on the full cost of all gifts to that person, not just the excess.
Are free gifts tax deductible?
Gifts shipped with a purchase are part of the sale's cost and are deductible. Gifts of your own products, given to advertise, are deductible too. For other gifts, the item must carry a conspicuous advert for you, stay at £50 or less per recipient in the accounting period, and not be food, drink, tobacco, or a token or voucher exchangeable for goods. Miss that and the whole cost is added back, unless another exception applies.
The Bottom Line
Most free gifts in a supplement brand are not gifts at all. Gift-with-purchase costs go to cost of sales as the related orders are fulfilled, so your margin tells the truth. Qualifying samples are expensed as marketing when they are dispatched and carry no output VAT. Other no-strings giveaways have to be tested under the VAT business gift rules and the corporation tax rules, and the corporation tax £50 amount is not a general exemption: it is one condition of the small advertising gift exception. The only reliable way to stay on the right side of all of it is to track by person, not by campaign.
If you want us to look at how your gifting, sampling and creator costs are coming through, that is exactly the kind of review we run for UK ecommerce brands between £1m and £20m. We are specialist social commerce accountants, we work on supplement brand numbers every week, and we will tell you plainly which bucket each cost belongs in. Book a call and we will go through it with you.