Summary: This case concerned the VAT treatment of a promotional offer by Marks and Spencer. The issue was whether the £10 price (for food items and a “free” bottle of wine) should be apportioned between the food and wine, or whether the wine was genuinely “free”. The Tribunal considered the contract, commercial reality and the customer’s perspective and decided that an element of the price was for the wine, so that VAT was chargeable on that element.

This case concerned the VAT treatment of a promotional offer by Marks and Spencer plc (‘M&S’). The offer was described as “Dine In for £10 with Free Wine”. Customers could buy three specified food items for £10 and receive a “free” bottle of wine.

If they were sold separately, the food items would generally be zero-rated for VAT purposes; the wine, by contrast, would be standard-rated. The issue was whether the £10 price should be apportioned between the food and wine; or whether, as M&S contended, the wine was supplied free of charge for VAT purposes.

HMRC’s position was that the promotion was a purchase of four items for the entire £10, there being no gift element. It was a single promotional deal and was not a sale of food items for £10 plus a gift of wine.

They argued that the economic and commercial reality of the transaction was critical. The language of the promotional material and the perspective of the customer, whilst relevant, were not determinative.

M&S argued that the VAT analysis must respect the structure chosen in an arm’s length transaction such as the promotion. The contractual deal could not be rewritten, and this was a case where “free means free”. That was the commercial reality, and that was the customer’s perspective on this transaction.

They argued that it is a classic VAT principle that the VAT system will respect the terms of whatever arm’s length commercial deal is reached between customer and supplier; it was not permissible to ignore or rewrite the terms of an arm’s length deal.

The First-Tier Tribunal (FTT) started by analysing the contractual terms and conditions. The essential point was that a customer could not acquire the wine without paying £10 and taking the food items. Therefore, the customer would pay £10 in order to receive the three food items and the wine, and the price had to be allocated across the four items for VAT purposes.

In terms of the economic reality, M&S was offering a single package of 4 items. A customer who walked into an M&S store and simply asked for his “free” bottle of wine would have been given short shrift.

On that basis, the FTT decided in favour of HMRC; some of the £10 price had to be allocated to the wine.

This case demonstrates the trajectory of current VAT case law as regards the interaction between the contractual arrangements, commercial reality and the customer’s perspective. The UK courts have made it clear that the contractual position is not conclusive of the VAT analysis, but it is the most useful starting point.

A broadly similar approach has been adopted by the CJEU. In HMRC v Newey (Case C-653/11) the CJEU re-affirmed that a consideration of economic and commercial realities is a fundamental criterion for the application of the VAT system. On that basis, whilst the contractual position normally reflects the economic and commercial reality, the contractual analysis will not be determinative where the contracts constitute a purely artificial arrangement which do not correspond with the economic and commercial reality of the transaction.

The FTT emphasised that each case will depend on its own specific facts and that there is no coherent or consistent set of principles which applies to promotional schemes such as the one operated by M&S.

The subtle but vital point is that contract, commerciality and the customer’s perspective are not conflicting paradigms in a battle for exclusive occupation of the VAT battlefield. Rather, they are all tools to be applied to identify the underlying essence of the transaction.