On 27 June 2019, the Upper Tribunal1 dismissed the taxpayer’s appeal and held that part of a payment made for a “free” item under a promotion was, for VAT purposes, attributable to that item.

In this case Marks & Spencer (M&S) made a promotional offer to customers whereby the customer was entitled to select three food dishes and claim a “free” bottle of wine (or non-alcoholic drink) for £10.

The correct VAT treatment of the promotional offer was important as food items are, generally, zero-rated whilst wine is standard-rated. M&S argued that as the wine was provided “free” of charge, none of the £10 should be apportioned to it for VAT purposes. HMRC argued that the £10 should, in part, be apportioned to the bottle of wine.

The Upper Tribunal considered whether there was a “direct link” between the wine and (part of) the consideration paid. Both parties accepted this to be the correct test to apply. There had to be “reciprocal performance” such that the payment received by the provider (M&S) constituted the value actually given in return for the wine supplied to the customer.

In the Tribunal’s view, the payment of £10 constituted consideration both for the three food items and for the bottle of wine. The wine would not be provided unless the customer paid the £10, therefore (according to the Tribunal) the required “direct link” was present. The Tribunal appeared to place some weight on the fact that, here, there was a “single simultaneous transaction” between M&S and the customer. The Tribunal distinguished the case of Kuwait Petroleum on the basis that, in that case, there were two separate transactions that “destroyed” the reciprocity of performance.

The Tribunal took the view that the word “free” was being used in a marketing or promotional sense only. The economic reality was that the package offered by M&S consisted of 4 items, which included the wine. This was not changed by the fact that some customers (less than 1%) chose not to take up the offer to include the bottle of wine.

The decision can be viewed here.