VAT and "free" item promotions

Where an item was described as provided “free” but its receipt was conditional on purchasing other qualifying items, the consideration payable for those items must be attributed in part to the “free” item.

The First Tier Tribunal has held that the provision of a “free” bottle of wine as part of a £10 Dine In Meal offer by Marks & Spencer was subject to VAT: Marks & Spencer v HMRC [2018] UKFTT 238. The bottle of wine was not “free” either as a matter of the true construction of the offer nor as a question of economic reality. The wine was, in reality, part of the £10 offer and as such part of the consideration of £10 must be attributed to the wine.

The decision is a reminder that the label applied by the parties to a contract will not be determinative of the true supply for VAT purposes. Whilst the VAT system will generally respect the bargain made at arm’s length between unrelated parties, that bargain must still be properly analysed to determine its true nature.


Before 2015, M&S ran a Dine In for £10 promotion under which three food items plus a bottle of wine could be acquired for £10. From 2015, this changed to a Dine In for £10 promotion which was based on buy three food items for £10 and get a bottle of wine for free. M&S contended that, under the new promotion, it was no longer required to apportion part of the £10 consideration to the wine, which reduced the overall VAT due on the £10 by, on average, around 70p. HMRC disagreed and the matter came before the FTT.

Free wine?

M&S, represented by Cordara QC, contended that it was a fundamental part of the VAT system that the terms of a bargain made at arm’s length was to be respected. Here, the promotion in the stores clearly spelled out that the wine was free and that the £10 consideration was entirely paid for the food items. In essence, there were two promotions: the first involved three items of food for £10; the second, conditional on taking up the first, was an offer of free wine.

HMRC argued that, if M&S were correct, then the result was fundamentally contrary to the VAT system in that M&S would have been able to deduct input VAT on the acquisition of the wine without having any obligation to account for VAT when they disposed of the wine. In any event, correctly analysed, the promotion was a purchase of four items for £10 without any gift element. It was a single promotional deal and is not a sale of food items for £10 plus a supply of wine for nil consideration. This was the economic and commercial reality of the transaction and the fact that the wine was marketed and promoted as “free” was not determinative.

The FTT accepted that the change in the promotion by M&S was made for both commercial and tax reasons. Commercially, offering something for “free” potentially had a different marketing effect to four items for £10. However, the FTT’s task was “to analyse and determine the nature of the agreement between M&S and the customer, starting with the words of the promotion and assessing whether that accords with commercial and economic reality”.

The proper construction of the promotion based on the terms was that it was an offer with a conditional element. Under that offer the consideration would always be precisely £10. The wine was offered conditionally. A customer could obtain it only by satisfying the condition that he had paid £10 and taken the food items. As such, the Dine In Promotion was a single offer, with all four items supplied simultaneously and in the same transaction for consumption on the payment of £10. Receipt of the wine is conditional on payment of the £10 and the purchase of the food items. The proper construction of the agreement did not support the conclusion that the wine was being supplied for no consideration. The wine was an integral element of the promotion, usually the single most valuable element in terms of separate retail price. Accordingly, the FTT concluded that on a proper analysis of the terms and conditions of the Dine In Promotion the customer paid £10 in order to receive the three food items and the wine, so the price must be allocated across the four items for VAT purposes.

Whilst unnecessary to do so, the FTT indicated that the economic and commercial reality of the transaction put the matter beyond doubt. The economic and commercial reality was that M&S was offering a package of items - dine in for two for £10 with free wine - but the wine was not being supplied as a gift or for nil consideration. Applying “commercial common sense” the term “free” was clearly being used in a marketing sense only.

Bespoke agreement

M&S also pointed to a section 85 agreement between it and HMRC from 2010 to deal with the VAT liability of certain other promotions. That agreement included the clause: “The Parties agree that the Appellant [M&S] is not required to account for VAT on specified reward goods supplied for no additional consideration as part of a promotional scheme, where on a minimum spend a customer gains a free specified item (such as a bottle of wine), and where a customer who purchases a specified number of items gets a free specified item (such as a cool bag).”

M&S argued that HMRC were, in any event, bound by the terms of that agreement and therefore no VAT was attributable to the free wine. The FTT disagreed. The agreement also included other clauses, one dealing with Dine In offers. It was unclear under which clause the current offer would fall and as such HMRC were entitled to take a different view. In such cases, the section 85 agreement stated that the “normal” VAT treatment would apply.

Deemed supply

HMRC also ran an alternative argument that, even if the wine was “free”, M&S were obliged to account for output VAT on the basis of the deemed supply rules in VATA 1994 Schedule 4. Wine formed part of the assets of M&S’s business and in a Dine In Promotion sale it was transferred or disposed of by M&S so as no longer to form part of those assets, “whether or not for a consideration”.

M&S accepted that in principle a deemed supply occurred but argued that no output VAT was payable as those deemed supplies fell within the exception for “a business gift the cost of which, together with the cost of any other business gifts made to the same person in the same year, was not more than £50”. Whilst M&S did not keep records to determine if any person received more than £50 in free gifts from M&S each year so as to fall within the exemption, M&S argued that where the terms on which a Member State implemented the small gifts exemption made it impractical for a taxpayer to prove entitlement to the exemption, it must be interpreted in a way which did not deprive it of its effectiveness.

The FTT again rejected M&S’ arguments. Whilst “highly dubious” about the arguments on the application of the small business gift exception, it was unnecessary to consider it in detail. The FTT had already held that the wine was in no real sense a “gift” and as such could not be a “small business gift”.


Whilst generally true that the VAT system will respect the terms of a bargain made at arm’s length, that bargain must be properly analysed. In this case, the wine, whilst described in marketing as “free”, clearly was not contractually free. It required the customer to do something to acquire that wine - to buy other goods - and was conditional on the customer meeting those conditions. Properly analysed, the customer paid £10 in the expectation of receiving the four items including the wine for £10. It was not necessary for the Tribunal to resort to the concept of “economic and commercial reality” to override the contractual terms in this case. It was merely necessary to ignore the label of “free” applied for marketing purposes by M&S and correctly analyse the bargain made between M&S and its customers.

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