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 for VAT purposes.

The Upper Tribunal has upheld the decision of the FTT that the provision of a “free” bottle of wine as part of a £10 promotion by Marks & Spencer was subject to VAT: Marks & Spencer v HMRC [2019] UKUT 182. 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, which found in favour of HMRC. M&S appealed.

Free wine?

M&S 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. M&S pointed out that £10 was payable for the three food items even if a person did not take up the offer of free wine and the value of the three food items always exceeded £10.

M&S relied heavily on the ECJ decision in Kuwait Petrol. In that case, the supplier provided both petrol and vouchers in return for payment. The vouchers were later exchangeable for “free” gifts. The question was whether part of the price paid for fuel was attributable to the vouchers. The ECJ indicated that there were two factors which made it difficult for the supplier to maintain the argument that vouchers were not provided free of charge: firstly, the redemption goods were described as gits; and secondly, the retail price was the same whether or not a customer accepted the vouchers.

The Upper Tribunal has, however, rejected these arguments. The payment of £10 in this case clearly constituted consideration for the food and wine together. There was a direct link between the provision of the wine and the payment of £10. The Tribunal distinguished Kuwait Petrol case on the basis that effectively involved two separate transactions “which destroyed the reciprocity of performance between the parties (ie between the payment for the fuel and supply of the reward goods). In contrast, under the M&S promotion, wine could only be taken simultaneously with the food. There was clear reciprocity between the payment of £10 and receipt of the wine.

The Upper Tribunal also agreed with the FTT’s conclusion that 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 or promotional sense only.

This analysis was not affected by the fact that a customer would have had to pay £10 for the three food items even if they did not take the wine. The proportion of customers opting to take the wine was not of any legal significance. A customer had a choice as to whether to three food items or four items (including wine) for £10. The payment of £10 was consideration for the actual items obtained in either case. However, the fact that 99% of customers did take the wine suggested that the economic reality was that most customers saw the promotion as a four item deal.

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).”

Whilst it was strictly unnecessary for the Upper Tribunal to consider this issue (having decided that the wine was not “free”), it indicated that it would have accepted M&S’ argument that the agreement did apply to the promotion had the wine been a “free gift”.

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”.

Before the FTT, 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”. The FTT again rejected M&S’ arguments. 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”. M&S did not pursue this argument before the Upper Tribunal, accepting that it could not meet the conditions.


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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