In life the well-known adage ‘there’s no such thing as a free lunch’, is universally accepted as a self-evident truth; but is there such a thing as a free drink?
If I make a client who has called it to see me a cup of coffee and give it to them, it’s clearly a free drink and in reality, I’d be highly unlikely to get away with charging them for it, and I’d definitely not be charging VAT on the drink. If I buy myself a new car, and the showroom gives me a complimentary frothy cappuccino while I wait to collect it, I’m pretty sure that nobody is accounting for any VAT on the drink.
But if I buy a sandwich-snack-smoothie lunch deal combination from a supermarket, you can be damned sure that VAT will be accounted for at the appropriate rate on each of the items purchased. So what made Marks & Spencer (M&S) think that they don’t need to account for VAT on the wine in its ‘dine in two for £10’ offer?
Unsurprisingly, this neatly leads us to another interesting VAT tribunal decision.
VAT on promotional offers
There have been plenty of case law in the past in relation to the VAT complexities arising from promotional offers. This latest case has arisen partly due to the unusual and specific facts of the case, but also because there was sufficient VAT at stake (over £11m) to make it a worthwhile argument for M&S to take on.
When M&S got to court, it was clear that there were four key issues crucial to the outcome of the case:
- Establishing the correct VAT treatment of the wine element of the promotion
- The effect of the unique retail scheme agreement entered into between M&S and HMRC
- The effect of the deemed VAT supply rules
- The recovery of Input Tax by M&S on wine purchased by it and disposed of under the promotion
Most of the arguments raised by the opposing legal counsel are mostly too technical, or dare I say dull, to repeat in this Blog, save to say that key issue number one turned out to be critical to the decision.
Tax Tribunal decision
In essence, the tribunal shot down the two main arguments put forward by M&S, which were:
- Their promotional material was well-worded and referred adamantly to the “free wine” available when purchasing the “dine in two for £10” offer; and
- They would not offer a refund under any circumstances, if a customer sought to return just the wine
The Tribunal concluded that the economic reality remained that a customer is paying £10 and receives four items in return: a main course, a side dish, a dessert, and a bottle of wine.
When viewed in this context, it’s very difficult to see an argument for not accounting for VAT at the standard rate on the wine element.
VAT Free Wine Afterthoughts
If the offer had been called “drink and dine for £9.99”, perhaps this argument never would have arisen – but “dine in two for £10” meant there was just enough uncertainty for the case to be argued all the way to the tribunal.
Given the amount of VAT at stake, I wouldn’t be at all surprised if an appeal to the Upper Tribunal comes next, though given my detailed knowledge of the VAT rules, I expect them to fail again.
It’s clear to me that they have not had the best tax advice from their accountants before launching the offer, assuming of course they even bothered to ask the question!
I do however have a solution to Messrs Marks and Spencer little problem; relaunch the offer and call it ‘two dine in for £9.99’ plus ‘spend a penny and enjoy a drink with your meal’. The wine wouldn’t be free as it would be optional whether or not to spend that penny and it wouldn’t infringe the current VAT regulations.
Food for thought methinks!
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.