4.5.4 Summary: when is a ‘free element’ actually supplied for consideration

As a main rule, payments for a multiple-element transaction should not be partly allocated to elements of that transaction that are advertised as and agreed to be made for no consideration. However, this is different where commercial and economic reality require differently, as is the case in a number of situations.

If the ‘free element’ is absorbed or amalgamated into the main supply that is made for consideration, as a result of which it no longer exists from a VAT perspective, the consideration should also be considered to be paid for that ‘free’, absorbed or amalgamated, element. Absorption and amalgamation are reflections of economic reality, since they apply in cases where the elements constitute a single, indivisible economic supply, which it would be artificial to split.

Also, if the ‘economic and commercial reality’ of a multiple element transaction is that parties to it cannot expect the ‘free element’ to actually be supplied for free, the consideration paid for the entire transaction should also be considered to be paid for the ‘free’ element. This can be the case for multiple element supplies where the ‘free’ elements have an absolute and relatively high value, for ‘combination deals’, for certain multiple element supplies where the customer has no choice whether to accept the free element and for multiple element supplies where the free element is an explicit part of a negotiated deal. In some of the latter situations, it is relevant to determine whether the ‘free element’ can be qualified as a ‘marketing incentive’, in which case that element should be considered to be supplied for no consideration.

Once it is established what elements to a composite, multiple element supply are made for consideration and what elements are actually supplied for no consideration, the question arises how to allocate the consideration to the relevant elements. I will elaborate on that in the next Section (Section 4.6).