1.1 Vouchers, promotional activities and EU VAT

Many businesses perform promotional activities. If a business wants to grow its turnover, it needs to sell more of its products, whether they are goods, services or both. Growing turnover requires either existing customers to purchase more or to increase the amount of customers that buy the products. Promotional activities are employed to entice existing customers to make more purchases and potential new customers to actually start buying a business’s products. Performing these promotional activities is, therefore, very much in the interest of the business and for the purpose of ensuring the continuation, if not growth, of the business. The costs of these promotional activities are business costs.

Promotional activities can be categorised into several types of activities, such as advertising, press releases, consumer promotions (schemes, discounts, contests), trade discounts, freebies, incentive trips, awards etc. Sales promotions, as distinct from advertising, publicity and public relations, include freebies, contests, discounts, free services, passes, tickets etc.1

Some promotional activities allow customers to purchase several items for a price that is lower than the combined shelf price of the individual products. Some of those products may be advertised as ‘free’ with the purchase of other goods or services. Discounts on the purchase of a single product can also be considered a sales promotion. Some businesses organise prize contests or lotteries to promote their products and/or brand. And, finally, vouchers are often used as sales promotion. Vouchers have many shapes and forms. Some examples are book tokens, cash back coupons and gift cards, but also loyalty reward ‘points’. The VAT treatment of these promotional activities is not very straight forward, even since the EU legislator introduced new rules on the VAT treatment of (transactions involving) vouchers.2

Sales promotions3 are one of the aspects of what is referred to by some as ‘the marketing mix’4 the four controllable variables that are combined to appeal to a business’ target market, the other three being product, price and place (distribution). Promotional activities refer to the entire set of activities, which communicate the product, brand or service to the user. The idea is to make people aware, attract and induce to buy the product, in preference over others. For the purpose of this research, I will only look at ‘sales promotions’. I will use the blanket term ‘promotional activities’ to refer to ‘sales promotions’.

From a VAT5 perspective, these ‘sales promotions’ are most challenging because they can at the same time be considered an essential business costs (for the business performing these promotional activities) as well as a transaction leading to consumption at the customer’s end of the transaction. From a VAT perspective, VAT on business costs is generally deductible, unless the costs are attributable to specific activities that disallow VAT deduction, such as certain VAT exempt transactions and non-economic activities. On the other hand, some promotional activities provide customers and potential customers of businesses with free goods or services. A basic rule of VAT is that consumption should be taxed: the EU VAT is a general tax on consumption.6 Taxation can be achieved in different ways, e.g. by adjusting the initial VAT deduction or by actually taxing the supplies that are made free-of-charge. This is especially true for transactions that occur at the end of a production and distribution chain (the business-to-consumer or B2C supplies) because by definition, these need to be taxed under the rationale underlying the EU VAT system. Consumers cannot deduct VAT – consumption has to be taxed. The tension between the right to deduct VAT on business related costs and the need to tax consumption makes the area of sales promotions a very rewarding research topic.

Vouchers are used by businesses in a wide range of promotional activities. Vouchers can be gift cards that are sold for consideration, enabling businesses to receive payments (at the time of the sale of the voucher) before they actually make a supply of a good or a service. Voucher can also be used to allow customers a discount, e.g. on the price of a specific product or on designated products for a specific period of time. Recent research in the field of VAT and promotional activities exists,7 but not specifically focussed on the VAT treatment of vouchers (as used for promotional activities).

Because vouchers are used as instruments in a wide range of promotional activities, I will first focus on the current VAT treatment of promotional activities as such and how, in my view, these activities should be treated for VAT purposes. I will then research how the use of vouchers in these promotional activities is treated for VAT purposes and how, in my view, this ‘use of vouchers’ should be treated for VAT purposes. I started writing this research a long time ago, before the Commission presented its view on the VAT treatment of vouchers. By the time I finished this research, the EU rules for the VAT treatment of certain vouchers were accepted by the EU Member States and these rules came into force on 1 January 2019. In this thesis, I will explain why I don’t think that these new rules represent the ideal VAT treatment of transactions involving vouchers, even though the new rules do provide for a more uniform interpretation and therefore provide more legal certainty for businesses using vouchers in the EU.