5.3 Discounts and rebates versus free supplies

The terms 'discounts' and ’rebates' cannot be applied to reductions covering the whole cost of supplying redemption goods, i.e. the full advertised price.1 I discuss the VAT consequences of free supplies in Chapter 6.

Discounts or rebates and free supplies are treated differently from a VAT perspective. In case of a discount or rebate, the business making a supply for which it offers a discount or rebate only has to (ultimately) account for and pay VAT on the amount of the consideration actually received in return for that supply, as I will explain below. This is even the case if the consideration is extremely low or even symbolic: as long as parties have agreed to make a supply in return for consideration, the value of that consideration is the taxable amount. 2 This may be different if Member States have implemented specific measures that would allow them to use an ‘open market value’ instead of the actual amount received but using the actual amount as taxable amount is the main rule.3

If the business receives no consideration at all, it will have to apply the provisions regarding ‘deemed supplies’, which means that the business may have to account for and pay VAT on a fixed amount, as described in Chapter 6. For goods, this is the purchase price of the goods or similar goods or, in the absence of a purchase price, the cost price, determined at the time when the deemed supply takes place.4 For services, the taxable amount shall be the full cost to the taxable person of providing the services.5 This means that if a very low consideration is charged because a substantial discount is granted, VAT is only due on the discounted amount, i.e. the actual consideration received, whereas if no consideration is received, a business will have to remit VAT on the cost of the supply. This is how the VAT mechanics work. In practice, from a marketing perspective, giving away goods or services for free is more attractive than selling goods or services, however low the price. Businesses then have to accept the ‘additional VAT cost’.

If the business that supplies the promotional goods or services advertises a price for these goods or service and where the customer makes a ‘payment in kind’ – e.g. by providing proof of ‘loyalty’ – the value of the consideration in kind has to be added to the low cash payment, to an amount equal to the difference between the advertised price and the actual cash payment.6