4.5.2.9 The VAT treatment of transactions where the customer has to accept the ‘free’ element

In some cases, the element advertised as ‘free’ is included in (the packaging of) the composite supply, making it impossible for the customer not to accept it. Examples are a third bottle of shampoo shrink-wrapped with two other bottles, where the offer is “get the third one for free” or a six-pack of bottles of beer where a beer glass is included in the packaging and advertised as “beer plus a free glass”.

On the one hand, it can be argued that since the products on offer are all well-defined and the products can only be supplied together for a fixed price, the ‘free element’ is, effectively, not ‘free of charge’. On the other hand, it can also be argued that if the supplier of these multiple-element offerings also sells the separate elements as included in the multiple-element offering, offering one of the elements for free should indeed be treated as such, especially in situations where the ‘free element’ is not an aim in itself for the (potential) customers.

In my view, there is no ‘one solution fits all’ for this type of multiple-element transaction. With regard to the above examples, it could be argued that the additional bottle of shampoo is an actual aim in itself for the average customer, making the transaction a ‘discounted’ sale of three bottles of shampoo. It could also be argued that the free beer glass is not an aim in itself, making it, in accounting terms, a ‘marketing incentive’ rather than an ‘agreed deliverable’. This could, of course, be different if the glass was a valuable collectors’ item.

What this means is that, in my view, the fact that a customer does not have a choice to accept an element that is advertised as ‘free’ cannot be considered a decisive element to use as the basis for deciding whether that element is, effectively, supplied free of charge. The concept of economic and commercial reality, as described and used above, should be applied to these types of offers on a case-by-case basis. Economic and commercial reality should, therefore, still dictate the VAT treatment of these types of multiple-element transactions in cases where this reality means that the ‘free element’ is actually not supplied for free.