4.5.2 Economic and commercial reality applied to other composite supplies where one or more elements are advertised as supplied ‘for free’

When considering a multiple-element transaction, the ‘main rule’ is to regard every element of that transaction as distinct and independent. This means that, as a main rule, if one (or more) element(s) to a multiple-element transaction where all elements should be regarded as distinct and independent is advertised as (and supplied for) free, that element is indeed supplied for no consideration. In this section, I will examine this ‘main rule’ in the light of ‘economic and commercial reality’.

In Chapter 3 I described that for a supply of goods or services to be subject to VAT, the supply has to be based on a legal agreement between the supplier and the recipient. The supply has to be made for consideration, which also has to be based on the legal agreement. There has to be a direct link between the supply and the payment, meaning that the consideration received by the supplier is the real and effective counter-value of the supply.

With regard to the question whether certain specific elements to a multiple-element supply are supplied for consideration, I will focus on the legal relationship or the legal agreement on which the supplies are based. If, based on the legal agreement, an element is deemed to be supplied free of charge, I will then examine whether ‘economic and commercial reality’ can affect that conclusion. As mentioned before, economic reality only becomes a relevant factor if it is not a proper reflection of the ‘legal reality’.1