7.4.5 Case 5

A manufacturer and supplier of disposable nappies prints coupons on the packing. In return for 20 coupons the customer is offered free entrance to an amusement park. The customer can redeem the coupons for a ticket with the manufacturer or directly with the amusement park. If the coupons are redeemed with the manufacturer, the manufacturer purchases the tickets from the amusement park. If the coupons are redeemed with the amusement park, it will send the 20 coupons to the manufacturer and will charge him € 25. Nappies are subject to 19% VAT; the entrance fee for an amusement park is subject to 6% VAT.

The retailer who sells the nappies has to account for 19/119 VAT on the full selling price. The issue of the coupons does not create a VAT liability. The amusement park has to account for 6/106 VAT on € 25 per ticket sold to the manufacturer. The manufacturer cannot deduct the VAT charged by the amusement park for the sale of the tickets. The manufacturer is entitled to a VAT refund of 19/119 × € 25 per ticket, since effectively the supply of the ticket for free to the customer is seen as a rebate in kind on the retail price of the nappies.

The retailer’s price for the nappies is unaffected. The manufacturer, if he pays cash to the amusement park for the ticket to be provided to the customer, can reduce his taxable amount accordingly. However, in the UK there is no capacity for a supplier to reduce his taxable amount for discounts in kind (see the Court of Appeal judgment in Total UK Ltd v HMRC [2007] EWCA Civ 987).

The retailer who sells the nappies has to account for 19/119 VAT on the full selling price. The issue of the coupons does not create a VAT liability. The amusement park has to account for 6/106 VAT on € 25 per ticket sold to the manufacturer. The manufacturer cannot deduct the VAT charged by the amusement park for the sale of the tickets. The manufacturer is not entitled to a refund.1

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