The EU VAT Treatment of Vouchers (FM nr. 157) 2019/2.6.4.2:2.6.4.2 Marks and Spencer: a UK case about VAT and economic reality

The EU VAT Treatment of Vouchers (FM nr. 157) 2019/2.6.4.2

2.6.4.2 Marks and Spencer: a UK case about VAT and economic reality

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In the UK, judges that rule VAT cases have applied ‘economic reality’ (or ‘commercial reality’ or a combination of these realities) when determining the objective characteristics of a particular transaction and/or the relevant elements thereof, for applying the proper VAT treatment of that transaction.1 In my view, this application of the concept of ‘economic and commercial reality’ is in line with the CJEU case law, as long as it concerns cases where there is a difference between legal reality and economic reality.

One of those cases (the Marks and Spencer case) deals with the VAT treatment of a specific transaction offered by a retailer: Buy any three (designated) food items for GBP 10 and get a bottle of wine (or another drink) for free.2 The UK Tax Authorities disagreed with the retailer’s view that the supply of the wine was indeed free. The supply of food items is subject to a local VAT rate of 0% in the UK, and because the value of the ‘free’ bottle did not exceed a certain threshold, the ‘gift’ was untaxed (no VAT was charged on the supply of the wine or the food). The UK court (First Tier Tribunal) held the following in this respect (emphasis by me, JB):

“96.

I conclude that on a proper analysis of the terms and conditions of the Dine In Promotion the customer pays £10 in order to receive the three food items and the wine, so the price must be allocated across the four items for VAT purposes.

97.

In my judgment this conclusion becomes even clearer when account is taken of the economic and commercial reality of the transaction.

98.

Adopting the approach set out by Lord Neuberger in Secret Hotels 2 (quoted at [80]) and looking beyond the labels attached by M&S, the wine was not being supplied as a gift or for nil consideration. Applying what Lord Neuberger termed “commercial common sense” the term “free” was clearly being used in a marketing sense, as in a “buy two get one free” promotion. The economic and commercial reality was that M&S was offering a package of items — dine in for two for £10 with free wine — at an attractive discount to their aggregate shelf price if bought separately.

99.

As acknowledged at [89], it is possible in principle for the economic and commercial reality of a transaction to accord with a contractual term describing it as free or as a gift. For a retailer, in-store samples of food or beverage might fall into this category. But a customer who walked into an M&S store during a Dine In Promotion and simply asked for his “free” bottle of wine would have been given short shrift.

100.

The fact that the wine would usually be the most expensive item in the promotion in terms of separate shelf price reinforces this analysis of the economic and commercial reality.”

In this case, the UK court uses economic reality to ‘redefine’ or ‘reconsider’ the transaction, and it bases the VAT consequences of that transaction on economic reality. The difficulty in this case is that in my view, the legal and commercial reality differ, but the opposite can also be argued: parties have agreed on a transaction where a free item is added to a composite supply made for consideration, and indeed no consideration was charged for that free item. In this kind of situation, ‘economic reality’ in the sense of ‘the view of the typical consumer’ should be used to determine the ‘economic reality’ in the sense of the ‘objective facts’ to test whether this is the same as the legal reality.

Some argue that this use of economic and commercial reality goes too far, as it breaches legal certainty. In the words of Van Doesum: “Indeed, such an infringement of legal certainty and the reclassification of transactions not carried out in the context of normal commercial operations is only possible by applying the abuse of rights doctrine. This doctrine is subject to conditions and is only to be applied as an 'ultimum remedium'. The abuse of rights doctrine cannot be simply circumvented by applying the ‘economic reality’ as an interpretation tool in itself. On the contrary, the abuse of rights doctrine contains an ‘economic reality’ test”.3

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