4.5.2.8 The VAT treatment of ‘combination deals’

Other species of ‘free elements’ to a multiple-element transaction are the transactions where a customer can obtain one or more items, often of the same type and/or brand, for free with the purchase of a minimum number or value of other purchases. Examples are ‘buy two, get one free’ and ‘the cheapest item out of five for free’. Another way of presenting these proposed transactions would be ‘buy three for the price of two’ and ‘buy five for the price of four’.

In these schemes, the free element is an aim in itself for the customer (contrary to, for example, the free goods supplied with the purchase of petrol) and it cannot be obtained for free unless other purchases of items of the same type and/or brand are made as well.

Similar to the items described in the previous section (4.5.2.7), the absolute and relative value of the free items would be an indication of the fact that economic and commercial reality require the consideration paid to be partly allocated to the free elements. However, the difference with the transactions described in the previous section is that, for example, the price for the two items purchased without the ‘free’ third item, and the price of four items without purchasing a fifth, is the same as when the ‘free’ element would be included in the transaction. This could be considered an indication that these elements are actually supplied for no consideration.1

In these latter cases, the ‘economic and commercial reality’ is that in fact, a discount is offered for a multiple-element purchase. This is, in my view, not a ‘discount in kind’, as has been defended,2 but an actual discount on the purchase of all (agreed) elements of the transaction. The economic and commercial reality is, in my view, that the customer can choose three items and pay for those three items the price that she would have normally had to pay for two items. The payment, however, is clearly meant to be made for the entire transaction. The same applies to the other example (‘buy five for the price of four’). Economically and commercially, a discount is granted on five (usually similar) items to boost turnover. This was confirmed by a UK court that decided that, based on economic and commercial reality, a scheme where a supermarket offered ‘three food items for consideration’ to ‘get a bottle of wine for free’ was to be treated for VAT purposes as if all elements were supplied for consideration, even the element that was advertised as ‘free’.3

This is not the same as rewarding loyal customers by giving them free goods, as was the case for Kuwait Petroleum. In the first situation, customers choose to purchase three items and pay a smaller amount (i.e. the price of two items) than the total selling price of the individual elements, and the customer decides which items he chooses to purchase at the time of the transaction. Usually, these schemes dictate that the cheapest of the three items will be supplied at no extra cost (‘for free’) but the customer first gets to decide which items he wants to purchase (and, ultimately, for what price). In the ‘petrol and free goods’-example, the customer cannot choose to buy as many ‘redemption goods’ as possible to get a few litres of free petrol. The first scheme is a discount scheme, the second a loyalty scheme that rewards multiple purchases with free goods. In accounting terms, all items in the first scheme are ‘deliverables in a multi-deliverable agreement’ whereas the ‘redemption goods’ are considered ‘marketing incentives’.

From the viewpoint of ‘commercial and economic reality’, these schemes are different and therefore they should be treated differently from a VAT perspective. This means that in my view, based on the economic and commercial reality of these types of ‘combination deals’, they should be treated as discounted deals where the total payment is made for all elements of the multiple-element transaction.