7.10.1 Introduction

As mentioned before, some argue that ‘there’s no such thing as a free lunch’1 or that nothing is free when it comes to business transactions. The phrase is said to have been popularised by Milton Freedman,2 a Nobel-prize winning economist who published a book with the same title.3 For this section, the phrase is relevant because it implies that businesses will not actually give away anything for free because they always expect something in return. I will establish whether, from a VAT perspective, ‘customer loyalty’ and ‘user data’ can be treated as consideration for a supply. After all, customer loyalty and user data must be worth something if a business is prepared to reward getting access to it?

For ‘something in return’ to qualify as a consideration for VAT purposes, there has to be a direct link between a supply and the consideration, which implies an agreed reciprocal performance based on a legal relationship, and the consideration must be capable of being expressed in money.4 If there is a supply for consideration, the supply is taxed to the amount received or to be received by the supplier in return for his supply. If the consideration is not or not entirely in money, the consideration is determined either by the advertised value of the supply (minus the consideration in money, if any)5 or, in absence of an advertised price, the price paid for the supply made in return.6

If a business makes a supply of goods free of charge, this supply can still be subject to VAT, even if the supply was made for business purposes.7 This is different for services.8 If the ‘free’ supply is a supply of goods, it is only taxable insofar as the VAT on those goods or the component parts thereof was wholly or partly deductible.9 This is not required for the supply of ‘free’ services – any service provided for no consideration is subject to VAT, except where that supply is made for business purposes.10 These provisions only apply if the supply is made within the scope of the system of VAT.11 The tax status of the recipient is irrelevant.12 Also, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.13 This means that, as a main rule, when a supply is made free of charge for consumption purposes, VAT will be due. The taxable amount for these supplies is the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application, disposal or retention takes place, where it concerns goods,14 or the full cost to the taxable person of providing the services, where it concerns services.15

This means that in many cases there is no difference in VAT treatment between making a supply of goods for consideration in kind to loyal customers that are private individuals or making the same supply for free: VAT is due on the purchase price of the goods if they have no advertised value for which they can be bought. This should also apply to situations where a consideration in kind is paid for the supply of a service, because for those supplies the taxable amount must correspond to the amount which the supplier is prepared to spend for that purpose, and for the provision of services ‘free of charge’ the taxable amount is ‘the full cost’ of providing the services, which, in my view, is the same amount.

However, situations exist where there is a difference between the VAT treatments of a supply of goods for free and a supply of goods for a consideration in kind. Some examples are:

It is, therefore, relevant to establish whether or not ‘loyalty’, (access to) customer data’ or any other customer action can be qualified as a consideration in kind. In my view, it can be, but it is not always the case.