4.5.2.1 The legal agreement regarding specific elements to a multiple-element supply is generally leading

As mentioned before, for determining the VAT treatment of a multiple-element transaction, as a main rule, every element of the transaction should be treated as distinct and separate. In my view, this main rule should also be applied when determining whether the consideration received for a multiple-element transaction must be allocated to certain elements. This means that if, in a multiple-element transaction, some elements are agreed to be made for consideration and one or more elements are agreed to be made for free, the total amount paid should, as a main rule, only be allocated to the elements that are agreed to be made for consideration. If one or more elements of a multiple-element supply have not been specifically agreed on as being made for consideration, the consideration for this composite supply cannot be allocated to those elements. This view is supported by (at least) two CJEU cases.

In the Fillibeck case,1 the German tax authorities wished to impose VAT on the ‘free’ transport provided by Fillibeck to its employees.2 Fillibeck tried to argue that transporting his employees to a work site was actually paid for by the employees, and therefore done ‘for consideration’, on the basis that the transportation was paid by ‘a proportion of the work performed by the employees’, which was, in Fillibeck’s view, sufficiently well-defined and agreed. The CJEU did not agree with Fillibeck, explaining that “… since the work to be performed and the wages received are independent of the use or otherwise by employees of the transport provided to them by their employer, it is not possible to regard a proportion of the work performed as being consideration for the transport services. In those circumstances, there is no consideration which has a subjective value and a direct link with the service provided”.3 In other words, Fillibeck provided a service but not for consideration, because no specific payment4 was agreed or paid for it.5 Even though in this case, no actual ‘multiple element supplies’ were made, it is clear from the ruling that a consideration cannot be partially allocated to something (an act, an element) if that was not explicitly agreed.

In the Kuwait Petroleum case,6 the UK tax authorities argued that the provision of gifts by a petrol company should be taxed as the (free) supply of gifts. The petrol company, Kuwait Petroleum, operated a scheme where people that purchased petrol could choose to collect a voucher per fixed amount of petrol purchased (e.g. with every 12 litres of fuel). The goods were provided to these clients in exchange for the vouchers with no additional payment. Kuwait Petroleum, using similar arguments as the German tax authorities in the Fillibeck case, argued that a proportion of the payment for the petrol should be considered to be made for these ‘gifts’, which would mean that the taxable amount for the totality of the supplies would only be the consideration received for the petrol and that there was no additional supply ‘free of charge’ which should be taxed separately (in addition to the supply of the petrol that was supplied for consideration).

Even though the CJEU stated that it is for the national court to inquire whether, at the time of purchasing the fuel, the customers and Kuwait Petroleum had agreed that part of the price paid for the fuel, whether identifiable or not, would constitute the value given in return for the vouchers or the redemption goods, in its view nothing suggested that there was such reciprocal performance by the parties involved. The CJEU substantiates this view by stating that, first, under the promotion scheme the redemption goods were described as gifts and second, that the retail price of the fuel sold, whether or not the purchaser accepted the vouchers, was the same and this was the only price referred to on the invoices issued in relation to the fuel purchase. Therefore, according to the CJEU, Kuwait Petroleum could not reasonably maintain that the price paid by the customers of fuel in fact contained a component representing payment for the value of the vouchers or the redemption goods.7 The CJEU upheld this decision in later rulings.8

The key point made in this case is that in the ‘main’ agreement (regarding the supply of fuel for consideration) between parties nothing was mentioned or agreed about a payment for the supply of the vouchers or redemption goods. More than that, the redemption goods were actually advertised as free.

In my view, the outcome of this case correctly reflects the ‘economic and commercial reality’ of these transactions. From an economic perspective, it can be argued that businesses never give away anything for free and that the price of ‘gifts’ will normally be included in the price of the products sold for consideration. However, this is ‘economic reality’ in the sense of ‘economically’ or ‘from a financial point of view’ rather than the concept of ‘commercial reality’ or ‘the way a business is normally run’, which in my view should be applied to this case.

From a commercial perspective, businesses prefer advertising or offering promotional products for free rather than for consideration, since ‘free’ items appeal more to customers. This means that the ‘commercial reality’ of the transaction implies that the promotional products are indeed offered free of charge. In my view, the supply of the promotional products is not absorbed by (or amalgamated with) the supply of the petrol – they are separate supplies from a VAT perspective, as I explained Section 4.2. Even though customers of Kuwait Petroleum have a right to the vouchers, the vouchers are not part of the supply of the petrol. The supply of the vouchers or, indirectly, the promotional products, are free supplies made conditional to the supply of a certain amount of petrol. The fact that the customers could decide not to take the vouchers, in my view, does not change that. In economic, or commercial, reality the goods are supplied free of charge.

Also, based on the EU VAT rules that are relevant for deciding whether a supply is made for consideration, the required ‘direct link’ between the payment (for the petrol) and the supply of the promotional products is absent. Besides the fact that the legal agreement stipulates that the goods are supplied for free, all customers that purchase petrol pay exactly the same amount per unit of petrol, regardless of whether they accept free vouchers with that supply. There is no agreed ‘quid pro quo’ as regards the payment and the supply of the vouchers or the ‘underlying products’. The only ‘quid pro quo’ is the consideration paid by the customers for the supply of the fuel, which is offered at a specific price per unit. The fact that Kuwait Petroleum used part of the turnover generated by the sale of petrol to fund the supply of the promotional products is an internal accounting matter rather than a basis for establishing a direct link between the payment for petrol (as based on an explicit legal agreement stipulating price per unit) and the supply of the promotional gifts.

Based on the above, it can be argued that the legal relationship or the agreement dictates whether the consideration agreed and paid/received for a multiple-element supply should also be allocated to specific elements thereof. In my view, in both CJEU cases described above, the legal agreements between the parties could be used as a basis for the VAT consequences of the transactions, as they correctly reflected the ‘economic and commercial reality’ of these transactions.

As I mentioned in Section 2.5, ‘economic and commercial reality’ is, in my view, based on the purport or aim of the agreement between the parties, separate from the way in which that agreement is put into wording/writing.9 Only where the ‘economic and commercial’ reality deviates from legal reality, the VAT treatment of a transaction should not be based on the legal reality but the economic and commercial reality.10

The accountancy approach to transactions can also be seen as the application of a specific form of ‘commercial and economic reality’ (see Section 4.5.2.2). For multiple-element transactions where one (or more) of the elements is advertised as (and agreed to be) free, in my view this ‘reality’ can be also be applied, as I will describe in Section 4.5.2.6.

The above implies that business making composite supplies are very much in control of the VAT treatment of their composite supplies, as they decide how to advertise the specific separate elements of a composite supply and how they price these elements, as well as how the transactions are legally agreed. Customers, especially end consumers, normally are not actively involved in negotiating the terms to an agreement for the supply of goods or services to them. This does not mean that these businesses have unlimited powers in this respect: they are also bound by ‘economic and commercial reality’. For example, advertising the supply of a car (subject to the standard VAT rate) where the purchaser also gets a bunch of flowers (subject to the lower VAT rate) as the purchase of (a very expensive) “bunch of flowers and a free car!” should not result in applying the lower VAT rate to the entire consideration for this composite supply. I will elaborate on the mitigating effect of the application of ‘economic and commercial reality’ to the ‘unlimited power’ of businesses deciding the VAT treatment of composite supplies in Section 4.5.2.6.