M&S has recently lost a VAT case at the First-tier Tax Tribunal. The case related to the M&S “Dine In for £10 with Free Wine” promotional offer. Unless M&S can successfully appeal the Tribunal decision, it will be left with a hefty VAT bill (just under £12m).
The VAT status of food supplies can be complex. Generally the supply of food is zero-rated, but the supply of wine is standard-rated and so gives rise to 20% VAT. This case boiled down to two competing views on the M&S promotion:
- The M&S view: that the wine really was free and so should not be subject to VAT.
- The HMRC view: that the wine was described as “free” for promotional purposes, but in reality formed part of the supply made for £10 (such that part of the £10 ought to be apportioned to the wine element, and some VAT was therefore chargeable).
On balance, the Tribunal preferred the HMRC analysis. In particular, it noted that:
- receipt of the wine was conditional on the simultaneous purchase of the other three meal items in the promotion and payment of £10;
- the wine was an integral part of the offer and was often the most valuable element of the four items supplied to customers (and a meal deal without it did not make economic sense because customers would not necessarily save any money); and
- although customers were not compelled to take the “free” wine with the meal, in fact over 99% did.
In the words of the Tribunal, “what matters is not that a customer may choose to take only the food items for his £10 but that he cannot acquire the wine without paying £10 and taking the food items…notwithstanding the label attached to it by M&S, [the wine] is not free... 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.”
The case is a disappointing result for M&S, but does serve to highlight just how difficult it can be to apply the correct VAT treatment to retail promotions and offers. In the present case, M&S failed on both the main issue (the wine is not “free”), and also a secondary issue (even if the wine is a gift, a deemed market value supply would arise under specific “business gift” VAT rules). On that basis, any appeal by M&S will be an uphill battle.
Broadly speaking, in assessing the VAT treatment, a Tribunal will look at the nature of the relationship between the supplier and customers. It will look first to the contractual terms (often sparse if those terms are between major retailer and individual customers, and influenced by commercial considerations and a desire for brevity and simplicity). Those contractual terms must then be assessed against economic and commercial reality to determine the VAT position.
That assessment process is no easy task. M&S will not be the last food retailer to face an HMRC challenge on the VAT treatment of its promotional offers.
For more information on this case or any other tax matter please contact Matthew Short on direct Tel: +(44)(0)1223 222431 or Email: Matthew.Short@Mills-Reeve.com.