VAT and free gift promotions

The CJEU has held that the gift of a tablet or smart phone of low value with a subscription for a magazine is to be regarded as part of a single supply with the subscription for the magazine the main supply and the gift of the device ancillary to that supply: Deco Proteste - Editores Lda v Autoridade Tributaria e Aduaneira (Case C-502/22). As such, the supply was subject to VAT at a reduced rate of 6%. The Court rejected the Portuguese tax authorities argument that the gift was a separate transaction which was subject to VAT at the standard rate of VAT on a deemed supply of the gift.

Whilst the decision itself seems uncontroversial (and very much in line with the UK position), the analysis of the Court appears to highlight the purpose of the supplier in seeking to increase magazine sales as an important feature in determining that the devices were merely ancillary to the main supply. This contrasts with the typical approach highlighting the purpose of the average customer as to whether an element represents an end it itself. This raises the possibility of potential conflicts if the purpose of the supplier and average customer do not coincide.

Background

Deco Proteste - Editores (DPE) is a Portuguese company that publishes magazines which were sold on subscription. Under a promotional campaign aimed at attracting new customers, it gave new subscribers a gift of a tablet or smartphone (of a value below €50) when they paid their first subscription payment. No minimum period of subscription was required and the device was not recovered if the subscription was cancelled.

The Portuguese tax authorities took the view that the devices were gifts and, therefore, subject to VAT at the standard rate of 23% based on the deemed supply rules in Article 16 of the VAT Directive. DPE appealed, arguing that the devices were not given away as gifts, as there was no intention to provide something free of charge. In reality, this was a commercial offer consisting of the provision of a service (magazine subscription) with a linked supply of goods (the device) with the consideration for the magazine subscription covering both elements.

Decision of the CJEU

The CJEU has had little difficulty in determining that, on the facts of this case, there was a single supply covering both the subscription for the magazine and the supply of the device. The devices were not, in reality, provided as a free gift.

Did that supply amount to a single supply? The Court noted that the first criteria to be taken into account when considering the existence of a single supply, is "the absence of a distinct purpose of the supply from the perspective of the average customer". In those circumstances, a supply must be considered to be ancillary to a principal supply if it does not constitute for customers an end in itself but a means of better enjoying the principal service.

However, and confusingly, whilst the standard analysis of the Court emphasises the purpose of the average customer, it is interesting that the specific analysis in this case involves the Court emphasising the purpose of the supplier in seeking to increase its sales of magazines. The Court goes on to say: "The fact that the applicant in the main proceedings gives a subscription gift to new subscribers constitutes an incentive to subscribe. Its sole purpose is to increase the number of subscribers to the magazines published by that applicant and, consequently, to increase its profits. Moreover, it follows from the order for reference that the applicant in the main proceedings, in its commercial calculation, takes account of the fact that some subscribers will terminate their subscription after payment of the first monthly instalment, which allows them to keep the gift without being obliged to remain subscribers. The fact remains that the subscription gift enables the applicant in the main proceedings to increase significantly the number of its subscribers each year."

The Court then jumps to the further conclusion (perhaps somewhat disingenuously) that, "The provision of such a gift therefore has no distinct purpose from the point of view of the average consumer, who agrees to pay at least one month's subscription in order to obtain the gift." The Court, rather more rationally, then goes on to point out a separate argument that the provision of a device might also be seen as ancillary to the main supply of a subscription on the basis that it enables a customer to benefit from that main supply by viewing the content digitally.

Comment

It is perhaps unfortunate that the Court has, in this case, highlighted that the test of whether one element is ancillary to another might be determined from the perspective of the supplier as well as from the perspective of the customer. What if those perspectives do not coincide (as might arguably be the case here where customers only subscribed to the magazine for one month to get the device)?

More broadly, the decision that the provision of a "free item" in such circumstances is not a "gift" but that it is provided in part for the overall consideration for the whole supply is very much in line with recent UK VAT decisions, such as the Marks & Spencer decision. Nevertheless, whilst this decision is no longer binding in the UK, businesses may wish to consider if any items treated as "business gifts" (and which have been subjected to output VAT as deemed supplies) might come within the scope of this single supply analysis.