Marks and Spencers PLC v Revenue and Customs (Tax)

Factual and Procedural Background

This appeal concerns the correct VAT treatment of a promotional offer made by the Appellant called “Dine In for Two – £10 – with Free Wine” (“the Promotion”). The Promotion allowed a customer to choose three food dishes on payment of £10 and obtain a bottle of wine (or other non-alcoholic beverage) described as “free.” Food items sold separately are zero rated for VAT, but wine is standard rated. The central issue was whether the £10 should be apportioned between the food and wine, as contended by the Respondent, or whether the wine was supplied for nil consideration, as contended by the Appellant.

The First-tier Tribunal (“FTT”) decided that the £10 should be apportioned between the food and wine. The Appellant appealed against this decision with permission from the Upper Tribunal. A secondary issue concerned the applicability of a Bespoke Retail Scheme Agreement (“BRSA”) between the Appellant and the Respondent, which the Appellant argued would treat the wine as supplied for nil consideration if the wine was found to be free. The parties asked the Tribunal to decide these issues in principle, leaving the exact VAT calculations to be resolved separately.

The Tribunal heard the appeal on 2 and 3 May 2019 and dismissed the appeal, upholding the FTT’s decision that the £10 should be apportioned between the food and wine.

Legal Issues Presented

1. Whether the £10 consideration paid by the customer should be apportioned between the three food items and the bottle of wine, or whether the wine was supplied free of charge for VAT purposes.
2. If the wine was supplied free of charge, whether the BRSA applied to treat the wine as supplied for nil consideration.

Arguments of the Parties

Respondent's Arguments

• The supply of the three food items and the wine constituted a single transaction with a direct link between the £10 paid and the four items supplied.
• There was a legal relationship and reciprocal performance between the customer and the Appellant, so the £10 was actual consideration for both the food and the wine.
• The label “free” attached to the wine by the Appellant was irrelevant to the VAT analysis.
• It was not necessary for the parties to have agreed a specific allocation of the £10 between the food and wine; the direct link and reciprocal performance sufficed.

Appellant's Arguments

• No part of the £10 paid constituted consideration for the wine; the £10 was solely for the three food items, and the wine was provided free of charge.
• The terms of the promotion, including in-store signage, online terms, and till receipts, consistently described the wine as “free” and the food items as costing £10.
• The three food items were always worth at least £10, and no discount was given if the wine was unavailable, supporting that the wine was free.
• Relied on the decision in Kuwait Petroleum, arguing the wine was a conditional gift linked to the purchase of the food but was not consideration for the £10.
• The timing difference between this Promotion and Kuwait Petroleum (wine supplied simultaneously here, vouchers later there) was not a material difference.
• The economic reality was that the £10 was for the food alone, and the wine was a free promotional item.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lex Services plc v Customs and Excise Commissioners [2004] STC 73	Fiscal neutrality and importance of legal certainty in VAT treatment.	Supported the proposition that different VAT effects in previous promotions did not breach fiscal neutrality.
Hartwell plc v Customs and Excise Commissioners [2003] STC 396	Value given by parties is relevant, not third-party valuation.	Supported Appellant’s helpful propositions but did not resolve the central issue.
Airtours Holidays Transport Ltd v Revenue and Customs Commissioners [2016] STC 1509	Contractual analysis must consider economic and commercial reality.	Tribunal applied Lord Neuberger’s approach in assessing the nature of the agreement.
Secret Hotels 2 Ltd v Revenue and Customs Commissioners [2014] UKSC 16	Economic reality and commercial common sense guide VAT characterisation.	Used to support that “free” was a marketing label, not reflecting true consideration.
Kuwait Petroleum (GB) Ltd v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488	Distinction between separate transactions and the need for direct link in consideration.	Appellant relied on it to argue wine supplied free; Tribunal distinguished based on simultaneous supply.
Staatssecretaris van Financiën v Association Coöperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445	Definition of “consideration” requiring a direct link between supply and payment.	Confirmed that VAT consideration is the actual value given by the customer, not objective market value.
HMRC v Loyalty Management UK Ltd (Joined Cases C-53/09 and C-55/09) [2010] STC 2651	Consideration must be linked directly to the supply; contractual terms are important but not conclusive.	Applied to confirm the need for reciprocal performance and legal relationship.
Apple and Pear Development Council [1988] STC 221	Direct link between charge and benefit required for VAT consideration.	Reinforced principle that no direct link means no consideration.
Tolsma v Inspecteur der Omzetbelasting Leuwarden (Case C-16/93) [1994] STC 509	A supply is for consideration only if there is reciprocal performance and a legal relationship.	Used to affirm the legal relationship and reciprocal performance requirement.
National Car Parks Ltd v HMRC [2017] UKUT 247 (TCC), [2017] STC 1859	Confirmed VAT consideration is the actual amount paid with a direct link to the supply.	Applied to analogise the variability of consideration and direct link in the instant case.
Town and County Factors Ltd v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263	Existence of legal relationship can suffice for VAT even if contract is not legally enforceable.	Supported that legal enforceability is not necessary to establish VAT consideration.
HMRC v Newey (trading as Ocean Finance) (Case C-653/11) [2013] STC 2432	Contractual terms must reflect economic and commercial reality; artificial arrangements are disregarded.	Applied to assess whether contractual terms genuinely reflect the transaction’s reality.
WHA Ltd v Revenue and Customs Commissioners [2013] UKSC 24; [2013] STC 943	Contractual position is a useful starting point but not conclusive for VAT analysis.	Cited to support the Tribunal’s approach to contractual interpretation and economic reality.

Court's Reasoning and Analysis

The Tribunal began with the accepted legal test that a supply is made for consideration only if there is a direct link between the goods or services provided and the consideration received, establishing a legal relationship involving reciprocal performance. Both parties agreed this test derived from EU law and relevant CJEU case law.

The Tribunal examined the terms of the Promotion and the commercial and economic reality. It found the Promotion was a single transaction: the customer paid £10 at the till and simultaneously received three food items plus a bottle of wine or alternative beverage. It was not possible to separate the transaction into two distinct parts, nor could the customer purchase the food items first and later claim the wine.

The Tribunal observed that although the wine was described as “free” in marketing materials and receipts, this was a promotional label, akin to “buy two get one free,” rather than an indication that the wine was supplied for nil consideration. Over 99% of customers took the wine, which was typically the most valuable item in the bundle by shelf price.

The Tribunal rejected the Appellant’s reliance on Kuwait Petroleum, distinguishing that case on the basis that it involved two separate transactions separated in time, whereas here the supply was simultaneous and indivisible.

Consequently, the Tribunal concluded that the £10 consideration was paid for the combined supply of the three food items and the wine, requiring apportionment of the £10 for VAT purposes.

Regarding the BRSA, the Tribunal noted that the Appellant conceded that if the wine was not supplied free, the BRSA issue did not arise. However, the Tribunal expressed a differing view from the FTT, finding that the Promotion fell within the BRSA’s example of “free items” and that the BRSA was intended to be illustrative and cover future promotions, not only those existing at the time of its signing. The Tribunal interpreted clause 5.1 of the BRSA narrowly, holding it did not displace express agreed treatments.

Ultimately, since the Tribunal upheld the finding that the wine was not free, the BRSA did not prevent output tax being charged on the wine element.

Holding and Implications

The Tribunal DISMISSED the Appellant’s appeal, upholding the FTT’s decision that the £10 paid by customers under the Promotion should be apportioned between the three food items and the bottle of wine for VAT purposes.

The direct effect is that output tax is chargeable on the wine element of the Promotion. The Tribunal declined to alter the BRSA’s effect, confirming it does not prevent VAT being charged on the wine in this context.

No new legal precedent was established; the decision applies established principles of VAT law concerning consideration, direct link, and contractual analysis in the context of promotional offers.