Value-Added Tax in the ‘Marketing Mix’ and Sales Promotion Methods

The “marketing mix,” also known as the four Ps of marketing, refers to the four key elements of a successful marketing strategy: product, price, place and promotion. The first three Ps sound relatively straightforward: you need to create a product that a particular group of people wants, price it at a level which matches the value they feel they get out of it and put it on sale at some place that they can find it.

The last P—promotion—seeks to make potential customers aware that the product exists and to persuade them to actually choose this product over all other alternatives. The latter can be achieved through sales promotion methods such as price reductions.

Price reductions come in different shapes and sizes. Although they all allow customers to pay less, each type may have different value-added tax implications for the retailer.

Discounts

Under EU VAT law, the taxable amount on which VAT is calculated shall not include discounts and rebates granted to the customer at the time of the supply. If the price is reduced after the supply, the taxable amount should be reduced accordingly. If discounts or rebates aren’t included in the unit price, they must be displayed separately on invoices.

If a business is granted a lump-sum discount that relates to previous transactions, it must allocate the discount to all transactions it relates to and adjust the input deduction accordingly. This also applies if the supplier granting the discount doesn’t issue a correcting invoice or any other supporting documentation (Court of Justice of the European Union, Case C-684/18).

Prompt Payment Discounts

A prompt payment or early settlement discount may be offered to encourage customers to pay more quickly. An example of such a discount is a customer being offered a reduction in the amount payable by 5% if the payment is made within 14 days. Accounting for VAT on prompt payment discounts is more complex than the VAT calculation on normal discounts, and the rules may vary significantly per country.

In Germany, retailers don’t have to correct previously issued invoices if the customer takes advantage of the prompt payment discount. However, in Poland, credit notes are mandatory for such scenarios. In the UK, retailers have two options if the customer pays the lower amount: to issue a credit note for the amount of the discount; or, if they don’t want to issue a credit note, to include further information on the original invoice (such as a statement that the customer can only recover the VAT actually paid, and the terms of the prompt payment discount).

Discount Vouchers

Discount vouchers, also known as money-off coupons, are financial incentives that offer customers a reduction in the price of a future purchase. They are usually issued when another product is bought, or distributed free as part of a marketing campaign. When a discount voucher issued by the retailer is redeemed, VAT is only due on the amount actually received from the customer.

However, where a retailer participates in a manufacturer’s discount scheme and is reimbursed by the manufacturer for the discount given, VAT will be due on the full amount received from both the customer and manufacturer. This usually occurs in two steps. When a manufacturer issues a discount voucher to the final customer who presents it to the retailer, the retailer reduces the price paid by the customer and calculates VAT on the amount received. Next, when the retailer claims the discount back from the manufacturer, VAT is accounted on the reimbursed amount.

Although EU VAT law has special rules for vouchers, these rules don’t apply to discount vouchers. The EU Voucher Directive 2016/1065 excludes from its scope any instrument that entitles the holder to a discount upon purchase of goods or services, without giving the right to receive such goods or services. Where discount vouchers alone are accepted as payment for goods or services, VAT may be due under the rules for giveaways, as explained below.

Giveaways

Under EU VAT law, a 100% price reduction isn’t treated as a discount but triggers the application of the special rules on free supplies. Under these rules, if a retailer gives away goods for no consideration and input VAT on the purchase of these goods has been deducted, the retailer must account for VAT on their purchase price or cost value at the time it gives them away.

The purpose of these rules is to ensure that all transactions that result in consumption are taxed, irrespective of whether they are made for consideration. An exception applies to gifts of low value made to the same person within a particular time period. What is considered as low value varies per country—for example, UK £50 ($62), Germany 35 euros ($38), Ireland 20 euros.

Promotions such as “buy one get one free” aren’t treated as free supplies. The total amount received from the customer is deemed to cover all the items involved. If the items are subject to different VAT rates, the price reduction will have to be apportioned accordingly. Some countries, for example, the UK, allow a simplification if a minor item is supplied with a main item that is subject to a different VAT rate.

If the simplification conditions are met, retailers may account for VAT on the minor item at the same rate as the main one. If a manufacturer makes payments to retailers towards the costs of the promotion, these payments represent additional consideration for the supply to the customer and the retailer must account for VAT on them.

Conclusion

Price reductions are common short-term incentives for retailers to attract new customers, clear inventory, and increase sales. Retailers who offer their customers price reductions must make sure that they account for the VAT correctly. If a low price is charged because a substantial discount is granted, VAT is only due on the discounted amount. However, if no consideration is received, the retailer will have to account for VAT on the cost price of the goods.

From a marketing perspective, giveaways are more attractive to customers than products sold at a low price. But from a financial perspective, they are more expensive, as the retailer must bear the VAT cost.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aleksandra Bal is indirect tax technology & operation lead at Stripe. The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.