Marketing Plan Backfires

A ST J PRICE FCA comments on a case where a seemingly good marketing idea resulted in an unexpected expensive VAT bill.

'WHAT DO YOU know about the difference between a multiple supply at two different rates of VAT and a compound or composite one covering various elements but at the same rate?' I asked.

'Try me,' replied the Busy Practitioner.

'Well, suppose you are a nappy manufacturer, who normally sells packs of 124 nappies in a cardboard container. Your marketing department suggests putting them in a "free" plastic toy box at the same price. The idea is that, if you can sell a month's supply of nappies to a new mother, she will, with a bit of luck, go on buying your brand. The nappies are zero rated as articles designed as clothing for young children and not suitable for older persons. Is the box, which carries your nappy trademark, part of the zero rated supply?'

'Is not Commissioners of Customs and Excise v United Biscuits (UK) Ltd (trading as Simmers) [1992] STC 325 the answer to that one? Surely the tribunal held that you can package biscuits in a fancy tin and you still only have one supply because you need a container for them anyway?'

'That was my initial reaction. However, first thoughts in VAT are often wrong. In Kimberly-Clark Ltd (17861), the tribunal found several distinctions. Can you work out what they were?'

'Surely, the basic principle is the same in both cases? The box and the tin are containers needed as a means of packaging the product. Perhaps, the biscuit tin carries a more discreet trademark than the box but, essentially, they are both containers.'

'Yes but, in United Biscuits, the supply was of biscuits in a biscuit tin, not of biscuits in a general-purpose container. Moreover, the tin lengthened the shelf life of the biscuits. In contrast, the box made no difference to the practicalities of delivering the product or to its storage life. Moreover, the box must have been fairly big, since nappies are bulky and therefore had an obvious value for storing things.'

'But surely, the biscuit tin had a marketing purpose too, since it made the kind of attractive present which one would buy for granny.'

'Yes, but you would not usually buy nappies as a present. Moreover, the tin's subsequent use would be primarily for storing zero-rated food. In contrast, the box added an additional incentive to buy those particular nappies because of its subsequent value for storing toys or other items. The marketing promoted the box as a storage item, not as packaging for the nappies.

'Taking an overall view of the matter, the tribunal found the supply of the box to be separate from that of the nappies and with a distinct use. There was not therefore a single element, but two component parts. That of the box was not ancillary to the main supply of nappies, because it could not be said that it was merely a means of better enjoying or facilitating the use of them.'

'But was the price the same as the supply in a cardboard box?'

'Yes, but the tribunal found that that had as much to do with the nature of the promotion as with that of the supply. It thought that a customer for the nappies, if asked what she was buying, would say "nappies and a free toy box" whereas a purchaser of the biscuits would say "I'm buying a fancy tin of biscuits".

'Another point, which the tribunal did not make, was that the promotion in the box was temporary, whereas fancy biscuit tins are a permanent feature of the marketplace.

'The tribunal also rejected the idea that the box was supplied for no consideration and therefore free of VAT. Even if it was free because there was no extra sum charged, the transaction was caught under the repetitive gift rule, since retailers will have bought bulk supplies.'

'Oh dear! Do you claim you would have advised correctly on that one?'

'No, I might well have got it wrong, but then the constant learning process in VAT is one of the aspects which keeps me interested in it!

'This case also illustrates, yet again, the need for marketing departments to consult VAT specialists. No doubt, most people in marketing would be aghast at the idea of having to check with the accountants, let alone the tax department. Yet failure to do so can be expensive. Kimberly-Clark was already spending money on the box as a marketing ploy, which was cutting its profit margins. Now it has a VAT bill of over £321,000, which will have dug a further nasty hole.

'Technically, Customs could now pursue the retailers since their supplies were partly standard rated, and at a higher price including the retail margin. However, perhaps they will leave them in peace if Kimberly-Clark agrees not to try to collect the VAT, which it ought to have charged in the first place.'

A St J Price FCA is a VAT consultant in Gloucestershire and author of Value Added Tax in the Tolley's Tax Essentials series, now in its third edition. He may be contacted on 01285 851888, fax: 01285 851889, e-mail: asjprice@aol.com.

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