VAT on Promotions

[richb78uk]

I'm writing an ecommerce prmotions module to handle by x get x free and x for x. There seems to be little agreement on how the VAT should be calculated so I hope somone can shed some light on it, see my example below with 3 options which I've found so far at Rev & Customs and other sources.

Customer Buys:
DVD1 £8.51 (Ex VAT 17.5%)
Book1 £12.00 (0% VAT)
Teddy1 £6.81 (EX VAT 17.5%)

You have a 3 for 2 promotion on these products so Teddy1 is Free because its cheapest

Order Total is £20.51 (ExVAT)


So on this order how would you charge VAT:

Option 1: Charge VAT at 17.5% on Order Total: £3.58 VAT

Option 2: Charge VAT Just on DVD1: £1.49 VAT

Option 3: Apportion VAT in proportion (ie mixed rate):
Total Order Before Discount Ex VAT = £27.32
0% Portion of Total is 44%
17.5% Portion of Total is 56%

Apply these portions to our total: £20.51
£12.02 at 0%
£15.29 at 17.5% = £2.68 VAT

[David Griffiths]

This is known as a mixed supply and you can find information about it in the VAT guide, section 8.1 (http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&id=HMCE_CL_001596#P648_52231)

Basically you make an apportionment, as you've done in example 3. You'll see that the book says that there are no hard and fast rules but the method must be fair, and example 3 looks to be perfectly fair