Subject: Interpretation of “samples” and “gifts of small value” under the Sixth VAT Directive in the context of free promotional music distributions.
Executive Summary:
This European Court of Justice (ECJ) judgment concerns the Value Added Tax (VAT) treatment of free copies of recorded music distributed by EMI Group Ltd for promotional purposes. The case clarifies the interpretation of “samples” and “gifts of small value” as exceptions to the general rule that applying business assets for non-business purposes is subject to VAT. The Court ruled that promotional music distributions can qualify as “samples” even if they are in their final form and distributed in large quantities, provided they are intended for assessment and promotion. National legislation cannot arbitrarily limit the definition of “samples” or “gifts of small value” in a way that undermines the EU directive. While Member States have some discretion in defining “small value” for gifts, this cannot extend to treating gifts to different individuals at the same employer as gifts to a single person. The recipient’s VAT status is irrelevant.
Main Themes and Important Ideas/Facts:
- The Dispute: EMI Group Ltd challenged the UK tax authorities’ (Commissioners for Her Majesty’s Revenue and Customs) position that VAT was due on free copies of recorded music distributed for promotional purposes. EMI argued these distributions should be exempt as “samples” or “gifts of small value” under the Sixth VAT Directive.
- Legal Context (Sixth VAT Directive Article 5(6)): The core of the case revolves around Article 5(6) of the Sixth VAT Directive. This article states that applying business goods for private use or disposing of them free of charge is treated as a taxable supply unless it is for “the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business.”
- Purpose of Article 5(6): The first sentence aims to prevent untaxed final consumption by treating certain non-consideration transactions as taxable supplies, ensuring equal treatment with a final consumer.
- Purpose of the Second Sentence (Samples and Gifts): This constitutes an exception, exempting samples and gifts of small value for business purposes from VAT.
- Interpretation of “Samples”:Lack of Definition: The Sixth Directive does not define “samples.” Interpretation requires considering the wording, context, and objectives of Article 5(6).
- Narrow Construction: The exception for samples and gifts is to be construed narrowly to avoid undermining the purpose of the first sentence of Article 5(6), while still being effective.
- Two-Stage Assessment: To determine if a distribution is a sample, a two-stage assessment is required:
- Is the distribution consistent with the essential characteristics of a sample?
- Examine the specific circumstances of the distribution.
- Essential Characteristics of a Sample: A sample’s objective is to “promote the product of which the samples are specimens, by allowing for the quality of that product to be assessed and for verification that the product has the qualities sought by a potential or actual buyer.” (Paragraph 22)
- Samples in Final Form: The concept of samples cannot be limited to goods given in a form not ordinarily available for sale. For certain products, such as recorded music (CDs), distribution in the final form is necessary for full assessment. “Goods, distributed as samples, which are identical to the final product to be placed on the market are, it is true, liable to be the subject of final consumption. That fact cannot, however, justify an exemption in respect of samples covering only those specimens which differ from the product represented…” (Paragraphs 26-27)
- Recipient of Samples: Samples can be distributed to individuals other than potential buyers, such as intermediaries (journalists, radio presenters, “pluggers”), provided this distribution is consistent with promotional objectives. This is particularly relevant in the artistic sector where critical assessment by intermediaries influences market coverage.
- Quantity of Samples: The distribution of multiple or even a significant quantity of samples to the same recipient is not, in principle, excluded from the exemption, as the necessary quantity depends on the nature of the product and the recipient’s use of the samples. In the case of recorded music and “pluggers,” distributing hundreds of copies may be necessary for further distribution to influential individuals. “The mere fact that the number of copies distributed, in such a context, might amount to several hundred… cannot be considered, in itself, to be contrary to the objective pursued by the exemption in respect of samples, in so far as that number of copies is consistent with the nature of the product represented and with the use which the ‘plugger’, as an intermediary, must make of those copies…” (Paragraph 36)
- Improper Use of Samples: The possibility of improper use (e.g., samples entering the normal sales chain) does not automatically affect their classification as samples. Member States can require precautions like mandatory labelling (“Promotional Copy Not For Resale”) or contractual clauses with intermediaries.
- National Legislation Restrictions on Samples: National legislation cannot generally limit “samples” to non-saleable forms or only the first in a series of identical specimens, unless this allows for consideration of the product’s nature and the specific business context.
- Interpretation of “Gifts of Small Value”:Margin of Discretion for Member States: While the expression “small value” is not uniformly defined in the Directive, Member States have “a certain margin of discretion as regards the interpretation of that provision, provided that they do not fail to have regard to the objective and role of the provision at issue within the scheme of the Sixth Directive.” (Paragraph 42)
- Monetary Ceilings: National legislation setting a monetary ceiling, such as the GBP 50 limit in the UK legislation, is compatible with the Directive. This also applies to cumulative ceilings for gifts to the same person over a fixed period or forming part of a series. “The setting, in national legislation, of a monetary ceiling of the order of that established by the legislation at issue in the main proceedings, namely GBP 50, does not go beyond the margin of discretion granted to Member States. The same holds true with regard to a rule under which such a ceiling applies cumulatively to gifts made to the same person in the course of a 12‑month period or, alternatively, forming part of a series or succession of gifts.” (Paragraph 44)
- Treating Gifts to Different Individuals as to the Same Person: National legislation that presumes gifts to different individuals with the same employer are gifts to the same person (the employer) is not compatible with the Directive. This would undermine the effectiveness of the exemption for small value gifts. “Such national legislation, a fortiori where it establishes a cumulative monetary ceiling for all gifts made to the same person in the course of a fixed period, would deprive the provision – which provides that gifts of small value made for business purposes are exempt from VAT – of its effectiveness.” (Paragraph 48)
- Determining the Recipient: Classifying a distribution as a “gift of small value” depends on the distributor’s intended final recipient, irrespective of their working relationship or shared employer.
- Recipient’s VAT Status: The tax status of the recipient of samples (e.g., whether they are a fully taxable person able to deduct input VAT) is irrelevant to the classification of the distribution as a sample.
Quotes from Original Sources:
- Article 5(6) of the Sixth Directive: “The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the [VAT] on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business shall not be so treated.” (Paragraph 4)
- Purpose of Article 5(6) First Sentence: “…to ensure equal treatment as between a taxable person who applies goods for his own private use or for that of his staff and a final consumer who acquires goods of the same type…” (Paragraph 17)
- Purpose of Samples Exemption: “…to reflect the commercial reality that the distribution of samples is carried out in order to promote the product of which the samples are specimens, by allowing for the quality of that product to be assessed and for verification that the product has the qualities sought by a potential or actual buyer.” (Paragraph 22)
- Samples in Final Form: “…in many cases, making available specimens which correspond to that product in its final form is a necessary prerequisite for the process of assessment.” (Paragraph 27)
- Quantity of Samples: “…the distribution of a number of specimens by way of ‘samples’ cannot be considered, in principle, to be excluded from the scope of the exception in respect of ‘samples’… since the number of samples which a taxable person can distribute to the same recipient… depends on the nature of the product represented and on the use to which the recipient must put those samples.” (Paragraph 33)
- National Legislation on Samples: “…That term cannot be limited, in a general way, by national legislation to specimens presented in a form which is not available for sale or to the first of a series of identical specimens given by a taxable person to the same recipient, unless that legislation allows account to be taken of the nature of the product represented and of the specific business context of each transaction in which those specimens are distributed.” (Paragraph 40)
- Margin of Discretion for Gifts of Small Value: “…The Member States therefore have a certain margin of discretion as regards the interpretation of that provision, provided that they do not fail to have regard to the objective and role of the provision at issue within the scheme of the Sixth Directive…” (Paragraph 42)
- National Legislation Treating Gifts to Different Individuals as to the Same Person: “…Such national legislation… would deprive the provision – which provides that gifts of small value made for business purposes are exempt from VAT – of its effectiveness.” (Paragraph 48)
Implications:
This judgment has significant implications for businesses distributing products for promotional purposes within the EU, particularly in sectors where assessment requires providing the final product (like music or software). It clarifies that national VAT legislation cannot impose overly restrictive interpretations of “samples” or “gifts of small value” that are incompatible with the principles of the Sixth Directive. Businesses should review their promotional distribution practices and relevant national VAT legislation in light of this ruling.
Note: The reference to VATupdate.com in the second source provides context about the platform as a source of information on VAT and customs updates but does not directly contribute to the legal analysis of the EMI case itself.
See also
Flashback on ECJ Cases – C-581/08 (EMI Group Ltd) – Definition of a ”Sample” – VATupdate
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
