Andrew Needham looks at the VAT consequences of customer loyalty schemes.
What are loyalty schemes?
There are a large number of different loyalty schemes designed to increase turnover and maintain customer loyalty. They do this by linking purchases from a business to a reward, or reduction in price on subsequent purchases, by the issue of points. These schemes are commonly used not only by retail outlets, but also by manufacturers and other suppliers to encourage continued customer loyalty.
In some cases the reward is provided by the original supplier while in other cases they are obtained from a third party who is contracted to provide the rewards for which they receive payment from the original supplier or from a scheme promoter.
More complex loyalty schemes may involve a promotion business running the points scheme. This can result in multiple sponsors, multiple reward suppliers and some sponsors that are also reward suppliers. Each stage of the scheme needs to be examined carefully to confirm the correct VAT treatment.
HMRC’s position
Payments made by a business to a third-party reward supplier usually represent what HMRC calls ‘third party consideration’ for supplies made by the reward supplier to the collector. HMRC said any VAT charged by the reward supplier cannot be reclaimed as input tax by the paying business as the supply is to the customer.
A ruling that the operators of the popular Nectar points loyalty program were entitled to offset VAT against their costs was good news for many businesses which pay for the supply of goods or services but are not the obvious purchaser.
In a 2013 Supreme Court case - HMRC v Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd (LMUK)) [2013] UKSC 15 HMRC argued that Aimia could not recover the input tax because the retailers had supplied goods and services to customers who redeemed their Nectar points and not to Aimia. The payments made by Aimia were third party consideration for those supplies. Aimia argued that, following the principle in the Redrow case, there were two supplies made by the retailers. There was a supply of the goods or services to the customer redeeming the points but also a supply of redemption services to Aimia.
Nectar points are collected when customers shop at partner companies, most notably supermarket chain Sainsbury's. Once collected, points can be redeemed for a range of goods and services, either in whole or in part. As operator of the scheme, Aimia paid the companies offering rewards a ‘service charge’ at an agreed value per point redeemed. Those companies charged VAT on this service charge, which Aimia wanted to recover as input tax.
The UK Supreme Court ruled that Aimia should be entitled to claim input tax against VAT on service charges payable to businesses that redeem loyalty card points, in a split decision that rejected a preliminary ruling by the European Court of Justice. This means that in future the companies running the loyalty schemes can recover the input tax they are charged on services charges paid to the ‘reward suppliers’.
What about the ‘reward suppliers’ VAT?
The reward supplier should account for VAT on goods and services supplied to the customer in the usual way. The value will typically be the total of anything in the way of payment received from the collector, plus any consideration received from the sponsor supplier, manufacturer, or promoter of the scheme.
Practical tip
If a business organises a loyalty scheme for businesses it will now be able to reclaim the VAT on any service charges made by the reward suppliers.
