The European Court of Justice (ECJ) has ruled in favour of HMRC in a joined case involving two companies that claimed input VAT on payments made to operate a customer loyalty programme. The ruling is likely to disappoint taxpayers as originally the court of appeal had decided in their favour whilst the House of Lords had referred it to ECJ.
The cases involve two companies, Loyalty Management UK Ltd (LMUK) and Baxi Group Limited, the boiler and heating business:
· LMUK operated the ‘Nectar’ points scheme where consumers could redeem the points earned on shopping for products or services from other merchants known as redeemers. Whenever a consumer redeemed the points and collected an item from a merchant (redeemer) this way, LMUK paid the redeemer a service fee. LMUK claimed a credit for input tax paid on the fees paid to redeemers. HMRC rejected the claim saying the redeemers didn’t make a taxable supply to LMUK, rather it was a third party supply made to the consumers.
· Baxi, a manufacturer of boilers and other heating products, too offered loyalty points to its customers who bought its products. The points could be redeemed against their goods or services. However, the scheme differed from LMUK in that Baxi subcontracted the operation of the loyalty rewards scheme to a company called @1. Baxi paid @1 the retail sale price of the loyalty rewards and certain charges for specific services it received. Baxi sought to deduct the VAT on total payments made to @1. HMRC admitted the VAT claim on payments for services made by @1 direct to Baxi but rejected the claim for VAT refund on the supplies of goods made by @1 to the customers on Baxi’s behalf.
Given the wider ramifications of this ruling, companies operating various customer loyalty point schemes in the UK would need now to factor in this VAT element in their pricing decisions.
