HM Revenue and Customs Brief 46/08
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Issued 17 September 2008
VAT: Court of Appeal decision in the case of Loyalty Management (UK) Ltd (LMUK)
- HMRC position, pending outcome of appeal to the House of Lords
This brief confirms that the House of Lords has given us leave to appeal the
decision of the Court of Appeal in the case of Loyalty Management (UK) Ltd
C3/2006/1560 NCN:  EWCA Civ 938 (LMUK). It also provides interim guidance,
pending the outcome of our appeal, for those businesses affected by this
LMUK runs the Nectar Loyalty Scheme, whereby members of the public can
register as 'Collectors' and accumulate Nectar points when they buy qualifying
goods or services from 'Sponsors'. Collectors are able to exchange these points
for rewards of goods or services with specific suppliers, known as 'Redeemers'.
The Redeemer notifies LMUK of the number of points redeemed on a monthly basis
and receives payment from LMUK for these points based on a contractually agreed
amount for the points. This payment is described as the 'Service Charge'.
LMUK considers that the Service Charge payment is consideration for
'redemption services' supplied to it by Redeemers. It contends that these
supplies of services are wholly standard rated and that the Redeemers should
issue LMUK with tax invoices. LMUK regards the amounts charged as VAT on these
invoices as its input tax. It accepts that the Redeemer makes a supply of the
Reward goods or services to the Collector but only to the extent that the
Redeemer receives monetary consideration from the Collector.
We view the payment of the Service Charge by LMUK as third party
consideration for the supplies of reward goods and services by the Redeemers to
the Collectors, not as consideration for the supply of redemption services to
LMUK. As a result, none of the VAT charged by redeemers is recoverable by LMUK
as its input tax as the supplies have not been made to LMUK but to the
The Court of Appeal found that, on the facts of the case, there is a taxable
supply of redemption services by redeemers to LMUK in respect of which LMUK is
entitled to input tax credit. The payment made to the Redeemer by LMUK was held
to be consideration for those services. The Court confirmed that all such
payments from LMUK to Redeemers were consideration for fully standard rated
supplies (redemption services).
We have appealed the decision to the House of Lords, who gave leave and
decided to refer the matter to the European Court of Justice. It will be some
while before the final outcome of this litigation is known.
Our guidance on treatment of supplies and claims pending the outcome of our
appeal to the House of Lords
The Court of Appeal decision represents the law as it currently stands.
Therefore, Redeemers, although not party to the litigation, are nonetheless
affected by it. Redeemers need to ensure that the treatment of the Service
Charge accords with that decision, and that LMUK can benefit from the decision.
As we do not agree with the Court of Appeal’s reasoning and have appealed to
the House of Lords, we will continue to proceed on the basis of our view of the
law in relation to all parties, including LMUK. This is consistent with Notice
700/45 How to correct VAT errors and make adjustments or claims, section 8 and
paragraph 8.6 in particular.
If our appeal fails, corrective action, Notice 700/45 How to correct VAT
errors and make adjustments or claims, as per paragraph 8.7, will apply.
Redeemers are obliged to account for output tax due on the value of the full
consideration received from LMUK. Where this is not done, we will seek to assess
the amounts of output tax due, subject to the usual time limits. Redeemers thus
affected may wish to make protective claims for the additional VAT due, in the
event that our appeal is ultimately successful.
LMUK are entitled to reclaim input tax on output tax charged to it by
Redeemers to the extent that such claims are supported by the proper evidence,
in which case we will ensure assessments are in place to protect our position
pending the outcome of our appeal.
Redeemers - supply of rewards for no consideration
Since the consideration paid by LMUK is currently seen to be for redemption
services, rewards are being supplied by Redeemers to Collectors without
consideration or, where the collector pays cash in addition to points, for
The Court's view was that when payment for the 'reward' was partly cash (from
the Collector) and partly points, the supply was to the Collector to the extent
he paid for it. Therefore, the decision does not affect supplies of rewards by
redeemers to Collectors for partial consideration.
However, our view is that, where the supply by a Redeemer of a reward of
goods is made wholly for points, and the redeemer is entitled to input tax
deduction, the Redeemer is making a supply of those goods (under Schedule 4(5)
to the VAT Act 1994). VAT will be due, subject to the normal business gift
rules. Notice 700/7 Business Promotion Schemes covers the treatment of gifts.
Where Redeemers have not and/or do not account for output tax due on these
gifts, we will protectively assess for any output tax arising subject to the
usual time limits pending the outcome of the litigation. Where Redeemers do, or
have, accounted for output tax due on these gifts, they may wish to make
protective claims in the event that our litigation is ultimately successful.
Treatment of similar loyalty schemes
The Court of Appeal's decision was based on the specific facts of the case.
Therefore, we will continue to look at claims for similarity on a case-by-case
basis. It is our view that, until the LMUK litigation is finally concluded, it
is not clear on what basis other schemes might be seen as materially similar for
Consequently, if any other loyalty scheme promoter has claimed or taken an
input tax deduction in relation to payments it has made for goods or services
provided to members of the scheme by a third party, for example,
Redeemer/Supplier, we will disallow such a claim and invite an appeal to the VAT
and Duties Tribunal against that decision. Where we see that there might be some
similarity with the situation in LMUK, we will make an application to stay the
Tribunal proceedings, pending the final outcome of our appeal in LMUK.
As a consequence of a promoter claiming input tax deduction which we have
disallowed as third party consideration, we will look at the situation of the
third party suppliers of rewards in those schemes and protectively assess
against the eventuality that the payments are for services akin to redemption
services in the LMUK case. The position of supplies of rewards for no
consideration will be considered for protective assessment. In that case, those
affected may wish to make protective claims in the event that our litigation is
For further help or advice, please contact the National Advice Service on Tel
0845 010 9000 or Tel 0845 000 0200 (text phone).
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Article Published/Sorted/Amended on Scopulus 2008-09-20 07:42:12 in Tax Articles