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HM Revenue and Customs Brief 46/08


HM Revenue and Customs -Tax Authorities

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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: [2007] EWCA Civ 938 (LMUK). It also provides interim guidance, pending the outcome of our appeal, for those businesses affected by this decision.


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 Collector.

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 partial consideration.

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 VAT purposes.

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 ultimately successful.

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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© Crown Copyright 2008.

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Article Published/Sorted/Amended on Scopulus 2008-09-20 07:42:12 in Tax Articles

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