| REVENUE — Value added tax — Deductibility of input tax — Supply of secondary goods and services under loyalty points award scheme operated by taxpayer — Scheme operator paying service charge including VAT for redemption services — Whether goods supplied by redeemer to collector or to scheme operator for VAT purposes — Whether VAT deductible by scheme operator as input tax
Loyalty Management UK Ltd v Commissioners for HM Revenue and Customs [2007] EWCA Civ 1928
CA: Chadwick, Laws LJJ and Evans-Lombe J: 5 October 2007
The supply of goods or services by a retailer when redeeming loyalty points collected by a customer under the Nectar Loyalty Scheme was, for VAT purposes, a supply of “redemption services” to the scheme operator, as well as of goods and services to the customer, and the scheme operator was therefore entitled to input tax credit on its payments, by way of a “service charge”, to the retailer.
The Court of Appeal so stated in allowing the appeal of Loyalty Management UK Ltd (“LMUK”) from Lindsay J [2007] STC 536 who, on 22 June 2006, had allowed the appeal of the Commissioners for HM Revenue and Customs from the decision of the VAT and Duties Tribunal released on 6 April 2005 in favour of LMUK.
LMUK operated the Nectar Loyalty Scheme, whereby customers (“collectors”) who purchased primary goods from participating retailers received Nectar loyalty points which they could redeem to acquire secondary goods or services from those or other suppliers (“redeemers”) at no or reduced cost. The scheme was aimed at enabling retailers to retain the loyalty of their customers and to enable suppliers to increase their turnover. Under the scheme redeemers accounted to HMRC for output tax when they provided goods or services to collectors in return for points; the value of the supply was the amount paid to the redeemer by LMUK (plus any additional amount paid to the redeemer by the collector). Each month each the redeemer would send to LMUK an invoice for the relevant service charge, which was the aggregate of all the reward fees in respect of points redeemed by the redeemer in that month. The standard rate of VAT was charged on the full service charge even if a reward supplied to a customer was, for example, food or travel, and so was exempt or zero-rated. LMUK paid each redeemer’s invoice. It was the tax on those invoices in respect of which LMUK claimed tax credit. Lindsay J had held that the supply made by the redeemer for VAT purposes was the supply of secondary goods to the collector and not to LMUK, and that LMUK was not entitled to reclaim input tax paid on the service charge.
CHADWICK LJ said that the correct approach was to recognise that the redeemer made two supplies in the same transaction: a supply of secondary goods to the collector and a supply of redemption services to LMUK. Payment was made by LMUK. No payment was made to the redeemer by the collector (save in a case, not material in this context, where the secondary goods were obtained in part as a reward under the scheme and in part for cash payment). The relevant question was whether LMUK received any real benefit, or “anything at all” or (perhaps) “something of value”, in return for that payment: see per Lord Millett in Customs and Excise Comrs v Redrow Group plc [1999] 1 WLR 408, 418. If that question was answered in the affirmative, then there was no basis on which it could be said that the payment by LMUK was made only as consideration for the supply to another (the collector). If, when the collector exercised the right which he had acquired at the time of his purchase of the primary goods and did obtain secondary goods from the redeemer, that latter transaction was treated as a single supply to him, so that LMUK was not entitled to input tax credit in respect of the VAT charged on that supply, the tax authorities would receive not only VAT on the supply of the right to obtain the secondary goods but also VAT on the amount which LMUK had to pay to satisfy that right. The tax authorities recovered VAT on an amount which was greater than any amount which the ultimate consumer had paid for the secondary goods. If, on the other hand, when the collector exercised the right to obtain the secondary goods from the redeemer, the transaction was treated as two supplies, one of which was a supply of redemption services to LMUK, the tax authorities still received VAT on the supply of the right to obtain the secondary goods; but (after taking account of LMUK’s entitlement to input tax credit on the supply of redemption services) did not receive VAT on the amount which LMUK paid to satisfy that right. The tax authorities recovered VAT only on the amount which (taking the issue and redemption of points as a whole) the ultimate consumer had paid for the secondary goods. The latter treatment of the transaction led to a result which was consistent with the reasoning which underlay the decision of the European Court of Justice in Commission of the European Communities v Federal Republic of Germany (United Kingdom intervening) C-427/98) [2003] STC 301: the former treatment, for which the Commissioners contended, was inconsistent with that reasoning.
His Lordship added that the case was not an appropriate one for a reference to the ECJ.
LAWS LJ and EVANS-LOMBE J agreed.
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