Revenue and Customs v Loyalty Management UK Ltd

For VAT purposes, the legal and financial characteristics of a loyalty programme must be assessed robustly and by reference to its dominant features, rather than by the labels used in its contracts. Where payments to reward suppliers are closely linked to goods or services supplied to programme customers, they may constitute third-party consideration for those supplies. The same payment cannot simultaneously constitute consideration for separate supplies in different directions. Ancillary information obligations do not alter that characterisation where they are minor and inseparable from the wider arrangement. A supply of goods requires the recipient to acquire the right to dispose of them as owner. A contractual description such as “redemption services” is not determinative.

The Commissioners appealed against the London Tribunal Centre’s decision of 18 May 2005 concerning the VAT treatment of payments made by Loyalty Management UK Ltd in operating the Nectar customer loyalty programme.

Customers earned points from sponsors and redeemed them with suppliers for goods, services or discounts. LMUK paid suppliers amounts calculated by reference to the points redeemed and claimed the VAT element as input tax. The central issue was whether those payments were consideration for redemption services supplied to LMUK, or third-party consideration for goods or services supplied by suppliers to customers.

1. Appeal allowed. The Tribunal’s decision was set aside. The Service Charges paid by LMUK to suppliers were properly characterised, for VAT purposes, as third-party consideration for rewards supplied by suppliers to Collectors, rather than consideration for redemption services supplied to LMUK.
2. The court adopted a robust, commonsense assessment of the transaction. The dominant characteristics of the Nectar Programme were the acquisition of rewards by customers in return for their purchasing activity with sponsors. The Service Charges were calculated only by reference to rewards supplied and points redeemed. There was no separate retainer, fee or identifiable payment for information supplied to LMUK. Those information obligations were ancillary and minor.
3. Where rewards consisted of goods, there was no supply of those goods to LMUK. Under Article 5 of the Sixth VAT Directive, a supply of goods required the transferee to acquire the right to dispose of tangible property as owner. The Collector, not LMUK, selected and received the reward and obtained dominion over it.
4. The principle of fiscal neutrality did not require a different result. The consideration paid by LMUK was third-party consideration for the supplier’s supply to the Collector and could not also be consideration for a separate VAT supply by the supplier to LMUK. The reasoning in Redrow Group plc was not determinative because its materially different facts involved services performed at the house builder’s request and in accordance with its instructions.
5. The Tribunal had materially erred in law. Its conclusion that rewards were supplied to LMUK was inconsistent with the requirement of dominion, and its reliance on Intiem was too broad. That authority was confined to cases involving an employment-type relationship and supplies exclusively for the payer’s business.
6. On the Commissioners’ alternative argument, considered although not properly before the Tribunal, the assumed gratuitous disposal of goods forming part of LMUK’s business assets would have attracted the relevant charge under Schedule 4 paragraph 5 of the Value Added Tax Act 1994. There was, however, no sufficiently direct link between sponsors’ payments and particular rewards to make the assumed supply one for consideration. The question of an ECJ reference was left over.

High Court (Chancery Division): allowed the Commissioners’ appeal against the London Tribunal Centre’s decision published on 18 May 2005, and set that decision aside.