Loyalty Management UK Ltd v HM Revenue & Customs

For VAT purposes, one transaction may comprise separate supplies to different recipients. A supplier may supply goods or services to the final customer and distinct redemption or other services to the business that arranges and pays for them. The fact that the customer receives the principal benefit does not prevent a separate supply to the paying business where that business obtains something of value for its payment and uses it in its taxable business. The payment need not be treated exclusively as third-party consideration for the customer’s supply. The appeal was allowed because the redemption services supplied to the loyalty-scheme operator were taxable supplies for which it could recover input tax.

Loyalty Management UK Ltd operated the Nectar loyalty scheme. Retailers issued points to customers, who could redeem them with participating suppliers for goods or services. The suppliers charged Loyalty Management a reward fee or service charge and accounted for VAT on it.

The VAT tribunal allowed Loyalty Management’s appeal. On appeal under section 11 of the Tribunals and Enquiries Act 1992, Mr Justice Lindsay allowed the Commissioners’ appeal and dismissed Loyalty Management’s cross-appeal: [2006] EWHC 1498 (Ch). The central issue was whether the service charges were consideration for redemption services supplied to Loyalty Management or third-party consideration for supplies of rewards to customers.

1. Appeal allowed. Lord Justice Chadwick held, with Lord Justice Laws and Mr Justice Evans-Lombe agreeing, that the High Court order should be set aside. The tribunal’s decision allowing the appeal against the Commissioners’ ruling was restored, but on the basis that the suppliers made redemption-services supplies to Loyalty Management rather than supplies of the rewards themselves to it.
2. Under the Sixth Directive and the Value Added Tax Act 1994, the relevant questions were whether Loyalty Management paid the supplier, whether the payment was consideration for services supplied to it, and whether those services were used or intended for use in its business. The services included providing rewards to customers, supplying information and participating in the loyalty scheme. Loyalty Management obtained something of value in return for the service charge.
3. Redrow and Plantiflor established that a single course of conduct may constitute separate supplies to different persons. The same transaction could therefore involve a supply of rewards to the customer and a distinct supply of redemption services to Loyalty Management.
4. Auto Lease did not compel a different result. It concerned whether fuel was supplied to the lessor, not whether separate services were supplied to the lessor. It established that the rewards themselves were not supplied by the redeemers to Loyalty Management, but did not exclude a services supply.
5. The coupon authorities did not require the service charge to be treated solely as third-party consideration. Treating the transaction as including a supply of redemption services preserved fiscal neutrality.
6. A preliminary reference was unnecessary because the governing principles were established and the remaining issue was their application to the facts. The alternative argument concerning a deemed supply by Loyalty Management under Schedule 4 paragraph 5 of the Value Added Tax Act 1994 was left undecided.

1. Court of Appeal (Civil Division): Appeal allowed; order set aside and the tribunal’s decision restored on a different legal basis.
2. High Court, Chancery Division: Mr Justice Lindsay allowed the Commissioners’ appeal from the tribunal and dismissed Loyalty Management’s cross-appeal: [2006] EWHC 1498 (Ch).
3. Value Added Tax and Duties Tribunal: Appeal from the Commissioners’ ruling allowed: [2005] UKVAT V19056.