Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited)

For input VAT in a multi-party loyalty scheme, the court must identify the supplies by assessing the economic arrangements realistically and as a whole. A single transaction may include a supply to the customer and a different taxable service to the payer.

Where a promoter makes a taxable supply of contractual reward rights and pays redeemers to honour those rights, the payments can be necessary business costs and consideration for services supplied to the promoter. The promoter may deduct the VAT, so that tax falls only on its added value.

A preliminary ruling on EU law binds the national court on interpretation. It need not determine the domestic appeal where the reference omitted material facts or arguments. Earlier input-tax guidance is not universal: payment which merely discharges an obligation to a third party may instead be third-party consideration.

Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited) concerned the Nectar loyalty scheme. Sponsors paid the scheme promoter, LMUK, to grant collectors points representing contractual rights to rewards. LMUK paid redeemers to provide the rewards and associated services.

HMRC decided that LMUK’s payments were third-party consideration for supplies to collectors and that LMUK could not deduct the VAT as input tax. The tribunal allowed LMUK’s appeal in [2005] BVC 2628. The High Court reversed that decision in [2007] STC 536, but the Court of Appeal allowed LMUK’s appeal in [2007] EWCA Civ 938; [2008] STC 59.

The House of Lords referred questions to the Court of Justice. Its preliminary ruling in Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK Ltd and Baxi Group Ltd, Joined Cases C-53/09 and C-55/09; [2010] STC 2651, treated LMUK’s payments as third-party consideration for rewards while leaving open whether they also included consideration for a separate service.

The central questions were how that ruling applied where the reference had omitted material features of the scheme, and whether the redeemers also supplied taxable redemption services to LMUK for which input VAT was deductible.

1. Disposition. By a majority of three to two, the appeal was dismissed and the Court of Appeal’s decision was affirmed. Lord Reed, Lord Hope and Lord Walker concluded that LMUK was entitled to deduct the VAT charged by redeemers. Written submissions were invited concerning the form of the order.
2. Effect of the preliminary ruling. The Court of Justice determines the interpretation of EU law, while the national court determines the facts and applies the law to them. Section 3(1) of the European Communities Act 1972 required the Supreme Court to follow the Court of Justice’s legal guidance. The ruling was nevertheless not dispositive because the reference had omitted material findings and had not fully presented the arguments central to the domestic appeal. The Supreme Court therefore had to decide the case using all the tribunal’s findings while respecting the ruling’s guidance on economic reality and the need to consider all relevant circumstances.
3. Economic reality and multiple supplies. VAT analysis required a realistic appraisal of the entire network of transactions. It was possible for a redeemer, within one transaction, to supply rewards to collectors and different redemption services to LMUK. The fact that a payment could constitute third-party consideration for a collector’s supply did not exclude its also being consideration for a taxable service supplied to LMUK.
4. Supply to LMUK and input-tax deduction. LMUK made a taxable supply when it granted collectors contractual rights to obtain rewards. Its corresponding obligation was fulfilled through redeemers, and its payments to them were essential costs of that taxable business. The legal relationship involved reciprocal performance: redeemers accepted points and provided rewards because LMUK paid them to do so. The payments therefore remunerated a service supplied to LMUK. Deduction was required so that LMUK accounted for VAT on its added value rather than also bearing VAT on the necessary cost of satisfying the reward rights it had sold.
5. Earlier authorities. The conclusions and reasoning in Customs and Excise Commissioners v Redrow Group plc and Customs and Excise Commissioners v Plantiflor Ltd remained correct. Redrow’s reference to obtaining anything for the payer’s business was not a universal or literal test. The thing obtained must realistically constitute a taxable supply to the payer, and payment merely discharging an obligation to a third party may instead be third-party consideration. Auto Lease Holland BV v Bundesamt für Finanzen was distinguished because it established that the collector received the goods, a point which was not disputed.
6. Dissent. Lord Carnwath, with whom Lord Wilson agreed, would have allowed the appeal and restored the High Court’s order. In their view, the preliminary ruling bound the Court to treat the payments as third-party consideration for supplies to collectors. Article 17(2) of the Council Directive 77/388/EEC required goods or services to have been supplied to LMUK itself. Only separately identifiable services could support an apportioned deduction, and LMUK could not raise that alternative factual case after declining to advance it before the tribunal.

1. United Kingdom Supreme Court: In [2013] UKSC 15, HMRC’s appeal was dismissed by a three-to-two majority and the Court of Appeal’s decision was affirmed, subject to written submissions on the form of order.
2. Court of Justice of the European Union: In Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK Ltd and Baxi Group Ltd, Joined Cases C-53/09 and C-55/09; [2010] STC 2651, the Court gave a preliminary ruling on the treatment of payments made by loyalty-scheme operators to redeemers.
3. House of Lords: HMRC’s appeal from the Court of Appeal was referred to the Court of Justice for a preliminary ruling. The appeal subsequently continued in the Supreme Court.
4. Court of Appeal: In Loyalty Management UK Limited v Commissioners for HM Revenue and Customs, [2007] EWCA Civ 938; [2008] STC 59, LMUK’s appeal was allowed and its entitlement to input-tax credit was upheld.
5. High Court: In [2007] STC 536, HMRC’s appeal was allowed and the tribunal’s decision was reversed.
6. Value Added Tax and Duties Tribunal: In [2005] BVC 2628, LMUK’s appeal against HMRC’s decision was allowed.