Case Preview: HMRC v Loyalty Management UK Ltd
15 Monday Oct 2012
This case is notable for the fact that it has already been heard by the House of Lords (prior to the inception of the Supreme Court), who stayed the proceedings and referred the case to the Court of Justice of the European Union for a preliminary ruling on the correct interpretation of the relevant provisions of the Principal VAT Directive (Council Directive 2006/112/EC).
Loyalty Management UK Ltd (“LMUK”) operates the Nectar points scheme which rewards customers by giving them points when they buy goods or services from certain businesses (known as ‘sponsors’). The customers then redeem the points in return for other goods and services (“Rewards”) from other suppliers (known as ‘redeemers’; in practice the sponsors and redeemers are frequently the same business).
LMUK is paid by the sponsors for the points it issues under the scheme (LMUK also receives a fee for providing certain other services, such as marketing services). LMUK then pays the redeemers a fixed amount (a “Redemption Amount”) for each point which is redeemed in return for Rewards.
The key question at issue is whether LMUK can recover the VAT charged by the redeemers on the Redemption Amount on the basis that the Redemption Amount was consideration for a supply of services that LMUK received from the redeemers. If, in contrast, the correct analysis is that the Redemption Amount was consideration paid by LMUK as a third party in respect of the supply of Rewards to customers, LMUK would not be able to recover this VAT.
The decision of the CJEU
The CJEU focused on the economic reality of the loyalty schemes, and determined that there was a direct link between the payment of Redemption Amounts and the supply of the Rewards to customers.
The CJEU therefore decided that the Redemption Amounts were consideration for the supply of such Rewards and were not (subject to one exception detailed below) consideration for the supply of services to LMUK.
However, the CJEU did decide that, potentially at least, to the extent that the redeemer made a profit margin in respect of the receipt of the Redemption Amounts, that profit margin could be viewed as consideration for a separate supply of services to LMUK.
The CJEU noted that LMUK had in its written and oral observations argued that it was not possibly to split the Redemption Amounts in this way, and view them as consideration for two separate supplies, one of which was a supply of services to LMUK.
However, the CJEU have left it to the Supreme Court to decide whether this is in fact possible on the facts of the case. If the Supreme Court decide that such separation is possible, LMUK will be able to recover the VAT on the proportion of the Redemption Amount which the Supreme Court determines should be viewed as consideration for a supply of services to LMUK.
The CJEU’s ruling on the correct interpretation of the Principal VAT Directive is clearly binding on the Supreme Court, and so the hearing by the Supreme Court will likely focus on the extent to which a proportion of the Redemption Amounts can be viewed as consideration for a supply by redeemers to LMUK.
However, the decision of the Supreme Court is likely to be of wider significance, because the ruling of the CJEU would seem to conflict with the reasoning of the House of Lords in Commissioners of Customs and Excise v Redrow Group Plc  UKHL 4, which has been relied on in numerous cases to allow the recovery of VAT by Person A, where Person A is paying an amount to Person B in connection with the supply of goods or services to Person C.
Following the House of Lords decision in Redrow, provided that Person A could show that he had received something of benefit in return for the payment he made, he could recover the VAT on that payment, on the basis that the payment was consideration for a supply of services to him.
Going forward, a careful analysis of these tripartite relationships will be needed in order to decide whether, looking at the economic reality of the situation, a payment by Person A has a direct link with the supply of goods or services by Person B to Person C. To the extent that this is found to be the case then Person A is unlikely to be able to recover the VAT on that payment. The Supreme Court’s decision will help to clarify this, particularly where a profit margin is being made by Person B.