matthew_wentworth_phLast month the Supreme Court decided, by a majority of 3-2, to dismiss the appeal of the Commissioners for Her Majesty’s Revenue and Customs. The decision followed a reference to the Court of Justice of the European Union by the House of Lords, and an important part of the decision was the extent to which the ruling by the CJEU was determinative of the appeal. The majority thought that it was not and, despite seemingly clear statements from the CJEU to the effect that HMRC’s appeal must succeed, the majority still found for the taxpayer.

The facts

Aimia Coalition Loyalty UK Limited (“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, and LMUK accordingly accounts for VAT in respect of the supply it makes of issuing points (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.

LMUK is contractually obliged as part of its operation of the Nectar scheme to ensure that customers can, in return for the redemption of their points, obtain Rewards from the redeemers. Therefore, in order for its business to work, LMUK needs to be able to ensure that the points it has supplied (a supply in relation to which it has accounted for VAT) can be redeemed 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 Supreme Court

In holding that the CJEU’s decision did not determine the appeal the majority focussed on the fact that the CJEU had not been asked in the reference to the CJEU to consider the relevance of a number of facts which the Supreme Court considered particularly relevant to the appeal, especially the fact that that a key part of LMUK’s business was the making of supplies for VAT purposes when it issued points to customers, and it was therefore essential for LMUK’s business to work for it to be able to have these points redeemed in return for further goods or services.

The majority concluded that, in the circumstances, the CJEU had provided helpful guidance as to how the relevant VAT legislation was to be interpreted. However, the CJEU had not decided that, in the factual situation at hand, the only possible conclusion from a VAT perspective was that the payment by LMUK had to be seen as third party consideration for the supply of goods or services by the redeemer to the customer, with the consequence being that no supply had been made to LMUK for VAT purposes, and so LMUK could not recover as input tax the VAT in respect of the payment it made.

Indeed, Lord Walker, who was on the panel who agreed to refer the case to the CJEU, expressed regret that the case had ever been referred to the CJEU, preferring to see the resolution of the case as a matter of applying well-established VAT principles to the particular facts at hand.

The majority emphasised the importance the CJEU attached to the economic reality of the arrangements and, in particular, whether in light of the economic reality the payment could be seen as consideration for a supply to LMUK.

Lord Reed, with whom Lords Hope and Walker agreed, concluded that the economic reality was that the payment LMUK made was a vital cost component of its business; LMUK’s business only worked as intended if it could ensure that customers could redeem their points for Rewards. In light of this, the economic reality was that LMUK was clearly receiving a service from the redeemers in return for the payment it made, and so it could recover as input tax the VAT on the payment it made.

Lords Carnwath and Wilson dissented on the basis that the decision of the CJEU was clear: the payment by LMUK could only be seen as third party consideration for the supply of Rewards by the redeemer to the customer, and as a consequence could not also be consideration for a supply by the redeemer to LMUK. As such, LMUK was prevented from recovering the VAT in respect of this payment.

The Supreme Court was however unanimous that the House of Lords decision in Commissioners of Customs and Excise v Redrow Group Plc [1999] STC 161 did not need to be overruled, although the conclusions in that case would need to be modified. In particular, it is now clear that Lord Millett’s comments in Redrow that it is enough for a taxpayer to receive “anything at all” in return for the payment it makes in order for it to be able to recover its VAT in respect of that payment went too far. In each case it must be determined what (if anything) the payer, as a matter of economic reality, is obtaining in return for its payment.


The decision of the Supreme Court leaves the law in respect of VAT and tripartite supplies in a state of uncertainty.

What is clear is that, at least until there is a further reference to the CJEU, the payment of an amount of consideration by Person A to Person B can be treated as consideration for a supply to both Person A and a separate supply to Person C. In other words, it needn’t be the case that, just because the payment is held to be consideration for the supply of goods or services to Person A, it cannot also be treated as consideration for a supply to Person C.

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 can be viewed as consideration for the supply of goods or services by Person B to Person A.

Following Lord Reed’s analysis, where it is essential for Person A to make such a payment, in the sense that the payment is a cost component of the supplies it makes to its customers, then it is likely that Person B will indeed be making a supply to Person A.

In each case a careful analysis of the facts will be required. The one thing we can be certain of is that things are not as gloomy for taxpayers as it had appeared after the judgment of the CJEU.