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Loyalty Management UK Limited (LMUK), the company which operates the “Nectar” loyalty points scheme, has won an important judgment against HM Revenue and Customs (HMRC) in a VAT case at the Court of Appeal.

The Court of Appeal held that businesses offering reward goods to customers in exchange for redeemed Nectar points were making supplies of services to LMUK for VAT purposes.  LMUK had, therefore, incurred VAT input tax on the supplies, and could recover it – the point contested by HMRC.

Daniel Lyons, indirect tax partner at Deloitte, said: “Given the frequency of these arrangements in the retail sector, the amounts of VAT in question are potentially very large indeed. We strongly welcome this decision, as a defeat for LMUK could have threatened the existence of Nectar and other loyalty schemes.”

Under the Nectar scheme, various participating retailers, known as sponsors, issue points to their customers as a reward for the customers making purchases from them.  A customer accumulates a points balance, and is able to redeem those points in return for certain “reward” goods provided by selected businesses, known as redeemers.

LMUK receives payment from the sponsors according to how many points the sponsors issue to their customers.  In turn, LMUK pays agreed amounts to the redeemers according to the reward goods that the redeemers give to the customers redeeming points. 

The judgment in the Loyalty Management case was concerned with this payment made by LMUK to the redeemers (upon redemption of the points).  The question was: was this payment the consideration for a supply by the redeemers to LMUK?  Both sides agreed that, if it was, LMUK would be entitled to recover the VAT charged to it on that supply.

The Court of Appeal declined HMRC’s request to refer the case to the European Court of Justice, on the basis that the relevant legal principles were already well established.

Daniel Lyons added: “Clearly, the primary impact of the judgment will be on businesses operating or participating in retail ‘points’ arrangements. More widely, the judgment confirms that, depending on the legal and commercial relationships between parties, the supply of goods to one party may constitute a supply of services to a second party, provided that the second party has paid for those goods to be supplied to the first party and received a “real benefit” from the fact that those goods were supplied.”

Notes to editors:

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