Lords Decide Loyalty Scheme Case Appeals

08 Apr 2008

Her Majesty’s Revenue and Customs (Petitioners) v Loyalty Management (UK) Limited (Respondents)

Her Majesty’s Revenue and Customs (Petitioners) v Baxi Group Limited (Respondents)
Total (UK) Limited (Petitioners) v Her Majesty’s Revenue and Customs (Respondents)

An Appeal Committee of the House of Lords comprising Lord Hoffmann, Lord Walker and Lord Mance has granted the Commissioners leave to appeal in two separate cases involving loyalty schemes operated by Loyalty Management (UK) Limited (‘LMUK’) and Baxi Group Limited. It held that an immediate reference should be made to the ECJ. On the same day the Appeal Committee refused Total (UK) Limited leave to appeal in a case against the Commissioners for HM Revenue and Customs.

LMUK promotes the ‘Nectar’ high street customer loyalty scheme. Retailers who accept Nectar Points from customers as payment in whole or in part for goods or services are paid a “Service Charge” by LMUK. Baxi operates a loyalty scheme for purchasers of its boilers under which reward goods are provided by a separate company and paid for by Baxi. LMUK and Baxi contend that they are entitled to reclaim the VAT on their payments as consideration for a supply of services to them. The Court of Appeal agreed. The Commissioners argue that the payments are third party consideration for supplies of rewards (either goods or services) to the recipients; accordingly LMUK and Baxi have no right to deduct the VAT.

During argument Lord Hoffmann commented that the guidance of the ECJ was needed in reconciling the decision of the House of Lords in CEC v Redrow Group plc [1999] STC 161 with more recent decisions of the ECJ. The Appeal Committee rejected the submissions of LMUK and Baxi that the issues raised were acte clair in their favour.

A number of other appeals concerning customer loyalty schemes are currently stayed pending the resolution of LMUK and Baxi. As a result, both the Commissioners and taxpayers have a significant interest in the outcome of the two cases.

Total operated a sales promotion scheme through which customers could collect points every time they purchased fuel. Once the customer had collected a certain number of points these could be exchanged for a voucher issued by Total. The voucher was worth £5 when the customer used it to purchase goods or services in certain high-street retailers or donated its value to charity; it could not be exchanged for cash.

The main issue was whether the transfer of the voucher to the customer constituted a retrospective discount off the price of the fuel. Total contended that it was operating a price reduction scheme and that the voucher had the same VAT consequences as a cash rebate; i.e. that it reduced the amount on which the company was liable to pay output tax. The Court of Appeal had rejected this analysis [and held that the voucher did not act as a rebate because the customer received more at the same price rather than the same at a lesser price. In doing so the Court had placed significant reliance on the scheme documentation].

Before the Appeal Committee Total argued that there was a direct link between the supply of fuel and the provision of a voucher which enabled the voucher to act as a retrospective reduction in the price received for the fuel. It also suggested that a reference be made to the ECJ and alleged that the Court of Appeal’s judgment offended the principle of fiscal neutrality. The Commissioners contended that the principles of law to be applied were clear and that the scheme documentation was evidence that the voucher acted as a grant of an additional benefit to the customer and not as a price reduction. The Appeal Committee refused Total leave to appeal.

The result clarifies the position with regard to loyalty schemes which allow customers to collect points when goods or services are purchased and subsequently to redeem those points for non-monetary ‘rewards’. Following Total the transfer of a non-monetary reward [for example a voucher] to a customer redeeming his points does not operate to reduce the taxable consideration obtained by the supplier for the original goods or services.

Christopher Vajda QC represented the Commissioners against Loyalty Management (UK) Limited.

Nicholas Paines QC represented the Commissioners against Baxi Group Limited.

Christopher Vajda QC and Andrew Macnab represented the Commissioners for HM Revenue and Customers against Total (UK) Limited

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Andrew Macnab