Who Supplies What in a Loyalty Reward Scheme

25 Nov 2010

Cases C-53/09 and 55/09 HMRC v Loyalty Management UK and Baxi Group Ltd

A loyalty reward scheme is an increasingly common marketing device used by retailers to encourage their customers to continue to use them for their purchases. The retailer gives the customer a card, and when the customer makes purchases from that retailer they receive a certain number of ‘reward points’ in proportion to the amount they have spent. When the customer has accumulated sufficient points, these can be exchanged for ‘reward’ goods or services.

Underlying a fairly simple marketing concept is a structure of interlinked transactions the VAT treatment of which has caused considerable confusion and difference of opinion. In its judgment in Cases C-53/09 and 55/09 HMRC v Loyalty Management UK Ltd and Baxi Group Ltd (judgment of 7 October 2010) the Court of Justice of the European Union (‘CJEU’) has clarified that payments which are made to the company which supplies the reward goods/services are third party consideration for the company supplying those rewards to customers.