HMRC have outlined their position following the Court of Appeal decision in the case of Loyalty Management, pending outcome of appeal to the House of Lords.

In summary:

The Taxpayer Company runs a loyalty scheme, whereby members of the public can register as ‘Collectors’ and accumulate points when they buy qualifying goods or services from ‘Sponsors’. Collectors are able to exchange these points for rewards of goods or services with specific suppliers, known as ‘Redeemers’. The Redeemer notifies the taxpayer of the number of points redeemed on a monthly basis and receives payment from the taxpayer for these points based on a contractually agreed amount for the points. This payment is described as the ‘Service Charge’.

The Court of Appeal found that, on the facts of the case, there is a taxable supply of redemption services by redeemers to the taxpayer in respect of which the taxpayer is entitled to input tax credit. The payment made to the Redeemer by the taxpayer was held to be consideration for those services. The Court confirmed that all such payments from the taxpayer to Redeemers were consideration for fully standard rated supplies (redemption services).

HMRC have appealed the decision to the House of Lords, who gave leave and decided to refer the matter to the European Court of Justice. The Court of Appeal decision represents the law as it currently stands.

Further information on HMRC's position is available at http://www.hmrc.gov.uk/briefs/vat/brief4608.htm.