The Court of Appeal held that a company which operated a loyalty card scheme was entitled to recover as input tax the VAT element of the reward fee or service charge which it paid to suppliers which under the scheme had agreed to accept scheme points or vouchers in return for the supply of goods or services to members of the public.

Facts

The taxpayer operated the Nectar customer loyalty rewards programme under which customers were awarded points when buying goods, known as primary goods, from participating retailers. The accumulated points could be used to acquire secondary goods or services from a number of other suppliers at no cost or a reduced cost. Payment for those secondary goods or services became due from the taxpayer to the supplier. Customers were also able to exchange Nectar points for vouchers which could be redeemed against the cost of goods at the participating retailers.

The taxpayer sought to recover, as input tax, the VAT element of the reward fee or service charge which it paid to the suppliers. Customs ruled that it was not entitled to do so because there was no supply of redemption services between the suppliers and the taxpayer in respect of the reward fee which represented third party consideration for supplies made by the suppliers to the final consumers.

The VAT and Duties Tribunal allowed an appeal by the taxpayer, holding that when the suppliers supplied secondary goods to customers in return for points the supply was made to the taxpayer and not to the customers, and that the service charge paid by the taxpayer to the supplier was in return for all the redemption services, which included the provision of goods provided to the customer, the processing of vouchers and the provision of information. The tribunal refused to make a reference to the ECJ for a preliminary ruling (Decision No. 19,056; [2005] BVC 2,628).

Customs appealed from the tribunal to the High Court, and the taxpayer filed a respondent's notice seeking to substitute for the tribunal's conclusion, that when the suppliers provided secondary goods to customers in return for points the supply made by the supplier is to the taxpayer and not to the customer, a conclusion that there was a supply of redemption services between the suppliers and the taxpayer in respect of the reward fees. Lindsay J allowed Customs’ appeal and dismissed the taxpayer's cross-appeal ([2006] BVC 776 (Ch)), holding that the service charge was third party consideration for VAT purposes for a supply by the suppliers to the customers. The taxpayer appealed to the Court of Appeal arguing that the judge should have held that the payments which it made to the suppliers pursuant to the scheme were payments by way of consideration for the supply of the redemption services to the taxpayer.

Issue

Whether the payments made to suppliers in pursuance of the loyalty scheme were payments by way of consideration for the supply of redemption services to the taxpayer; and whether there should be a reference to the ECJ.

Decision

Chadwick LJ (Laws LJ and Evans-Lombe J agreeing) (allowing the appeal) said that, in all the circumstances, on the facts of the present case, the analysis and reasoning of the House of Lords in C & E Commrs v Redrow Group pic [1999] BTC 5,062 and C & E Commrs v Plantifor Ltd [2002] BTC 5,413 pointed strongly to the conclusion that there was a supply of redemption services to the taxpayer in respect of which the taxpayer was entitled to input tax credit.

There was no reason why, in a VAT context, a supplier (S) might not be treated as making, in the same transaction, both a supply of services to one person (P1) and supply of different services to another person (P2). In addressing a claim for input tax credit by a person (P2), the relevant questions were whether P2 made a payment to S; whether that payment was consideration for services supplied to P2; and whether those services were used or to be used in the course of a business carried on by P2 (C & E Commrs v Redrow Group plc [1999] BTC 5,062 applied).

Applying Lord Millett's analysis in Plantiflor to the facts of the present case, the taxpayer made a supply of services to the collectors: it arranged, through the retailers, for the issue of points which the collectors could use to obtain rewards; and it arranged, through the redeemers, for rewards to be obtained for points. By its agreement with the collectors, the taxpayer granted rights which (by the arrangements made for the issue and redemption of points) the collectors could exercise to obtain rewards. But the taxpayer did not make a supply of the rewards themselves (whether the rewards were goods or services). It had not undertaken to do that. It had undertaken only to make arrangements for the rewards to be supplied by the redeemers. When a collector obtained rewards from a redeemer, the redeemer made two different supplies. One was the supply of the rewards (whether goods or services) to the collector: the other was the supply to the taxpayer of the redemption services of providing the rewards to the collector, providing information to the taxpayer and otherwise participating in the scheme. In relation to the supply by the redeemer to the taxpayer the answer to each of the three relevant questions identified in Redrow was in the affirmative. (Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/01) [2005] BTC 5,151; [2003] ECR I-1317 and EC Commission v Germany (Case C-427/98) [2003] BTC 5,149 distinguished; WHA Ltd v C & E Commrs [2003] BTC 5,481 considered.) It was not necessary to seek a preliminary ruling from the European Court of Justice.

Court of Appeal (Civil Division).
Judgment delivered 5 October 2007.