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Nectar Cards Operator Triumphs in VAT Test Case

The operator of the ‘Nectar’ loyalty card scheme has achieved a major victory over Her Majesty’s Revenue and Customs after the Supreme Court accepted that it is entitled, for the purposes of VAT, to reclaim input tax on service charges it pays to retailers who agree to redeem ‘points’ in exchange for good or services.

Aimia Coalition Loyalty UK Limited operates the Nectar points scheme on the basis that consumers who collect points (collectors) can obtain them from participating retailers (sponsors) and that they can in turn be used to obtain goods or services from those or other participating retailers (redeemers). The company levies VAT on sponsors, who pay the company an agreed sum for each point issued. However, the Aimia is in turn charged VAT by redeemers to whom it pays service charges at an agreed value per point redeemed.

The company argued that it should be permitted to deduct as input tax the VAT element of the services charges that it pays to redeemers and to offset those sums against VAT it receives from sponsors. However, Her Majesty’s Revenue & Customs (HMRC) submitted that the service charges were third-party consideration in respect of the redeemers’ supply of goods and services provided to collectors. The dispute had been referred for a preliminary ruling to the European Court of Justice (ECJ) which ruled broadly in favour of HMRC.

Ruling in favour of Aimia, however, the Supreme Court ruled, by a majority, that it was not bound by the views expressed by the ECJ which had been based on an incomplete evaluation of the facts. The court noted that Aimia provided to collectors a contractual right to obtain goods and services from redeemers and that the counterpart to that right was an obligation on Aimia to procure that redeemers provide goods and services wholly or partly in exchange for Nectar points. The service charges paid by Aimia constituted the costs of fulfilling that obligation and were therefore an essential cost of the company’s business.

The court concluded: “The economic reality is that the redeemers make taxable supplies to Aimia. The service charges represent the value to Aimia of the service which the redeemers provide. Aimia should, therefore, be entitled to deduct from the VAT for which it is accountable the VAT charged by the redeemers so that Aimia pays VAT only on the added value for which it is responsible.”

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