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‘Nectar’ Loyalty Scheme Operators Score VAT Triumph


The company that operates the Nectar loyalty card scheme (the scheme) has triumphed in a marathon struggle with the tax authorities in respect of the VAT treatment of ‘service charges’ that it pays to retailers who allow customers to exchange points for goods or services.


As part of the scheme, Aimia Coalition Loyalty UK Limited (ACL) entered into contracts with retailers (redeemers) who were required to provide customers (collectors) with goods and services wholly or partly in exchange for Nectar points. The collectors earned such points through purchases made from other retailers (sponsors) who paid ACL for allowing them to do so. There was no dispute that the latter payments were subject to VAT on the basis that ACL provides sponsors with a taxable supply of services.


The dispute related to ‘service charges’ that ACL pays to redeemers to exchange Nectar points for goods or services. ACL sought to deduct the VAT element of the service charges as input tax on the basis that the service charges were paid to redeemers for a service supplied to it for the purpose of its business.


Her Majesty’s Revenue and Customs (HMRC) maintained that the service charges were third party consideration for the redeemers’ supply of goods and services to collectors and that ACL was not entitled to deduct input tax. The issue had previously been considered by the House of Lords who referred the question of how to characterise the service charges to the Court of Justice of the European Union (“CJEU”) which concluded that the service charges amounted, at least in part, to third party consideration.


The case returned to the Supreme Court (the Court) which nevertheless decided by a majority that ACL was entitled to deduct the VAT element of the service charges. It did so on the basis that, having regard to the relevant contractual relationships, the service charges were paid to the redeemers for a service supplied to ACL for the purpose of its business. The Court declined to follow the CJEU’s characterisation of the service charge as third party consideration on the basis that the terms of the reference to it by the House of Lords had precluded the CJEU from considering all relevant aspects of the relationships between the parties involved in the Nectar scheme.


After the parties were given an opportunity to make written submissions as to the form of the order the Court should make, HMRC invited the Court to make a further reference to the CJEU on grounds that a national court is obliged to make a further reference if it finds the ruling of the CJEU on the first reference to be incomplete or unsatisfactory. ACL resisted the application and the Court unanimously refused to make a further reference.


The Court noted that it had not, by its previous decision, questioned the CJEU’s ruling on any question of EU law, but rather had proceeded on the basis of a more comprehensive account of the facts than the CJEU was afforded. The majority of the Court had considered that the case could be decided by applying well-established principles to the facts of the case. The Court also noted that a further reference to the CJEU would be unfortunate given that the litigation commenced in 2003.