In my recent blog here https://vatexchange.co.uk/blog-how-to-avoid-a-vat-assessment, I had a bit of a rant about the importance of businesses understanding their own business transactions and being able to explain them to HMRC, if they don’t want to end up with VAT assessments for one-off or unusual payments.
I was trying to make the point that it’s a bit unfair to expect HMRC to accept your argument that a payment isn’t liable to VAT if you can’t explain the legal and commercial reason that you received the payment in the first place. HMRC aren’t running your business so the onus is on you to understand your income.
I also pointed out that however well intentioned and well prepared you or your client might be in providing such information, there are some situations when HMRC will disagree with the business’s view. And these are the situations that end up in the courts.
HMRC have recently issued a Revenue and Customs Brief here http://www.hmrc.gov.uk/briefs/vat/brief6008.htm setting out their view about one such issue that is going through the courts at the moment. It is a really interesting case as it touches on the very fundamentals of VAT – what is a supply and who is making the supply and who is receiving the supply.
The Brief reminds businesses about HMRC’s view of the issue and how any businesses involved in this or similar schemes should treat the transactions for VAT purposes pending the outcome of HMRC’s appeal to the House of Lords.
The Nectar Scheme
The case concerns something that most of us will be familiar with – loyalty schemes. I’m not going to repeat the information given in the Brief, but here are the basic facts.
The case concerns payments made by Loyalty Management (UK) Limited (“LMUK”) to retailers in the following circumstances.
• Members of the public, or “Collectors”, accumulate Nectar points when they make purchases from certain retailers, or “Sponsors”.
• Collectors can redeem the points for reward items from the original retailer or others, known as “Redeemers”.
• LMUK pays the Redeemers an amount referred to as a “service charge” each month, based on the amount of points they have accepted from “Collectors” in return for reward items.
The issue is the VAT liability of the “service charge” payments. HMRC and LMUK have completely different views:
• LMUK believes that they are consideration for standard rated supplies of services by the Redeemers to LMUK. The Redeemers should issue VAT invoices to LMUK, which LMUK can use to recover the VAT charged as input tax.
• HMRC believes that the payments are third party consideration for the supply of the reward goods to the Collectors, ie additional cash payments made by LMUK. They believe that the Redeemers should account for output tax on the payments, but as the payments are for supplies of goods to the Collectors, the VAT is not LMUK’s input tax.
So the nub of the matter is that if Customs are correct, then the VAT charged by the Redeemers can’t be recovered. This VAT becomes additional tax revenue.
These loyalty schemes have been going for years (a quick look in my own purse finds 3 regularly used loyalty cards) and you would assume that the legal and contractual issues involved have been well documented and agreed by solicitors for all the parties involved. Never mind the VAT issues, these schemes are big business for all of the parties and the amounts of money involved must be huge. So the potential VAT cost to the revenue of loosing this case could be substantial.
Business promotion schemes have always been difficult………..
Business promotion schemes have always been difficult from a VAT point of view, because they involve so many factors which don’t fit into the normal two way supply model for VAT purposes. Third party consideration, collection of points, multiple retailers etc.
You’d think that HMRC would accept the business’s legal and contractual explanations of the arrangements, especially if backed up by written agreements. But this is not the case and there hae been many cases involving business promotion schemes over the years.
So this case is a very big reminder that HMRC may still disagree with the business’s explanation if they think that there is a risk to the tax revenue by accepting the business’s view. However carefully you have documented the transactions involved, or taken legal advice to establish the contractual position, this is no guarantee that HMRC will accept your interpretation.
So I can only advise that if you are in any doubt whatsoever and the amounts of VAT involved are higher than you or your client can afford to loose, it is time to take proper professional advice and agree the correct VAT position with HMRC.
If HMRC don’t agree with your view, it might be possible to limit the potential VAT cost and/or the cost of fighting their decision in the Tribunal or the courts by changing the arrangements. But what you don’t want is a potential bombshell ready to explode.