VAT on Nectar?
HMRC has appealed to the House of Lords in the case of HMRC v Loyalty Management (UK) Ltd  EWCA Civ 938. The case is expected to be an important test of how retailers account for VAT in respect of the popular loyalty card schemes, such as Nectar, Tesco Clubcard, Boots Advantage Card and others.
Loyalty Management UK (LMUK) runs the popular Nectar card scheme, whereby cardholders earn points on shopping and can redeem them for goods at a variety of outlets. These outlets inform LMUK of the points redeemed per month, and receive a payment for them (the “service charge”) on which they charge VAT. LMUK are claiming on their VAT returns that this service charge is a consideration for “redemption services”, which are standard rated, and LMUK therefore regards the amounts paid as VAT on the service charge as reclaimable input tax.
HMRC however view the service charge as a third party consideration for the supplies of reward goods and services by the outlets to the Nectar cardholders. Under this interpretation, the VAT charged by the outlets to LMUK is not recoverable by LMUK as input tax, because the supply was made to the cardholders rather than LMUK itself.
The most recent decision was in the Court of Appeal, which found that there is a taxable supply of redemption services by the outlets to LMUK, and that LMUK is therefore entitled to reclaim the input tax. HMRC’s appeal to the Lords followed, and the Lords have referred the case to the European Court of Justice, so it will be sometime before a new decision becomes available.