7.4.1 Case 1

A supplier of flour offers his customers (bakers) the opportunity to collect ‘points’. The bakers can redeem the points at the supplier for goods which they can use in their bakery. Flour is subject to 6% VAT; all the goods for which the points can be redeemed are subject to 19% VAT.

The supplier of the flour will charge 6% VAT to the baker, who will deduct this VAT. The issue of the points does not create a VAT liability. The supply of gifts is actually a discount in kind, which will entitle the supplier of flour to issue a credit note for an amount equal to the value of the gifts. The VAT on the credit note is deductible by the supplier and is payable by the baker. The end effect is neutral. The supply of the gifts is subject to 19% VAT, payable by the supplier and deductible by the baker. Here again the end effect is neutral. However, a practical problem would arise when the supplier has no intention to issue an invoice for the supply of the gifts.

As a matter of current HMRC policy the treatment would be not to reduce the taxable amount in respect of the supply of the primary goods (the flour) on pro-vision of the points. On redemption of the goods for the points, the issue would be whether the goods were supplied ‘free of charge’ such that an output tax charge arose, or under a ‘contractual obligation for the provision of the redemption goods’ under which no output tax liability would arise. If a deemed supply of business gifts arose, the input tax would be deductible by the recipient of the business gift subject to the usual rules.1 HMRC policy is that the redemption goods are subject to output tax under the business gift rules.2

The UK operates a policy involving a ‘tax certificate’ affording deduction of input tax on the receipt of a business gift – put to business use and on which VAT was accounted for by the provider of the business gift.

If the bakers redeem the points at a third party who operates the scheme and the third party issues an invoice to the supplier of the flour, the questions are how the supply qualifies (as the supply of advertising and marketing services for operating the scheme and/or the supply of goods) and whether the supplier of the flour can deduct the VAT. These issues are referred by the ECJ in HMRC v Loyalty Management UK, reference made on 6 February 2009 (Case C-53/09) and HMRC v Baxi Group Ltd, reference made on 6 February 2009 (Case C-55/09).3

It is not clear whether the supply of the goods in case the points are redeemed can be treated as a rebate in kind which reduces the tax base of the previous supply or whether the consideration paid for the flour also includes a (conditional) payment for the goods subsequently provided.

It is likely that the supplier of the flour makes a deemed supply when he supplies the additional goods.4 There is no mechanism in place which would enable deduction of input VAT on the receipt of the business gift.

It is unlikely that the redemption of the points gives rise to a rebate (which would suppose that the redemption of the points is the refund of money5). The supply of the standard-rated goods for free would give rise to the application of a business gift scheme (no VAT deduction if the value of the goods exceeds € 60, VAT included).