In Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited) [2013] UKSC 15 the Supreme Court considered the question of whether the taxpayer (as the operator of a loyalty scheme) was entitled to input tax in respect of payments it made to participants in the scheme who provided goods to members of the scheme in return for the redemption of points.

Facts

The loyalty scheme involved four parties: (1) the promoter, being LMUK (now known as Aimia); (2) the members of the scheme (“collectors”); (3) retailers of goods and services (“sponsors”) who pay for their customers, if they produce a loyalty card, to have points credited with LMUK when they purchase goods and have their card swiped; (4) other retailers (“redeemers”) from whom collectors receive goods and services, at no cost or a reduced cost, when their cards are swiped and points are debited to their accounts.

The scheme is built upon three contractual arrangements:

• First, LMUK agrees with the collectors that they will obtain points when they purchase goods or services from sponsors and that goods and services will be available to them at no, or a reduced, cost when they redeem points.
• Second, LMUK agrees with sponsors that it will credit collector’s accounts with points for which the sponsor has agreed to pay and will secure that goods and services will be made available to collectors on their redemption of points. In return, sponsors will pay LMUK based on the number of points credited to collectors’ accounts plus an annual marketing fee.
• Third, LMUK agrees with redeemers that they will provide collectors with specified goods and services on the redemption of points, and will provide a number of other services to LMUK in return for the payment of “service charges” by LMUK based on the number of points redeemed.

The arrangements were summarised in the following terms by Lord Reed (at [7]):

The “points” are a means of describing the collector’s contractual rights to receive goods and services at no cost or at a reduced cost. The sponsors pay LMUK for the grant of those rights to collectors. LMUK uses part of its receipts from the sponsors to pay the redeemers to provide collectors with goods and services in accordance with their rights. LMUK derives its profits from the difference between its receipts from sponsors and its payments to the redeemers.

In essence therefore, when sponsors pay LMUK for the points issued to collectors, they are paying LMUK for granting the collectors the right to receive goods and services in exchange for their points. The redeemers provide the collectors with the goods and services to which their points entitle them, and LMUK pays the redeemers the redemption value of the points. It is thus by means of the redeemers’ performance of their contractual obligations to LMUK that LMUK fulfils the obligations which it has undertaken to the sponsors and collectors and so carries on its business.

Lord Reed also noted that the facts were complex and unusual, and they differed in fundamental respects from sales promotion or customer loyalty schemes operated by retailers as part of their own business. In those cases, the issue of points does not involve a taxable supply (it was common ground that the provision of points was a taxable supply by LMUK).

LMUK contended that it was entitled to deduct input tax with respect to payments it makes to the redeemers as the payments were consideration for the redeemers supply to it of the services for which it had contracted with them. The Commissioner contended that the payments were third party consideration for the redeemers’ supply of goods and services to collectors and no input tax was deductible by LMUK.

History of the proceedings

The matter has a long, and one could say, unsatisfactory, history.

The Tribunal allowed LMUK’s appeal and considered that the transactions could only be understood in the context of the arrangements between LMUK, the sponsors, the redeemers and the collectors viewed as a whole. Further, assessing the commercial and economic reality of the case, the Tribunal considered that “the proper analysis of the transactions under which a [redeemer] provides goods to a [collector] in return for points is that the [redeemer] is providing a service to [LMUK] in assisting it to discharge its obligations to [collectors]. The Tribunal also concluded that LMUK’s payments to redeemers were consideration only for the supply of the services which it received from them.

The Revenue appealed to the High Court, which allowed the appeal on the basis that the payments by LMUK to the redeemers were third party consideration for the supply by the redeemers to the collectors. It followed that the payments could not also be consideration for the supply of services to LMUK.

LMUK appealed to the Court of Appeal, which allowed the appeal. The Court regarded the decision of the House of Lords in Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408; [1999] STC 161 as authority for two propositions:

1. a supplier could be treated as making, in the same transaction, both a supply of services to one person and a supply of different services to another person; and
2. in addressing a claim for input tax by one of those persons, the relevant questions were (1) whether that person had made a payment to the supply, (2) whether the payment was consideration for the services supplied to him, and (3) whether the services were used or to be used in the course of a business carried on by that person.

Applying the approach adopted by Lord Millet in Customs and Excise Commissioners v Plantifor Ltd [2002] UKHL 33; [2202] 1 WLR 2287; [2002] STC 1132 the Court of Appeal observed that it could be said that when a collector received goods and services from a redeemer, the redeemer made two different supplies – one was the supply of goods and services to the collector, the other was the supply to LMUK of the services of providing the rewards to the collector. Further, in relation to the supply by the redeemer to LMUK, the answer to each of the relevant questions identified in Redrow was an affirmative:

1. LMUK made a payment to the redeemer
2. that payment was consideration for services supplied by the redeemer to LMUK, since LMUK received something of value in return for the payment, and
3. the services supplied by the redeemer to LMUK were used or to be used in the course of LMUK’s business of operating the scheme.

The Revenue appealed to the House of Lords, which referred a number of questions to the European Court of Justice for a preliminary ruling. The Court of Justice joined the reference with another case, being Baxi Group Ltd v Commissioners for Her Majesty’s Revenue and Customs [2008] STC 491, which concerned a loyalty scheme of an entirely different character. Lord Reed observed that the Court of Justice appeared to have considered that both cases were alike. The Court of Justice made its ruling in Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK and Baxi Group Ltd (Joined Cases C-55/09 and C-55/09) [2010] STC 2651. The Court answered the question as follows:

Payments made by the operator of the scheme to redeemers who supply loyalty rewards to customers must be regarded, in Case C-53/09, as being the consideration, paid by a third party, for a supply of goods to those customers or, as the case may be, a supply of services to them. It is, however, for the referring court to determine whether those payments also include the consideration for a supply of services corresponding to a separate service.

The appeal before the Supreme Court

The first issue before the Supreme Court was how to apply the ruling of the Court of Justice.

Lord Reed observed that it was “particularly unfortunate” that the reference to the Court of Justice failed to fully reflect the facts or the issues in dispute, with the consequence that the Court of Justice did not fully address those facts or those issues. The Revenue contended that the findings of the Court of Justice were incompatible with the Redrow line of authorities, which therefore should not be followed. Lord Reed observed that the Court of Justice’s judgment did not directly engage with the issues considered in those cases, which was indeed part of the problem with which the Supreme Court was now faced – since the decision of the Court of Appeal was based upon an application of the principles in Redrow.

Lord Reed dismissed the appeal by the Revenue and upheld the decision of the Court of Appeal. In doing so, his Lordship noted that the Court of Justice had focused on the relationship between redeemers and collectors and was not requested to consider the other dimension to the case, being the claim of LMUK to input tax. His Lordship concluded as follows (at [79]):

It is implicit in that approach that the transaction between a redeemer and LMUK involves a taxable supply by the former to the latter. That analysis appears to me to be consistent with economic reality. LMUK carries on a genuine business for its own benefit. It issues the points in his own name and on its own behalf: it is note a mere cipher for the sponsors. As a matter of economic reality, the payments which it makes to redeemers are an essential cost of its business. 

Lords Hope and Walker agreed with Lord Reed. Lord Walker was one of the Lords who directed the reference to the Court of Justice. His Lordship observed that with hindsight that reference was unnecessary and it would have been better if the reference was not made.

Lords Carnwath and Wilson dissented. The judgment begins with the powerful words:

Luxembourg has spoken…

The dissenting Lorships did not see how the Court could now go behind either the decision of the House of Lords to make the reference, or the findings of the Court of Justice.