VAT, vouchers and loyalty points

The AG has opined that a scheme providing loyalty points on purchases which could be redeemed to acquire further items from the supplier did not amount to a multi-use vouchers: Skatteverket v Lyko Operations AB (Case C 436/24). The opinion is another which exposes the very real difficulties in applying the VAT rules in this area, requiring a degree of creativity from the AG to reach the “right” verdict.

In particular, the AG’s opinion addresses head-on the question of the VAT treatment of unused vouchers. Several recent cases have relied on the existence of multi-use vouchers (where the consideration is not brought into account until points are redeemed) to argue that consideration attributable to unused vouchers falls outside the scope of the VAT system. However, the AG in this case argues that that result will only arise where the value of the multi-use voucher is specified from the outset. Where it is merely “specifiable”, then the consideration does not fall to be ignored until the voucher is redeemed.

Background

Lyko sells hair care and beauty products in physical shops and online. It developed a customer loyalty programme under which Lyko’s customers (all private individuals) receive points for each ordinary purchase, which they can then redeem for goods in the points shop. Points can be redeemed only in connection with a new ordinary purchase. The product range in the points shop consists of products from the company’s ordinary range. The products are mainly of low value, but may be subject to different VAT rates. Any points acquired are lost if not used within two years. Lyko sought a tax ruling confirming that the points were multi-use vouchers for VAT purposes.

It appears that the reason that Lyko sought this confirmation was so that any unredeemed points would fall outside the scope of VAT. Payments for a multi-purpose voucher (unlike single-purpose vouchers) are taxable only when the voucher is redeemed. If it is never redeemed, VAT is not due on that amount. All companies therefore have an incentive to avoid single-use vouchers. That can be achieved relatively easily by issuing vouchers that can be used for products with different VAT rates. That was the situation in this case. “If the points are treated as a multi-purpose voucher, the remuneration for those unredeemed points should, in principle, not be taxed. On the other hand, if the points are to be regarded only as a kind of discount scheme, then they have the effect of reducing tax only if and when they are redeemed. In that case, VAT would be payable in full on the first acquisition of the goods and it is only on redemption of the points that goods would be purchased at reduced prices, which would then also reduce the tax.“

Opinion of the AG

Firstly, the AG rejected arguments that a “voucher” is limited to a “classic voucher”, that is a voucher which has been purchased for consideration and already represents a specified value when it is issued. Such an approach would unnecessarily limit the scope of the voucher rules in Articles 30a and 30b of the VAT Directive. Those provisions indicate that it is necessary to define vouchers, recognising their essential attributes, in particular the nature of the entitlement attached to a voucher and the obligation to accept it as consideration for the supply of goods or services. They do not indicate that a voucher must specify or represent a fixed monetary value which is already specified at the time of its creation.

Secondly, the AG rejected the argument that the points were “free”. The points acquired by the first purchase have a monetary value, both at the time of acquisition and at the time of redemption. At the time of acquisition, the points relate to the price of the first purchase and, in that respect, are acquired (for consideration) by the customer in addition to the purchased item. It would be difficult to argue that in the case of points that depend on the price of the purchase, those points are credited to the customer free of charge. The fact that other customers who do not participate in the customer loyalty programme pay the same price for the goods does not change that.

The AG noted that “the notion that they are points acquired ‘free of charge’ is unrealistic and does not correspond with economic reality. In the case of a promotional campaign (three tins for the price of two), it would never occur to anyone to assume that the third tin is a gift or is supplied free of charge. All the tins have been purchased for consideration, but the customer (who purchased three tins) paid 33.33 percent less than the other customer, who has bought one or two tins”.

In principle, therefore, it was necessary to attribute part of the consideration initially paid for goods to the points. Accordingly, if those points amounted to a multi-use voucher, Lyko’s argued that that part of the consideration should be left out of account and only brought into account when actually used. And the value attributed to any unused points would never be brought within the scope of VAT.

However, the AG has rejected that analysis of the treatment in this case on two bases.

Multi-use voucher?

Firstly, the AG opined that the points in this case did not amount to a multi-use voucher. The AG noted that two conditions need to be met: the goods to be delivered or the possible supplier must be apparent from the voucher or its conditions; and the customer loyalty programme must form the basis of the obligation to accept points as consideration for a supply of goods. The AG argues that this second condition is not met in this case.

Vouchers must be distinguished from instruments entitling the holder to a discount, which are specifically not covered by Article 30a of the VAT Directive. “Discount instruments do not oblige anyone to supply upon presentation of the voucher, but only to reduce the price when a customer undertakes to purchase goods. They are an incentive to give rise to a further supply for consideration, since they make it cheaper by means of a discount. By contrast, vouchers… contain a self-standing obligation, triggered solely by the customer, to accept them as consideration for a supply (or if the amount of the voucher is insufficient, for part of the consideration if the customer so chooses). What matters is that a voucher can be used independently by the rightholder as consideration for a supply of goods or services.”

In this case, the points collected from Lyko can only be used when the customer makes a future purchase, by using the points to obtain further goods from Lyko’s range in the context of that subsequent purchase. “In so doing, the points do not create an obligation on the part of the supplier to supply goods, but may be used only in connection with (another) obligation on the part of the customer to make a subsequent purchase. It is only in the context of that obligation that another item (the reward) can then be acquired additionally by means of points. However, there must be an obligation on the part of the supplier for there even to be a voucher. It is only in that case, for example, that, under Article 30b(1) of the VAT Directive, the transfer of a (single-purpose) voucher can already be regarded as a supply of goods.”

“In the present case, the points acquired do not impose any obligation – from an economic point of view – to supply a reward, but ‘only’ give the customer the right to a ‘more favourable’ additional purchase. By redeeming the points, the price of that second purchase is reduced by the value of the selected reward – the price of the second purchase (goods and reward) remains identical… The position would be different only if the points could be redeemed for a reward irrespective of another purchase.”

In this case, the points system constitutes only a discount on a future purchase, which does not amount to a multi-use voucher.

Treatment of unused points

Secondly, the AG rejected the argument that the unused points would fall out of account. The points in this case would have amounted to a multi-use voucher if they granted an independent right to a specifiable reward, the issue of which does not yet have any consequences for VAT purposes. Only the redemption of points would constitute a supply (of the reward) for consideration (in the form of the voucher). At the time of that redemption, it would be possible to indicate and determine the value of the voucher on the basis of the chosen reward. The supply of the reward would have to be taxed at the time of redemption. Corresponding to that, that redemption would then (for the first time) reduce the taxable amount of the purchase which included the purchase of the points.

The AG explains that “under Articles 30a and 30b of the VAT Directive, a multi-purpose voucher which does not represent a specified value, but only a specifiable value, can have consequences for VAT purposes only when that specifiable value is specified. If that occurs only at the time of redemption, that voucher has, until that date, no effect, including on the taxable amount of the first purchase. Consequently, if the points are not redeemed, the taxable amount of the first purchase remains unchanged, both from the point of view of the seller – who has received a certain amount for the goods – and from the point of view of the customer – who has spent a certain amount on the goods received – and must be taxed in full. A breakdown of that taxable amount (into a taxed part for goods and an untaxed part for the voucher) is not possible in the event of the issue of a voucher with a merely specifiable value (unlike the issue of a multi-purpose voucher of a specified value), since the specifiable value of a voucher cannot be established unless it is redeemed.”

Comment

The AG’s opinion highlights some of the many complexities of the voucher rules. On top of those, recent cases (such as McDonald Resorts Ltd v HMRC (Case C-270/09), Findmypast Ltd v HMRC [2017] STC 2335 and Go City Ltd v HMRC [2024] UKFTT 745) have also recognised the existence of non-taxable credits or points where, since the purchase of those rights was not an aim in itself, but rather the purpose of the rights was to allow participants in the scheme to obtain various possible benefits, the service was not supplied until the points were converted into specific transactions. These cases also result in consideration attributable to unused points falling outside the scope of VAT. However, one can perhaps recognise some of the discomfort that the AG’s opinion sought to address in this case in the scenario where amounts are clearly paid as consideration but ultimately fall outside the scope of the VAT net where the acquired rights are not utilised.