Flashback on ECJ Cases – C-53/09 & C-55/09 (Loyalty Management UK and Baxi Group) – Payments to suppliers under customer loyalty program in taxable amount

On October 7, 2010, the ECJ issued its decision in the joined cases C-53/09 & C-55/09 (Loyalty Management UK and Baxi Group).

Context: Sixth VAT Directive – Taxable amount – Sales promotion scheme – Loyalty rewards scheme allowing customers to earn points from traders and to redeem them for loyalty rewards – Payments made by the operator of the scheme to redeemers supplying the loyalty rewards – Payments made by the trader to the operator of the scheme supplying the loyalty rewards

Article in the EU VAT Directive

Articles 5, 6, 11.A(1)(a) and – in the version resulting from Article 28f(1) – 17(2) of the Sixth Council Directive. (Articles 14, 24, 73, 168 of the EU VAT Directive 2006/112/EC).

Article 14 (Taxable transaction – Supply of Goods)
1. ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.

Article 24 (Taxable transaction – Supply of Services)
1. ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply

Article 168 (VAT Deduction)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Facts

Case C-53/09

LMUK operates a customer loyalty rewards scheme. Under this scheme, customers earn points which they can redeem for loyalty rewards consisting of goods or services when they purchase significant quantities of goods or services from retailers participating in the scheme. There are four actors in this scheme: the sponsors, that is to say, the retailers seeking to encourage customers to buy more from them; the customers; the operator of the scheme concerned, namely LMUK; and the redeemers, that is to say, the companies which supply loyalty rewards to customers in return for their points.
The sponsors award points to customers for each purchase on the basis of the amount of money spent. When the customer accumulates a sufficient number of points, he may receive a loyalty reward in return for those points, either for no payment or at a reduced price. The loyalty rewards are obtained by the redeemers.
Under this scheme, the sponsors pay to LMUK a specified sum of money in respect of each point issued. They also pay an annual fee for the marketing, development and promotion of the scheme in question. The redeemers receive a fixed amount of money from LMUK for each point redeemed; this sum is described as a ‘service charge’.
The redeemers issue an invoice to LMUK in respect of that charge which is inclusive of VAT. When LMUK sought to deduct that input VAT, the Commissioners decided that the tax paid constituted a tax on a charge which represents a payment made as the consideration for transactions carried out by the redeemers, not for the benefit of LMUK, but for the benefit of the customers, although payment for those transactions is made, wholly or in part, by LMUK. The Commissioners thus took the view that the charge in question was third-party consideration for the supply of loyalty rewards to customers and, consequently, that LMUK was not entitled to deduct the input tax paid on that charge.
LMUK challenged that decision before the VAT and Duties Tribunal. That tribunal took the view that the supplies of goods to customers made by the redeemers in return for points had to be considered to be supplies of services to LMUK.
The Commissioners brought an appeal against that decision before the High Court of Justice of England and Wales. That court, reversing the decision of the VAT and Duties Tribunal, held that the redeemers were supplying loyalty rewards to customers and that the charge concerned was consideration paid by a third party, namely LMUK, for that supply. The Commissioners also raised an ‘alternative argument’ before the High Court of Justice of England and Wales, relating to the case where the rewards consisted of goods, to the effect that, if the redeemers supplied such goods to LMUK, it followed that LMUK was liable to output tax on the deemed onward supply of those same goods to customers pursuant to Article 5(6) of the Sixth Directive. The High Court of Justice of England and Wales found in the Commissioners’ favour on the alternative argument.
LMUK took the case to the Court of Appeal (England and Wales), which reversed the judgment of the High Court of Justice of England and Wales. The Court of Appeal (England and Wales) took the view that LMUK paid the charge to the redeemers as consideration for the service supplied by them to LMUK. Consequently, LMUK was entitled to deduct the VAT payable on that charge.

Case C-55/09

Baxi is part of a group of companies which manufacture boilers and other associated heating products. That group of companies set up a loyalty reward scheme for customers, in this case installers of boilers, in order to encourage them to purchase its products. To use the terms employed in paragraph 10 of this judgment, Baxi acts as the sponsor in this scheme.
Customers participating in the scheme receive points which they can redeem for loyalty rewards, which comprise goods or services, when they purchase Baxi’s products. It must, however, be pointed out that it is evident from the order for reference that the dispute in the main proceedings relates only to loyalty rewards in the form of goods.
Baxi subcontracted the operation of the loyalty rewards scheme at issue to @1 Ltd (‘@1’). Under the general conditions of this scheme, customers have a contractual relationship with Baxi.
@1’s operation of the loyalty rewards scheme at issue covers, inter alia, its marketing to customers by means of catalogues and the internet, the handling of applications for registration, management of customers’ accounts, the choice, purchase and supply of the loyalty rewards, and the provision of a telephone helpline for customers.
Thus, one significant difference between this scheme and that at issue in Case C‑53/09 is the fact that @1 chooses and purchases the loyalty rewards and supplies them to customers. Consequently, that company acts simultaneously as the operator of the customer loyalty rewards scheme and as the redeemer. The loyalty rewards are supplied solely in exchange for points. It is not possible to receive a loyalty reward in the form of a reduced purchase price. Baxi pays to @1 the retail sale price of the loyalty rewards and certain charges for specific services.
Baxi sought to deduct the VAT on the amounts which it paid to @1. The Commissioners took the view that the amount of the retail sale price of the articles paid by Baxi to @1 consisted of two elements. One element in that amount was the consideration for the services supplied by @1 to Baxi, in respect of which services Baxi was entitled to deduct the VAT invoiced by @1. The other element was third-party consideration for the supplies of goods by @1 to the customers, in respect of which Baxi could not deduct VAT.
Baxi challenged that decision before the VAT and Duties Tribunal. That tribunal dismissed Baxi’s claim, holding that @1 was supplying the loyalty rewards to Baxi, which then supplied them to the customers without consideration. Baxi was therefore entitled to deduct the input VAT charged on the supply of goods which it received, but was obliged to account for the output VAT chargeable on the subsequent transmission of the goods to customers.
Baxi brought an appeal against that decision before the High Court of Justice of England and Wales, which held that @1 had supplied the loyalty rewards to customers and not to Baxi, but that @1 had also supplied services to Baxi which included the supply of those goods to customers. The price paid by Baxi constituted the consideration for the supply of that service and Baxi was therefore entitled to treat all the VAT invoiced by @1 as input tax.
The Commissioners brought the matter before the Court of Appeal (England and Wales), which held that Baxi was entitled to recover VAT on the whole of its payment to @1. In the view of that court, Baxi had to be regarded as having made the whole of the payment in return for a service supplied to it by @1 which consisted, in part, of the supply of articles to customers, thereby promoting Baxi, engendering customer loyalty and discharging Baxi from its obligations vis-à-vis the customers under the loyalty rewards scheme.
On an appeal brought by the Commissioners, the House of Lords concluded that a ruling by the Court of Justice on the interpretation of Directive 2006/112, formerly the Sixth Directive, was required to enable it to give judgment in the proceedings before it.

Questions

Case C-53/09

In circumstances where a taxable person (“the Promoter”) is engaged in the business of running a multi-participant customer loyalty rewards scheme … pursuant to which the Promoter enters into various agreements as follows:

(a) Agreements with various companies referred to as “Sponsors” under which the Sponsors issue “Points” to customers … who purchase goods or services from the Sponsors and the Sponsors make payments to the Promoter;
(b) Agreements with the [customers] which include provisions such that, when they purchase goods and/or services from the Sponsors, they will receive points which they can redeem for goods and/or services; and
(c) Agreements with various companies (known as “Redeemers”) under which the Redeemers agree, among other things, to provide goods and/or services to [customers] at a price which is less than would otherwise be payable or for no cash payment when the [customer] redeems the Points and in return the Promoter pays a “Service Charge” which is calculated according to the number of Points redeemed with that Redeemer during the relevant period;
- (1) How are Articles 14, 24 and 73 of [Directive 2006/112] … (formerly Articles 5, 6 and 11.A(1)(a) of [the Sixth Directive] …) to be interpreted where payments are made by the Promoter to the Redeemers?
- (2) In particular, are those provisions to be interpreted such that the payments of the kind made by the Promoter to Redeemers are to be characterised as:
  - (a) consideration solely for the supply of services by the Redeemers to the Promoter; or
  - (b) consideration solely for the supply of goods and/or services by the Redeemers to the [customers]; or
  - (c) consideration in part for the supply of services by the Redeemers to the Promoter and in part for the supply of goods and/or services by the Redeemers to the [customers]?
- (3) If the answer to question 2 is (c), so that the Service Charge is consideration for two supplies by the Redeemers, one to the Promoter and the other to the [customers], what are the criteria laid down by Community law to determine how a charge such as the Service Charge is to be apportioned between those two supplies?

Case C-55/09

(a) a taxable person runs a business promotion scheme operated by an advertising and marketing company under which “points” are issued to the taxable person’s customers in connection with the purchase of goods by the customers from the taxable person;
(b) customers redeem the points by obtaining reward goods from the advertising and marketing company without payment;
(c) the taxable person has agreed with that other company to pay it the recommended retail price of the reward goods:
- (1) How are Articles 14, 24 and 73 and 168 of Directive 2006/112 … (formerly Articles 5, 6 and 11.A(1)(a) and 17(2) [in the version resulting from Article 28f(1)] of [the Sixth Directive] to be interpreted as regards the payments by the taxable person to the other company?
- (2) In particular, are those provisions to be interpreted such that the payments by the taxable person to the other company are to be characterised:
  - (a) solely as consideration for a supply of services by the other company to the taxable person;
  - (b) solely as third-party consideration for the supply of goods by the other company to the customers;
  - (c) as consideration in part for the supply of services by the other company to the taxable person and in part for the supply of goods by the other company to the customers; or
  - (d) as consideration for supplies both of advertising and marketing services and of reward goods by the other company to the taxable person?
- (3) If the answer to question 2 is that such payments are to be characterised in part as consideration for a supply of services by the other company to the taxable person and in part as third-party consideration from the taxable person to the other company in respect of the other company’s supply of goods to the customers, what are the criteria laid down by Community law to determine how the payment is to be apportioned between those two supplies?

AG Opinion

None

Decision

In relation to a customer loyalty rewards scheme such as those at issue in the cases in the main proceedings, Articles 5, 6, 11.A(1)(a) and – in the version resulting from Article 28f(1) – 17(2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that:

– payments made by the operator of the scheme concerned 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; and

– payments made by the sponsor to the operator of the scheme concerned who supplies loyalty rewards to customers must be regarded, in Case C‑55/09, as being, in part, the consideration, paid by a third party, for a supply of goods to those customers and, in part, the consideration for a supply of services made by the operator of that scheme for the benefit of that sponsor.

Summary

Payments to suppliers under customer loyalty program in taxable amount

In the context of a customer loyalty program:

– payments by the administrator of the relevant program to participating suppliers who supply loyalty gifts to customers should be regarded as the consideration, paid by a third party, for a supply of goods to those customers or, where applicable, for a transaction of services for those customers. However, it is for the referring court to determine whether those payments also include consideration for a service which constitutes a separate supply, and

– payments made by the sponsor to the administrator of the relevant program who provides loyalty gifts to customers should be regarded in part as the consideration, paid by a third party, for a supply of goods to those customers and in part as the consideration for a transaction of services by the administrator of that program on behalf of that sponsor.

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