VAT and rewards for loyal customers

Repaying loyalty

These days most high street chains and other big businesses that sell to the public have a loyalty scheme for their customers. If it’s good enough for them it might be worth you doing the same. How you run the scheme is up to you, but you need to understand the effects for VAT purposes.

VAT joining fee

There’s no immediate VAT consequence for joining customers in your scheme unless you make a charge for this. For example, if a customer has to pay for a loyalty discount card, you must account for standard-rate VAT. If you charge £20 you’re actually charging £16.67 for the membership, plus £3.33 VAT. However, if like most schemes there’s no charge for membership there’s no VAT to worry about at this stage.

No supply

The courts long ago ruled that when you award points or value to members of a loyalty scheme it doesn’t count as a supply for VAT purpose. You only need to think about VAT when a customer redeems their points etc. in exchange for goods or services.

Points mean pounds

The three most common methods used for redeeming loyalty awards are:

• the customer gets a discount on the normal purchase price of goods or services
• you issue them a with a face value voucher (FVV), i.e. showing a value in pounds and pence) which they can use to pay for goods; and
• the customer gets free goods or services when they have earned enough points.

Discounts and FVVs

If you offer a discount the VAT position is simple; VAT is payable on the discounted price. How you show this on your invoice or receipt is up to you, as long as the actual discounted price is clearly shown.

If you issue a FVV to a customer to pay for goods you supply, for VAT purposes it’s treated in the same way as a discount. That is, you only have to charge VAT on the net amount, which again must be clearly shown on your invoice or receipt.

Free goods or services

Free goods or services you supply when a customer redeems loyalty points count as business gifts and:

• where the customer receives free goods you don’t have to account for VAT unless the cost to you of providing them exceeds £50 in a twelve-month period

Tip. You can recover VAT you pay on providing the goods, even where you don’t have to account for it on the supply because of the £50 limit.

• if you supply free services you don’t have to account for VAT, but if you bought in the service, you must. You charge VAT on an amount equal to what the service cost you, but you can reclaim the VAT you paid for the purchase (which makes it VAT neutral). However, if you pay someone else to supply the service, you can’t reclaim the VAT.