ECJ deals blow for businesses trying to reclaim VAT

The European Court of Justice has dealt a severe blow to UK businesses after
blocking two UK companies from reclaiming VAT.

Loyalty Management UK Ltd, which operated a ‘Nectar’ promotion scheme, and
Baxi, the boiler and heating business, are not entitled to reclaim VAT incurred
on the purchase of goods or services provided to another party under a customer
reward scheme, ruled the ECJ.

Grant Thornton (GT) said the decision created uncertainty for other
businesses involved in multi-party transactions by failing to clarify the
validity of the ‘Redrow principle’ established in the UK courts.

In the Redrow principle, the House of Lords ruled that where goods or
services are provided to one party but are paid for by someone else, the party
making the payment may be entitled to reclaim the VAT.

However, the principle has not been widely applied in the UK, with the taxman
insisting that it can only be used in limited circumstances.

Lorraine Parkin, VAT partner at GT, said: “In a complex judgment, the ECJ has
confirmed that HMRC’s position on VAT recovery is correct. This is bad news for
businesses operating a customer loyalty scheme as the amount of VAT that can be
claimed will now be restricted.”

Manufacturers and retailers operating such schemes will need to review these
schemes to see if they can be structured more effectively, or factor the
additional irrecoverable VAT into their operating costs, the firm added.

The case is likely to go back to the House of Lords, now referred to as the
Supreme Court, for further clarity on the VAT position, said Deloitte.

“Ultimately, it will impact upon many businesses in the UK which operate
loyalty schemes,” said Deloitte tax dispute resolution director Giles Salmond.

The case may also be significant in determining whether businesses can
recover VAT when they make payments for services rendered both to that business
and to third parties. This can occur with the payment of professional services
provided in the context of M&A activity, Salmond added.

Further reading:

EMI
VAT win opens up promo goods refunds for all businesses