Details about the case

The Marriott hotel chain has a reward scheme, which is operated by Marriott Rewards. This reward scheme works by members receiving points when they stay in a participating hotel and members can exchange those points for free room stays at the same or at a different participating hotel. The scheme is funded by the participating hotel paying for points to be issued to members and MR paying the relevant participating hotels when the points are redeemed for hotel room stays.

The main issue in the case was whether Marriott Rewards should incur a VAT cost on the payments made to the UK hotels upon redemption of the points. HMRC argued the payments were 'third party consideration' paid to the hotel on behalf of the member for the room accommodation. If this was correct, Marriott Rewards would suffer VAT as a cost to its business. However, MR argued the payments were consideration for the supply of redemption services received by MR and, therefore, VAT should be recoverable.

The Upper Tribunal found for Marriott Rewards in deciding that it had received a supply of redemption services from the participating hotels. As a business, Marriott Rewards should not suffer VAT on the redemption services because those services are cost components of its business (of operating a loyalty scheme).

As Marriott Rewards is a US-based entity, the hotels should not charge VAT at all - as the supply of redemption services is received by Marriott Rewards in the US.

What is the impact of the case?

This case demonstrates, at least from a UK perspective, that there are circumstances where VAT should not be a cost to loyalty schemes. The Upper Tribunal recognised that different types of loyalty/reward arrangements have different VAT outcomes; there may be an opportunity to review arrangements to benefit from the judgment. The Upper Tribunal's view is that:

  1. where a trader has an "own customer" model, (the trader issues points for no consideration and redeems points for free), this will normally result in a VAT cost; and
  2. where there is a separate company to the trader who operates the loyalty scheme (where the operator issues points to customers of traders for a fee paid by the traders), in some circumstances , VAT should not be a cost on the redemption services provided to the operator. On that basis, cross border redemption services should not generally be subject to UK VAT.