VAT Treatment of loyalty programmes

vat 1By Carin Grobbelaar and Janine Swanepoel, Grant Thornton Cape

Loyalty programmes are gaining more popularity as companies aim to make their products and services more attractive than their competitors’ offers. These programmes are widely used as incentive schemes to encourage spending and build loyalty by rewarding customers with discounts, vouchers and other benefits.

There are currently no sections in the VAT Act that specifically address the treatment of loyalty programme transactions and thus these transactions are subject to the normal VAT rules. However, in April this year, SARS issued the Discussion Paper on the VAT treatment of loyalty programmes.

The objective of the Discussion Paper is to promote discussion between SARS and stakeholders primarily to identify areas in the VAT Act that are interpreted differently by different stakeholders and to identify sections of the VAT Act that may require amendments. Due to the vast number of different loyalty programmes, it is SARS’ aim to adopt a policy, which will result in the consistent application of the VAT principles for all types of loyalty programmes.

The Discussion Paper defines and describes the,

  • characteristics of loyalty programmes;
  • nature and characteristics of a loyalty points;
  • loyalty programme structures;
  • transactions that form part of the programmes; and
  • parties to these transactions.

Loyalty programmes can generally be divided into two main types of programmes, namely the ‘exclusive programme’ (the so-called in-house loyalty programme) and the more complex ‘multiple party programme’. Both these types of loyalty programmes have a number of transactions, all of which have VAT implications.

The Discussion Paper explains the recommended VAT treatment of the various transactions within a loyalty programme and outlines proposed amendments to the VAT Act. Some of the changes proposed include for example, that in specific circumstances when loyalty points are redeemed the transaction should be treated similar to that of a voucher. Contact us for further examples and a summary of proposed changes.

While these proposals are still in the discussion phase, it is clear that all role players in the value chain will be affected by the proposed changes. Members making purchases using loyalty points, loyalty partners supplying goods and services and Loyalty Programme Operators, may all be subject to new VAT implications and possibly greater VAT liabilities.

Role players will hence be not only be compelled to review the structures of their loyalty programmes but also to assess the commercial viability of these schemes. In the meantime, it is important to remember that the normal VAT principles must be applied to each separate transaction that forms part in these loyalty programmes.