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Avios Group under investigation by HMRC for its VAT policies

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IAG, the parent company of British Airways, Iberia and Aer Lingus, issued its first half financial results yesterday.

Tucked away in the notes is a lengthy statement explaining that Avios Group is under investigation for its VAT returns, dating back to the start of 2018.

IAG is not commenting on the issue and the statement itself have could been clearer.

The debate appears to go like this:

  • Avios Group does not charge VAT when you buy Avios from the group, either directly or via Avios subscription, or to third parties who buy points (who would reclaim the VAT in most cases, so they are not directly impacted)
  • You don’t pay VAT when you buy a flight, so to the extent that buying Avios is simply pre-paying for flights, Avios Group is arguably correct not to charge VAT on Avios sales
  • Avios Group states that if Avios are redeemed for items which do incur VAT, such as wine, VAT is paid at that time on the value of the points redeemed

So far, so simple – so what’s the problem?

One issue could be that Avios sales carry a substantial profit margin. Imagine that you buy £100 of Avios and book a flight with them, but Avios Group only hands over £60 to the airline. The flight may be zero rated for VAT but what is the VAT treatment of the £40 margin?

HMRC also seems to be taking aim at the idea of Avios being a ‘club’, which would be liable to VAT on membership ‘fees’. A quick look at the VAT rules on ‘subscriptions’ or ‘memberships’ shows that a key issue is how the fee is apportioned if some benefits – such as a club magazine – are zero rated for VAT but other benefits are not.

It is possible that the expansion of Avios into non-flight earning and non-flight spending is coming home to roost. HMRC has always said that frequent flyer miles have no taxable value, since they are a rebate for money spent on flights. This is no longer necessarily the case for many of the Avios in circulation. It is also the case that they are no longer always redeemed for zero rated activities (ie flights).

We are unlikely to get to the bottom of this one for some time. As the statement below says, if Avios Group and HMRC do not come to an agreement and decide to go to a tax tribunal, IAG is required to lodge the whole of the disputed sum with HMRC first.

The sum involved would be so large that we are told it may be ‘material’ in the context of the parent company, not just Avios Group itself.

Here is the official statement from the accounts. Bolding is mine, the typos are from IAG!

A ‘protective notice’ is a way to extend the typical four year restriction on re-opening old VAT submissions. If HMRC had not done this then it would have lost the ability to challenge payments made in 2018.

At June 30, 2023, and through to the date of this report, His Majesty’s Revenue and Customs (HMRC) has issued protective notices of VAT assessments for the 19 months ended September 2019 to Avios Group (AGL) Limited, a controlled undertaking of the Group trading as IAG Loyalty. At the date of this report none of these protective notices of assessment are due for payment.

During the second quarter of 2023, and while its enquiries are ongoing at the date of this report, HMRC shared with the Group its emerging view on the appropriate VAT accounting, which differs to the current approach by IAG Loyalty. HMRC’s emerging view asserts that the charges made by IAG Loyalty are for participating / membership in the Avios scheme and the associated charges and are subject to VAT.

IAG Loyalty accounts for VAT depending on the nature of the goods or services for which Avios are redeemed, the vast majority of which are flights, and zero-rated. IAG Loyalty’s VAT accounting has and continues to be based on historical rulings issued by HMRC.

As at the date of this report, this emerging view did not consider the validity of the rulings HMRC has previously issued with regard to IAG Loyalty’s VAT accounting. Accordingly, and while having issued the protective notices, HMRC has not confirmed whether it considers its emerging view to be retroactive or only prospective in nature.

The Group expects further developments in this matter during the remainder of 2023, which may include HMRC issuing an update to its emerging view. Given the early stages of HMRC’s enquiries there remain a number of possible scenarios that could eventuate.

The Group has reviewed HMRC’s emerging view with its legal and tax advisors and considers it has strong arguments to support its VAT accounting, including having received rulings previously from HMRC on the matter, and therefore does not consider it probable that an adverse ruling will eventuate. Accordingly, the Group does not consider it appropriate to record any provision for this case at June 30, 2023.

The Group, in conjunction with its advisors, considers the disclosure of a potential range of exposures, associated with the aforementioned possible scenarios that could eventuate, could prejudice seriously the position of the Group in its ongoing engagement with HMRC.

Subsequent to the issuance of the emerging view, the Group continues to engage with HMRC on the underlying facts, circumstances and technical analysis of the matter. Should the Group and HMRC be unable to reach agreement on the appropriate VAT accounting, then the Group will have the ability to advance the case to an independent tax tribunal.

To enable the Group to advance to an independent tax tribunal, it will need to pay, without admission of liability, to HMRC the total amount of assessments issued at the time of application to the independent tax tribunal, which will be recoverable, in part or in full, should the Group be successful in the case. Until HMRC further progresses its enquiries, it is not possible to determine the payment required, if any, but any potential payment may result in a material cash outflow from to the Group.

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Comments (106)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Nick says:
    29 Jul29 July 05:43

    It’s always good, and often enlightening, to read the small print in any company report, especially if you’re invested there.

    • Michael Jennings says:
      29 Jul29 July 09:32

      The best reading is almost always the footnotes, yes.

  • davefl says:
    29 Jul29 July 06:32

    and logically the same stance would apply to Virgin then.

  • Heathrow Flyer says:
    29 Jul29 July 06:44

    I’d be interested to know what the Boots, Nectar et al VAT treatment is.

    • Rob says:
      29 Jul29 July 07:33

      Those schemes are rebates on spend, very simple. No issues.

      • AJA says:
        29 Jul29 July 08:11

        What about hotel schemes? Are they subject to VAT? You can buy points for them and you can redeem them for non-hotel activities such as tickets for the PGA Golf per yesterday’s article.

        The fact that you can redeem Avios for non-flying activities is not a new thing. You’ve been able to swap them for hotel points and even pay directly for a long time.

        And if you swap Avios for Nectar points you can redeem them in the same way as you can for existing Nectar points. And you state Nectar are rebates on spend. I’d argue the Nectar points can be purchased: 1)buy Avios, 2)convert into Nectar points, 3)spend Nectar points. Doesn’t that make Nectar points subject to VAT if the underlying Avios purchase is subject to VAT?

        • Rob says:
          29 Jul29 July 09:35

          The last point is similar to what happened in Germany. Lufthansa had to stop accepting conversions in from all schemes which sold points, because you could de facto buy M&M miles and this caused issues because it set a ‘value’ for the points.

        • Paul says:
          5 Aug5 August 07:32

          You are assuming that Nectar do not charge VAT on their points.

  • Vistaro says:
    29 Jul29 July 06:46

    Whilst the case may (or may not) have its merits it would appear this is really just the continuing attempt of a government already surrounded by largesse to extract more cash from what it feels are it’s subjects.

    • Rob says:
      29 Jul29 July 07:36

      Er, ok …. I see you have a different view on tax avoidance to most people.

      • Michael Jennings says:
        29 Jul29 July 09:34

        What “most people” think in the abstract may not be the same thing they think when they are doing their own taxes.

    • Will says:
      29 Jul29 July 08:47

      You can simplify things to a single use case here to establish the “problem”
      If you buy points as pseudo cash in a vat free transaction and that pseudo cash is used to purchase vatable goods without any vat declaration then you’ve effectively created a VAT avoidance scheme (I’d argue evasion)

      What confuses me though is why VAT isn’t being declared at redemption time.

      Gift cards have had to deal with this for years and my understanding is that the gift card is not vatable but the redemption of it is accompanied by the relevant vat declaration at point of sale.

      • Tariq says:
        29 Jul29 July 08:58

        They way I read it, it is; I.e. AGL are paying VAT on non flight redemptions at the point of redemption.

        The issue is the ‘excess’ – I suppose parallel to the absorption of profit arising from expiring unredeemed gift cards – do the gift card companies pay VAT on this profit when they recognise it in their accounts?

        • Will says:
          29 Jul29 July 13:14

          I’d assume not as there’s not a taxable good or service supplied.
          Obviously there’s the corporation tax on the gain due but that’s a small proportion of what the vat would have been.

          • Rob says:
            29 Jul29 July 13:31

            Is an unused gift card a taxable service? I suggest it is.

            Try this – if you prepay a meal but don’t show up, does the restaurant owe VAT on the money it pockets?

          • Track says:
            29 Jul29 July 21:53

            In both above examples, the VAT is charged at source.

            Not when you purchase a gift card, but when you pay for goods/services.

          • Will says:
            29 Jul29 July 22:19

            If you pre buy a specific meal, it should be vatable I would argue.

            As far as pocketing unused gift cards is concerned, why that practice has not been legislated against is beyond me.

            There is no reason in the consumer interest to expire gift cards and their value should be ringfenced until redemption at which point they become a taxable good/service.

            If HMRC want to have another look at something Amazon Shipping is interesting.

            As a seller on Amazon I use them. The service is collection from the U.K. to a U.K. address (wholly supplied in the U.K.).

            It’s charged to Luxembourg as no VAT and I have seen the driver pool, they are one man bands who’ll be under the threshold for VAT registration which is a real problem if your trying to compete as DPD/Parcelforce/RM etc.

            I’d personally argue VAT evasion is far more of an issue than indicated on here.

            For years ebay / amazon encouraged Chinese sellers to file fake VAT returns in order to sell under competing websites. There was huge legislation in the EU / U.K. to prevent it but many businesses were nearly finished by this practice (and of course profits routed via HK free of Corp tax) we were nearly one of them.

    • Bagoly says:
      29 Jul29 July 14:12

      My complaint about this is slightly different – I do wish HMRC would spend more effort to clamp down on fraud – people who definitely cheat and do not declare and pay, rather than on cases like this where the taxpayer is declaring and it’s about interpreting ambiguity.

    • Track says:
      29 Jul29 July 21:45

      @Rob charging VAT on proxy currency purchase, and then charging VAT again on the purchases with that currency.

      This is a plain definition of charging twice.

  • Cranzle says:
    29 Jul29 July 07:24

    Great article. Thanks Rob.
    Two things immediately spring to mind. Firstly, we should earn and burn. Secondly, I can see them losing this and it generally impacting the wider loyalty scene.

    Does anyone know how other loyalty providers deal with points (such as Boots or Tesco, where points can be spent on 20% or 0% rate products? They are also ‘clubs’ in my opinion (especially when you’re called Clubcard)

    • Ken says:
      29 Jul29 July 07:27

      Tesco doesn’t sell points to individuals, that is the main issue

    • Jack says:
      29 Jul29 July 09:04

      Anyone can join the club for free that does not make it a membership club and as such one that shouldn’t be taxed whatsoever as no airline loyalty schemes are . They will not lose as their is zero justification for it whatsoever . Any tax required as paid when redeemed ie for wines etc it has been going on for years . There is zero need for HMRC to be meddling

      • LittleNick says:
        29 Jul29 July 16:24

        Agreed, HMRC once again focusing on the wrong people/organisations. Have to agree with Vistaro, with regards to this Gov and it’s organisations extracting as much from us as politically feasible, a healthy dose of cynicism does no harm when it comes to Governments and it’s tax agencies!

  • Dutchy says:
    29 Jul29 July 07:32

    The margin view is a red herring, HMRC do not have differential VAT treatments for margin. E.g. children’s clothing is nil VAT rated, I assume children’s designer clothing is very high margin, there is not VAT risk in this case, so I don’t see that as being a real ent argument.

    I do think there is risk that IAG cannot recover VAT from their 3rd parties for two reasons – as points are nil rated their contracts may not have the provision to collect VAT on Avios as this scenario was not envisaged at the commencement of the contract. The other issue is that I suspect a huge volume of points come from banking which is also nil VAT and thus if IAG could pass on the VAT the banks could not recover this as they have no output VAT to offset. This may ‘break’ the commercial model for the banks and they would renegotiate rates.

    If HMRC get their way large devaluations are inevitable

    • RussellH says:
      29 Jul29 July 11:36

      I am not a VAT expert, but I have always understood that air tickets (+rail tickets) are VAT liable at 0%, while financial transactions are exempt.
      There is a material difference:- a VAT registered business whose sales are largely or exclusively zero rated, such as BA, can reclaim all input VAT paid, while a business that is wholely or partially exempt cannot reclain VAT on the exempt portion of it business.

      Ptresumably there are rules about apportioning the amount of turnover liable to VAT, which I can see could well be applied to avios bought by Amex or Barclays?

      • Will says:
        29 Jul29 July 13:16

        I’m not sure that understanding is correct.

        If you sell zero rates goods, you can still reclaim VAT on costs eg postage or packing materials and advertising.

        • Roy says:
          29 Jul29 July 17:46

          Correct. But if you sell VAT-exempt goods/services (which are distinct from zero-rated goods/services) then you can’t.

          There is a big distinction between paying VAT at a rate of 0% (zero rated) and supplies that are outside the scope of VAT (VAT-exempt).

          Which is that @RussellH said, I think.

    • Track says:
      29 Jul29 July 21:52

      — E.g. children’s clothing is nil VAT rated, I assume children’s designer clothing is very high margin, there is not VAT risk in this case.

      An excellent argument.

      Though the Government tries to find ways to go after the margin, eg, cold sandwich is not VATable but hot sausage roll becomes equal to a restaurant meal.

  • davefl says:
    29 Jul29 July 08:07

    I wonder if this is why Amex are stopping the sale of MR points

    • Rob says:
      29 Jul29 July 09:35

      Could be linked to it, although I also think no-one did it because no-one except HfP readers knew about it!

  • Gordon says:
    29 Jul29 July 08:08

    I have collected a nice balance of Avios, including boosting the 100k Avios from the barclaycard promotion recently, I do hope there will not be a devaluation….

    • dougzz99 says:
      29 Jul29 July 08:40

      Isn’t boosting just another word for buying. I’d be very careful about swapping cash for points of any sort unless you have a target, which is achievable in the short term.
      Whilst there remains some outsize value, it’s becoming rarer, and for me Avios are tops 1p. If you’re a couple and you have 241 vouchers and need to get a certain amount of Avios you’d otherwise struggle to get, I agree that can change the calculation on buying.

      • Gordon says:
        29 Jul29 July 09:02

        A large part of the Avios were from BAPP spend and travel. Agreed the boosting is a purchase, But at a rate that was acceptable because we aim to use the points on a 2-4-1 voucher banked and one on its way plus a Barclays upgrade voucher we have all travel by the end of 2024, so the first redemption booking Will be imminently, If there is any left in the bank hopefully before a said devaluation I’m sure an avios booking will take care of them….

    • DWB1873 says:
      30 Jul30 July 09:33

      Sounds more like there is a possibility theremight not be a company to redeem them with, let alone a devaluation!

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