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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.

  • Mark says:
    29 Jul29 July 10:42

    I see the biggest issue here is the nectar conversion.

    Converting a zero rated product (avios) for currency then using that vat free currency to purchase vatable goods. The question is, if I buy something vatable for £12.00 from Argos / Sainsburys do they pay the £2 in vat to HMRC?

    If they do, then there’s no issues here as I see it. If they don’t then that’s a whole big can of worms!

    • davefl says:
      29 Jul29 July 11:41

      Yes of course, you can see the vat element on the till receipt on a mixed basket of goods. That’s not the issue here

      • Jack says:
        29 Jul29 July 12:29

        There is no issues tax is paid on all necessary transactions so what exactly is the issue ? No other loyalty scheme has any issue ie club card

        • Rob says:
          29 Jul29 July 12:41

          If Clubcard sold points without charging VAT and let you spend them in Tesco for VAT-able items then there may be issues.

        • davefl says:
          29 Jul29 July 12:50

          Avios sell points at varying prices and the redemption value isn’t fixed. HMRC are querying where the difference in cash goes and why VAT isn’t applicable to that difference. Basically if you buy avios at 0.56p and spend them on a voucher for 0.5p, HMRC are asking where the VAT is on the 0.06p

          I would see Virgin and Amex as vulnerable to this scenario (before Amex decided to stop selling points). All other retail point schemes are a direct rebate on an amount, don’t let you buy points to top up and have fixed redemption rates.

          • LittleNick says:
            29 Jul29 July 17:01

            The problem with tracking the purchase of avios to when the avios are spent is what about those (many) where avios are acquired in multiple ways, flights, purchases and bought avois, and tying up which Avios are used for the purposes of redemptions. Yes HMRC could introduce similar rules like shares in Capital Gains tax but it gets far too complicated and needlessly bureaucratic

        • Track says:
          29 Jul29 July 19:07

          @Rob, but the above is exactly double-charging.

          First, you buy a proxy currency, and pay VAT on it.

          Second, you pay VAT on goods purchased with that proxy currency.

          That’s a double-charging of VAT and I am sure any Government would love to have it that way.

          • Chrisasaurus says:
            30 Jul30 July 06:39

            Indeed – it’d make gift cards rather less appealing if you were paying VAT on the gift card as well as on whatever you redeemed the credit for.

            This is not the issue here

          • Mark says:
            5 Aug5 August 11:24

            That was my point. There’s no need to pay vat on the avios if the retailer pays it on the end purchase anyway.

  • G says:
    29 Jul29 July 11:45

    Worst case scenario? Avios devaluation across the board? Or just on non flight redemptions.

    • points_worrier says:
      29 Jul29 July 12:18

      If you have any burning desire to cash out to nectar, I would do it now…

      • Ali B says:
        29 Jul29 July 12:23

        Panic merchants out already. Haha

        • davefl says:
          29 Jul29 July 12:52

          I think a certain amount of panic is warranted but the timescales for these things to work through the legal systems as has been pointed out is probably 5-7 years.

          • G says:
            29 Jul29 July 13:12

            True, and, the issue from my reading of it is purchasing avios – not necessarily redeeming on flights.

          • Jack says:
            29 Jul29 July 14:26

            There is no panic as it is ridiculous, not evidenced and won’t happen no loyalty schemes are taxed and people can spend as they wish . Membership is open to all

          • Rob says:
            29 Jul29 July 14:50

            But that’s simply not true. Lufthansa has been fighting a court battle for years over the value (and so taxation) of Miles & More miles. It had to stop selling miles AND stop accepting transfers from other schemes that sold points in an attempt to convince the courts that miles had no value. The case still isn’t over.

            In the US miles and points ARE taxed when not seen as a rebate. For eg, if you refer a friend to Amex in the USA then Amex reports your referral points bonus to the IRS and you are sent a tax bill for their assessed value of the Amex points.

            Similarly, miles or points bonuses for opening checking (current) bank accounts in the US are taxable (and Citi etc report you to the IRS) because, as you aren’t making any sort of purchase, it can’t be seen as a rebate.

    • Dev says:
      29 Jul29 July 13:20

      Call me naive but wouldn’t a devaluation exacerbate the problem. Hypothetically, you bug for £1, spend it for 50p and you have 50p that HMRC are querying.

      If you have a devaluation, the spend would be, say, 35p and you now have HMRC querying the 65p difference?

      Or have I got this totally wrong?

      • Chrisasaurus says:
        30 Jul30 July 06:42

        Well at most the vat element would be in dispute yes but the rest of it is theirs to keep so works very much as intended still.

  • Alex Sm says:
    29 Jul29 July 13:27

    Why does VAT exist in the first place? No one understands it properly, there are always issues with how it is charged/calculated/reclaimed. Looks like the world would be a better place without it, no?

    • Rob says:
      29 Jul29 July 13:28

      Only if you want the working to pay even more tax and the retired etc even less …..

      Also raises huge sums from tourists, non doms etc and has very low fraud levels.

      • John says:
        29 Jul29 July 13:43

        But most of VAT (I’ve read between 60-80% depending on elasticity) is actually paid by merchants, at least those selling to consumers, as they would be charging what the market can bear

        • Rob says:
          29 Jul29 July 15:02

          That doesn’t matter does it, because VAT applies to almost everything except food and a few other bits and pieces. If you have £200 left after buying food then you will still spend that £200 (and the Govt still gets the £33 VAT element) even if you get fewer goods for your money than you would if there was no VAT.

          • davefl says:
            29 Jul29 July 15:16

            Jaffa Cake anyone?

          • Paul says:
            5 Aug5 August 07:56

            VAT also doesn’t apply to rent, interest, loan repayments which for many families will be large outgoings.

      • Gordon says:
        29 Jul29 July 15:51

        Apologies Rob, I know you are on holiday! But was the VAT refund for tourists ever sanctioned in the uk or is it still in discussion. As apparently this was going to happen by 2024 and the one in Northern Ireland modernised.

        • Track says:
          29 Jul29 July 19:13

          No such discussions on VAT refund for tourists.

          There were some journalist or industry question to the PM to consider returning the scheme, pointing out that all European countries have it and the retail spending/goods spending from visitors has dropped noticeably (no surprise).

    • mark2 says:
      29 Jul29 July 13:57

      I believe that it was originally introduced to align with the EEC when we joined in 1970s.

      • Bagoly says:
        29 Jul29 July 14:05

        True – it’s a French idea.

        • Patrick says:
          29 Jul29 July 15:59

          Trust the French politicians to come up with a good idea to tax everything. At present we have 327 different active taxes

      • BA Flyer IHG Stayer says:
        29 Jul29 July 15:52

        Before VAT we had “purchase tax”.

    • JDB says:
      29 Jul29 July 15:42

      VAT is actually very simple and generally well understood until you get to very arcane areas such as the sale of Avios. From a government’s perspective it’s very popular as it raises a lot of money, is easy to collect and generally (for maybe 80%) quite difficult to avoid. HMRC has stepped up enforcement and cash stands out more; I notice far fewer builders, handymen, gardeners etc. wanting cash these days.

    • Will says:
      29 Jul29 July 19:59

      The way to solve that issue, is to have an annual land value tax. You’d also then stop all sorts of behaviours around land which create inefficiencies in the economy and land ownership related inequality.

      Development aside, the sooner we recognise that society brings the value to land not the private owner the better.

      You’d also see a paradigm shift in land owners attitude to new development if they thought their land tax bill would be reduced if development next door went ahead to spread the bill among more units.

      • Will says:
        29 Jul29 July 20:05

        I am of course advocating for higher land value tax (council tax isn’t really this, business rates sort of are but they are a terrible implementation) in return for reducing VAT.

        If you were to target tax at stored wealth and reduce it on expenditure / consumption you’d see a much different economy.

        I really think if we got away from the concept of storing excess wealth and bought into the idea that in a high consumption economy we’d all have great annual income then we’d be in a much better place than we presently are.

        Of course land owners and people who acquired wealth through inheritance/crime/luck would object.

  • Novice says:
    29 Jul29 July 14:11

    I know this is not the right place to ask but any answers will be appreciated.

    Can I transfer Avios from BAEC to Aerlingus club? And how do I do that?

    • davefl says:
      29 Jul29 July 14:16

      Use combine my avios from either direction. It may or may not work depending on whether you’ve sacrificed the correct number of chickens under a full moon 1st.

  • Novice says:
    29 Jul29 July 14:29

    On BAEC site it’s only got Iberia and Qatar as options for combining Avios.

    Does anyone know a work around for this? I’m looking to book aerlingus from MAN-BGI because it’s direct and I’d rather not have the hassle of connections. I have a lot of Avios and it’s time I start using them.

    Aerlingus flights are not showing in BAEC search but I know they are there because sky scanner has them.

    Do I need to call? Which number do I need to call? I usually pay cash so I’m a bit clueless.

    And, I know I should be asking in forums but I can’t wait around for the answer.

    • Novice says:
      29 Jul29 July 15:30

      Thanks… Though there’s no avios availability as usual. Don’t know how everyone else manages to get it. Though I’m getting the usual spend 270k avios to knock £1300 off the bill.

      I think I’ll just get cash.

  • Bagoly says:
    29 Jul29 July 14:54

    Case 1) IAG sells you Avios for £100 with VAT at 0%.
    At redemption for flights, IAG pays BA £70 with VAT at 0%. No issue with the £70.
    Should the £30 margin be subject to VAT – I’d say that would be extortion given that IAG as a whole is providing zero-rated air transport (and they could just change the £70 to £100 with no effect on the outside world)

    Case 2) IAG sells you Avios for £100 with VAT at 0%.
    You buy wine from Laithwaites for £75. That £75 includes VAT – not doing so would outright cheating/evasion; not the subject of a dispute – so Laithwaites pays HMRC £12.50. There is no issue on the £62.50+VAT. How about the margin of £25?
    One view is that your original £100 was effectively to buy wine, so should be subject to 20% VAT (or deemed to be £83.33 + 20% VAT of £16.67 and so HMRC now asks for £16.67 – £12.50)
    Other views are that it is not subject to VAT – one angle would be that you bought delayed air-transport (zero-rated) and if you happened to convert it at an under-value that’s your loss – that argument would be stronger if IAGL did not make a margin on the flight redemptions (which we all know is artificial to influence shareholder analysis)
    IAGL does after all pay 25% corporation tax on that margin already.

  • Rizz says:
    29 Jul29 July 18:06

    “If you refer a friend to Amex in the USA then Amex reports your referral points bonus to the IRS and you are sent a tax bill for their assessed value of the Amex points”.

    Rob – I had a number of Amex referral bonuses in the US and never got a tax bill from the IRS. First time I hear of this.

    • JDB says:
      29 Jul29 July 18:32

      Maybe you owe the IRS money!?

      You are required in the US to declare some points ‘income’ (other than that received from flying). See Shankar v. Commissioner of Internal Revenue.

    • Rizz says:
      29 Jul29 July 20:40

      OK, read a bit more. This only seems to apply if you earn more than 60,000 points per year from referral bonuses… No tax up to 60k.

    • Paul says:
      5 Aug5 August 07:54

      Are you a US tax payer. The IRS view maybe that you should be paying tax on this in the country where you are a tax resident. UK probably wouldn’t want to tax this unless they thought you are doing this as a business.

  • Jack says:
    29 Jul29 July 21:36

    The “paying more than its worth” case (buying £50 of gift cards for £100 of points) is certainly tempting for them to look at, but if their argument holds, does that have implications on the other side?
    Would that imply if I get £1500 worth of Virgin cruise for £1000 of points, they’d only be due VAT on the £1000 value?

    • Will says:
      29 Jul29 July 22:10

      Taking the gift card analogy, if you buy a discounted gift card, the vat is due on the redemption value not what you paid for it.

      The problem with points redemptions is that the airline can decide what the value is as they can create special fares for points.

      That said, is there even VAT on a cruise?

      It’s a very interesting case in general.

      I’ve not got a Sainsbury’s receipt to hand but is the VAT on a receipt shown if nectar points are used?

      If so then sainsburies presumably forward the VAR to HMRC?

    • Track says:
      29 Jul29 July 22:10

      Luckily, Virgin Voyages are bought from a US entity, and are consumed abroad, likely in the international waters (not the country of departure or calling ports).

      From either viewpoint, can’t charge VAT/sales tax on voyages, by the Grace of God.

    • Bagoly says:
      30 Jul30 July 15:33

      Excellent point – the only practical solution to me seems to be to treat points as a currency, so buying them is an FX transaction (outside the scope of VAT) and whatever GBP amount Laithwaites/BA/BAH gets from IAGL is the gross value from which to calculate VAT.
      For transactions within IAG there is the question of fair transfer prices.
      For VAT:
      a) for flights makes no difference because zero -rated.
      b) where BAH supplies a hotel or car rental there will be VAT (UK VAT for hotels or car rentals within the UK). That’s rather interesting because the margin on the hotel/car is typically viewable as “negative” – the package is less that the sum of the parts, so taking package-flight_cost would understate things – practicality suggests just deem the hotel element of the package to be amount (net + VAT) charged to BAH by the hotel.

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