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Avios Group at risk for £600 million of unpaid VAT in HMRC investigation

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If you were wondering how the new Government is going to fill the £22 billion black hole in the national accounts, IAG Loyalty / Avios Group may be here to help.

IAG, the parent company of British Airways, Iberia and Aer Lingus, disclosed in its first half financial results last week that it is potentially on the hook for £600 million of VAT relating to the sale of Avios.

This issue was first flagged a year ago, but HMRC and Avios have still not reached a resolution. The sum under dispute has continued to rise in the meantime.

Avios Group at risk for £600 million of unpaid VAT in HMRC investigation

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).

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. If Avios Group wins, it gets the money back.

Avios Group at risk for £600 million of unpaid VAT in HMRC investigation

Here is the official statement from the accounts:

Since 2022, HMRC in the UK has been considering the appropriate VAT accounting to be applied by IAG Loyalty, which currently recognises VAT on the redemption of Avios depending on the associated redemption product, for which the vast majority are flights that are zero-rated. The Group’s current VAT accounting is based on a ruling issued by HMRC. The Group, along with its legal and tax advisors, considers the existing VAT accounting remains appropriate.

At the date of this report, HMRC has not issued a decision on what it considers to be the appropriate VAT accounting IAG Loyalty should apply and as such it is not possible to reliably estimate what the range of potential exposures are, if any.

HMRC has issued IAG Loyalty with VAT assessments to protect its position in respect of historical periods for the 31 months ended September 2020 that amount to €247 million. Were HMRC to issue further VAT assessments, applying the same methodology as those already issued, up to 30 June 2024, the Group estimates these would amount to €710 million [£600 million].

In the event that HMRC issue an adverse decision, the Group will need to advance the matter to the First-tier Tribunal (Tax) and to do so, will need to pay to HMRC, without admission of liability, the total amount of assessments having been issued to the Group at that date, which will be recoverable, in part or in full, should the Group be successful through litigation in the case.

The Directors are satisfied that it is not probable that an adverse outcome will eventuate and accordingly, the Group does not consider it appropriate to record any provision for this matter at 30 June 2024.

There is some further information in the notes to the accounts:

HMRC’s emerging view asserts that the charges made by IAG Loyalty are for participating / membership in the Avios scheme and the associated charges are subject to VAT. This emerging view differs to the current VAT accounting approach by IAG Loyalty, which is based on the Ruling issued by HMRC. Accordingly, IAG Loyalty accounts for VAT depending on the nature of the redemption products for which Avios are redeemed, the vast majority of which are flights which are zero-rated. HMRC’s emerging view excludes any consideration of the validity of the Ruling.

One bit of relief would come from the ability to reclaim input VAT. IAG believes that:

the Group expects [up to £220 million] to be recoverable as input VAT for certain subsidiaries of the Group, predominantly by British Airways.

You can find out more in the IAG half year accounts here. It is a PDF so you can open it and search for ‘HMRC’ to find the relevant paragraphs.

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Comments (104)

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

  • G says:
    12 Aug12 August 04:41

    Yet again, more close minded, anti-business thinking from a sinking United Kingdom government which is no different from the previous in their incompetance.

    No question whatsoever as to how to invest in the UK, having axed investment in rail and supercomputers to pay for inflationary pay rises, but going after an ever decreasing share of the pie.

    Inheritance and capital gains to follow in October 🙂

    • H says:
      12 Aug12 August 05:14

      “This issue was first flagged a year ago”

    • Geoff says:
      12 Aug12 August 05:18

      HMRC isn’t the government 🙂

      Also, “ This issue was first flagged a year ago”

      Probably worth reading properly 🙂

    • KevMc says:
      12 Aug12 August 05:19

      HMRC started this investigation a year ago. The current government have been in power for 5 weeks, so has nothing to do with them.

    • Erico1875 says:
      12 Aug12 August 06:06

      They have only been in government for 5 weeks., give them a chance! They quickly and efficiently dealt with the riots in England.
      The clear incompetence of the last lot will take quite a bit of fixing.

    • memesweeper says:
      12 Aug12 August 06:14

      It’s not “anti-business” to treat all businesses consistently when it comes to VAT of schemes and clubs. Avios hotels, wines, etc, was asking for trouble, and now they have it.

      • LittleNick says:
        12 Aug12 August 07:48

        Be careful what you wish for, VAT is still paid on redemptions where appropriate. Worst case is we could end up being charged VAT for avios points when they get used on flights, I doubt we’d get a VAT rebate, it’s only us that suffer as always

    • Andy says:
      12 Aug12 August 09:32

      In what way it charging VAT correctly anti-business?

    • Occasional Ranter says:
      12 Aug12 August 10:36

      As an expert in such matters – What an ill-directed rant.

      I can’t think of much that is less in the way of making UK plc more attractive and more productive than… checks notes… correctly taxing the consequences of overreach by the promoters of a frequent flyer loyalty scheme.

      • PH says:
        14 Aug14 August 17:37

        It’s tempting to make some correlation in a broader sense between the UK’s woeful productivity and the fact that we have one of the longest / most complicated tax codes in the world. It is certainly good news for various lawyers, accountants and advisors… one sector where we are probably world class.

  • Gordon says:
    12 Aug12 August 05:11

    I presume that the as mentioned “unpaid” £600m figure will be incurring daily interest? If IAG have to pay, that’s going to be passed on to, well, we all know the answer to that.

    • Ryan says:
      12 Aug12 August 10:24

      Daily interest of c. £123k!

    • Callum says:
      12 Aug12 August 11:53

      You do realise you’re effectively saying they have identified a way to make £600m extra profit but have put it on the back burner?

      Doesn’t seem particularly likely to me… If they have a way to do that without damaging their long term business then they’d be doing so regardless of tax charges.

  • Dominic says:
    12 Aug12 August 05:51

    Weird start to the article pinning this on/implying it’s due to the Labour Government, when as you rightly note shortly afterward this is an issue flagged pre-Labour.

    • Adam says:
      12 Aug12 August 06:35

      I think the “here to help fill the £22bn” line is tongue in cheek.

      99.9% of people will understand this is pre-Labour (although we have found the 0.1% here in the first reply..)

      • Dominic says:
        12 Aug12 August 07:19

        Yes, for sure – read it as tongue-in-cheek, just I guess (as you identified!) people will jump into “typical socialists” etc etc. The first line is lightly amusing, in any case!

      • LittleNick says:
        12 Aug12 August 07:50

        Yes even if the issue is pre-Labour, I very much doubt they’ll have a different position on the issue vs the Tories.

        • Roy says:
          12 Aug12 August 09:39

          Highly unlikely that either the previous government or the current government have any “position” at all on this. They’ll leave it to HMRC and the tax tribunals, as well they should.

    • NigelHamilton says:
      12 Aug12 August 06:57

      If this was the Telegraph or the Mail the headline would have been ‘Keir Starmer’s tax grab on family holidays’

  • MSHORT says:
    12 Aug12 August 05:58

    I had a similar roblem with my company’s “vacation vouchers” on a very much smaller scale. That was 30 years ago.
    This is hardly a new thing from HMRC.

  • ChasP says:
    12 Aug12 August 05:59

    I would be even more concerned that means of filling the black hole would include making flights VATable or taxing Avios earned as part of your job

  • Nick says:
    12 Aug12 August 06:29

    So, who has the biggest budget/war chest for paying lawyers? IAG/Avios, or the taxpayer? I think we all know the answer to that one!

    • BA Flyer IHG Stayer says:
      12 Aug12 August 07:09

      I think you’ll find HMG will willingly spend a good sum progressing this. The long term gain in the tax take will be well worth it.

      If the figure is already £ 600m from 5 or six years it’s going to be worth it to get roughly £ 100m in perpetuity.

    • JDB says:
      12 Aug12 August 07:21

      HMRC uses top tax counsel. They also adhere strictly to their Litigation and Settlement Strategy, so they fight to win unlike a lot of other types of civil litigation where parties take a commercial decision to settle disputes.

  • TimM says:
    12 Aug12 August 06:36

    It would be simpler if VAT were imposed on flights or just abolish VAT altogether. VAT is purely a tax on the end-consumer and paid by everyone at the same rate regardless of income and wealth. It would be better to abolish VAT and National Insurance, then equalise income tax with capital gains tax to compensate.

    • Alex G says:
      12 Aug12 August 06:42

      Lots of people pay little or no income tax, but VAT is difficult to avoid and cheap to collect.

      And it raises money from overseas visitors.

      • Erico 1875 says:
        12 Aug12 August 06:52

        They could get a few billion if shareholder dividends were taxed at the same rate as PAYE

        • JDB says:
          12 Aug12 August 08:31

          @Erico1875 – dividends power your pension.

        • Thegasman says:
          12 Aug12 August 09:04

          The lower rate income tax rate on dividends accounts for the fact that corporation tax has already been paid on the money that is distributed.

        • Ryan says:
          12 Aug12 August 10:26

          They are when you take into account Corp Tax….

          • Occasional Ranter says:
            12 Aug12 August 10:41

            Anyone still complaining about lower tax rates on dividends must be completely ignorant of the way CT and IT rates have changed since 2016…

    • roberto says:
      12 Aug12 August 06:44

      Like that’s ever going to happen.!

    • Nico says:
      12 Aug12 August 06:45

      no chance to make it work, VAT is by far the biggest tax

      • Neil says:
        12 Aug12 August 06:56

        Income tax is the biggest.
        In 2023/24, £277 billion was raised from income tax, £180 billion from NICs and £170 billion from VAT. Corporation tax was the fourth largest tax, raising £103 billion.

    • JDB says:
      12 Aug12 August 07:22

      VAT isn’t imposed on flights (or aviation fuel) by international convention.

    • Lumma says:
      12 Aug12 August 08:41

      To be fair, it’s likely that someone on a million a year pays a lot more VAT than someone on Universal Credit

      • Rob says:
        12 Aug12 August 09:03

        Tim is confused. Someone on a low income would pay little VAT since a high percentage of their income goes on food (zero in most cases), utilities (5%) and council tax etc (0%). Someone on a higher income pays closer to 20% VAT (well, 16.66%) on their entire spending because only a small part is zero or 5%.

        • TimM says:
          12 Aug12 August 09:27

          I am not confused. You should read the VAT rules on food. It reads like something from a previous century, which it is.
          https://www.gov.uk/guidance/food-products-and-vat-notice-70114

          Someone on a low income pays no council tax.

          Unfortunately, those on a low income have a higher propensity to buy food which is taxed at 20% – processed, ready meals and takeaways.

          Then there is furniture, clothing, transport and most other things in life.

          Rob is seriously misguided.

          • TGLoyalty says:
            12 Aug12 August 09:53

            I think it’s fairer to say the system needs a massive overhaul. Because you’re right while those with least disposable income should be spending it on low or zero rated goods it’s likely they aren’t, doesn’t mean that those goods should have higher VAT.

            Brexit was pushed as a way for us to decide how the U.K. set VAT categories and the goods within them but from what I’ve seen the previous government did diddly squat to help industries that need it most like hospitality etc I think restaurant and cafe sales should be 10% (just put the duty up on alcohol sales)

          • Rob says:
            12 Aug12 August 09:57

            Transport is zero rated.

          • Dan says:
            12 Aug12 August 12:24

            Good to throw in some prejudice in for free.

        • Charlie says:
          12 Aug12 August 14:28

          Tim is less confused than you think. On flights, it’s a non-starter due to international treaties and also shooting oneself in the foot (although that hasn’t stopped ‘net zero’ policies by U.K. governments.) But he’s spot-on with regard to the lower paid paying a higher proportion of their income on VAT, and a whole load of left leaning and right leaning economists agree with him. If income could not be artificially shifted, either domestically (personal income disguised as business profits) or internationally (income earned in the U.K. disguised as profits reported outside of the U.K.) then VAT would not be necessary, and it is the poorer members of society who suffer as a consequence of VAT. I’d also argue the global poor suffer more as a consequence of corporation tax than others, due to corporation tax being entwined in treaties originating in the 1920s to encourage trade by preventing double taxation, with the current intergovernmental solution being a rather leftist position (which will not be ratified by the U.S.) of a minimum tax rate across all economies for a subset of businesses. If VAT and corporation tax were abolished by the U.K., and HMRC focused all their efforts on taxing personal income and capital gains, for example, that could be a starting point to the reform of the U.K. tax system, which would benefit the wealthy and the poor. Domestic businesses would be able to compete on a level playing field with multinationals and poorer members of society would pay less tax as a proportion of their income. This sort of idea should be championed by both the left and the right, because taxation is not domestic, it is international. A left-right cross-party solution on the tax type mix that should be taxed domestically is a starting point to tax reform. To be blunt: plug in the holes. Let the left and the right agree on a domestic mix of tax types that minimise external tax losses (for example, both the left and the right agree to abolish corporate taxation). Then let the left and right fight over the remaining tax types: ‘…we’ll increase income tax by 1%’ versus ‘…we’ll reduce income tax by 1% – for example.’

        • Ken says:
          12 Aug12 August 15:13

          Really?

          It depends what we mean by low income, but the bottom decile pay proportionately most (as a percentage of income) both in total indirect taxes, and VAT alone.

          A cursory google of ONS or IFS would show this.

          • Rob says:
            12 Aug12 August 15:18

            Obviously they do as a % of income, since higher earners don’t spend all they earn, but as a % of spending a low earner pays less in VAT.

        • Charlie says:
          12 Aug12 August 19:10

          You’re a smart cookie Rob, but you are missing the point on this one in my view. First, the poorest members of society haven’t got the time to whip up a zero VAT rated meal made of fresh vegetables and some good quality Sheffield sausages. It is more likely to be a 20% rated burger or a KFC or a Gregg’s sausage roll or two. The statistics on this are widely available, before you add in tariffs on booze and fags, which the poorest members of society pay a sizeable chunk of too. Second, of course the wealthiest pay more VAT, just as we pay more income tax and council tax etc. It is tax progressiveness that is the issue at hand. And the poorest members of society, at the moment, suffer as a consequence of VAT and stealth taxes.

  • Nico says:
    12 Aug12 August 07:07

    Thank you! Income tax still cant replace VAT then…

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