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

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.

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.

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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How to earn Avios from UK credit cards (October 2024)

As a reminder, there are various ways of earning Avios points from UK credit cards.  Many cards also have generous sign-up bonuses!

In February 2022, Barclaycard launched two exciting new Barclaycard Avios Mastercard cards with a bonus of up to 25,000 Avios. You can apply here.

You qualify for the bonus on these cards even if you have a British Airways American Express card:

There are two official British Airways American Express cards with attractive sign-up bonuses:

You can also get generous sign-up bonuses by applying for American Express cards which earn Membership Rewards points. These points convert at 1:1 into Avios.

Run your own business?

We recommend Capital on Tap for limited companies. You earn 1 Avios per £1 which is impressive for a Visa card, along with a sign-up bonus worth 10,500 Avios.

There is also a British Airways American Express card for small businesses:

There are also generous bonuses on the two American Express Business cards, with the points converting at 1:1 into Avios. These cards are open to sole traders as well as limited companies.

SPECIAL OFFER: Until 22nd October 2024, the bonus on American Express Business Platinum is increased to up to 80,000 Membership Rewards points, worth 80,000 Avios. You will receive 8 points per £1 spent for the first three months, on up to £10,000 of spending. Click here to read our full card review. Click here to apply.

SPECIAL OFFER: Until 22nd October 2024, the bonus on American Express Business Gold is increased to up to 40,000 Membership Rewards points, worth 40,000 Avios. You will receive 4 points per £1 spent for the first three months, on up to £10,000 of spending. The card is FREE for your first year. Click here to read our full card review. Click here to apply.

Click here to read our detailed summary of all UK credit cards which earn Avios. This includes both personal and small business cards.