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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.

  • john says:
    12 Aug12 August 09:45

    This just stinks of devaluation. If IAG lose, then they will devalue to recoup the losses. That’s why there is no need to make a provision for it!

    • Michael says:
      12 Aug12 August 10:53

      Agreed.
      Rather than waiting for the outcome before announcing a huge devaluation, one wonders whether Avios Group may (to mitigate the risk) slowly devalue Avios over a longer period (if this hasn’t started already), if their considered internal view is that the risk of HMRC winning is substantial.

      • John says:
        12 Aug12 August 12:14

        Avios have been devaluing since they started existing

        • Dan says:
          12 Aug12 August 12:28

          You might suggest nearly all currencies evaluate over time, nearly always worthwhile for a currency issuer to increase money (Avios) supply, leading to excess demand and in response price setter increase prices (except in the case supply and demand is almost entirely controlled but the same org).

    • BJ says:
      12 Aug12 August 13:26

      I disagree, there isn’t much scope for major devaluation as they’ve already fattened their golden goose for faie gras.

  • Greenpen says:
    12 Aug12 August 11:25

    Thank goodness the government is going after the rich individuals and corporations that pay little or no tax. Wasn’t it Warren Buffett who famously said he paid less tax than his cleaner!

    • Nic says:
      12 Aug12 August 12:27

      It is not the rich and corporations.reaponsible for the tax gap, but small businesses and self employed that offer cash payment to avoid VAT and tax on profits. The amounts to 10s of billions of lost tax. And we can all do something to stop it by refusing to pay cash. I have never had a single trade or builder that has not offered cash payment for a ‘discount’. Even had an architect so it.

      • The real Swiss Tony says:
        12 Aug12 August 15:11

        Tripe! I’m a small business, in 2013 I paid more corporation tax than Vodafone and think I would be laughed out of the room if I asked any of my clients to pay me cash… Large businesses can afford to invest in financial engineering (which arguably is part of the directors’ fiduciary duties) but tax avoidance shouldn’t come down to economies of scale.

    • BA Flyer IHG Stayer says:
      12 Aug12 August 18:13

      It was his Secretary and it wasn’t that he paid less tax in $$$ terms than her but he had a lower tax rate than she did because of all the deductions he could take that she couldn’t because of how the tax code was written that taxed various parts of his income at a lower rate than salary.

  • Blair Waldorf Salad says:
    12 Aug12 August 11:43

    I m totally clueless as to the territorial scope of this? Would it be restricted in its effect to UK-tax resident users of the Exec Club?

    Same question for the taxation of Avios earned via business travel; presumably HMRC could do nothing to non-UK tax residents?

    • SH says:
      12 Aug12 August 13:54

      This is a very interesting reply. There is no VAT due on sales to overseas customers as I understand it – would every member be able to simply use an overseas address and credit card to buy Avios 20% cheaper?

      Many even normally UK-resident BAEC members probably have a place of business or residence overseas. Or BAEC would need to follow the playbook of luxury brands and tax-equalize their pricing structure (eg a Cartier watch costs the same to you with Dubai’s 5% VAT as it does with the UK’s 20% VAT).

      What would then also happen to a business that could demonstrate it paid VAT to purchase Avios which it then used to buy a product or service? Could it reclaim the input VAT if it bought Avios to buy a bottle of wine that it then resold for cash?

    • Track says:
      12 Aug12 August 16:25

      IAG Loyalty (and its parent) will simply distribute the cost of its tax charges on all customers. They can’t devalue Avios for UK members of BAEC and not others.

      The consequences will be multiple but it’s clear that BA will lose a competitive edge in the US (there are already astronomical surcharges for redemptions).

      As to the HMRC demand and cost of business — even if hypothetically, BA starts to sell to UK customers with VAT (say to recoup this input VAT, basically keeping it to themselves) — all of their prices will go up globally.

      A lot of forum warriors here would smirk at things like £10 charge for ETA (travel authorisation), but the news are that Heathrow airport has already lost 90,000 purely transiting passengers. Since introduction of ETA trial scheme, first to Qatari citizens, surprise 19,000 of them decided not to travel. Thinking of all the spending lost, penny wise, pound foolish

      • TGLoyalty says:
        12 Aug12 August 18:12

        It’s not the £10 itself it’s the extra admin why bother where somewhere else requires nothing.

        • Dev says:
          12 Aug12 August 18:44

          Which is bizarre because the alternative to the ETA before it was introduced was a cumbersome visa application… the introduction of an ETA cannot be the root cause of 19,000 less Qataris wanting to come to London.

          • TGLoyalty says:
            12 Aug12 August 19:37

            Pretty sure they didn’t need a visa for short stays.

          • TGLoyalty says:
            12 Aug12 August 19:40

            But it’s deffo better for other gulf and GCC countries that can use it. Cheaper and quicker.

          • Rob says:
            12 Aug12 August 20:23

            They are NOT coming to London. You need an ETA to transfer – so they are transferring in Amsterdam or Frankfurt instead.

  • Swiss Jim says:
    12 Aug12 August 11:47

    As someone once very close to (and responsible for) such issues, the tax treatment here is hugely complex (and subject to arguments both ways) and the accounting treatment nuanced (and pretty subjective). If I were to guess HMRC will lose this. The risk however is that prospectively the law gets changed (with knock-on implications for collectors).

  • BJ says:
    12 Aug12 August 13:47

    The problem is it’s not just avios group, it’s the whole loyalty sector. Going after them for revenue in any meaningful way could raise substantial revenue but would result in a sea change in the sector with massive consequencies for ‘members of the scheme’ too. If I am not mistaken most schemes claim their currency have nominal values such as 0.00001p per point. If this the case but they then sell, directly or indirectly, their points for X.Yp per point then surely HMRC could simply tax scheme profits on the basis of capital gains tax or something similar following legislative change were the government sufficiently bothered.

  • Track says:
    12 Aug12 August 14:14

    Anti-business part is in issuing £200-400 million back claims, for the business done under HMRC ruling. Going forward, ok, change the rules, give notice period and allow business and customers to adjust. HMRC clinging to the notion of club, for which fees are VAT-able must be legally weak.

    News will not be good for us because ANY cost will be passed on to the customer. It will reduce British Airways competitiveness in the US, as US airlines (United, Alaska) still offer redemptions with $5 or $20 cash payment (no fuel surcharges).

    While they are at it, why don’t invalidate half a country ISA accounts, because of fractional shares problem. Guess what, UK government stock (debt) trades in fractions for the last 20 years, maybe longer. Another example at an artificially put up argument to support one’s chosen position of the day that ISAs should not have fractional quantities.

    There will be moves, such as reducing relief on pension contributions, or pushing pension funds to illiquid investments. Guess what, in 15 years there will be people retiring without any contributions to pension pots and even more dependant on the public purse.

    Ties back to the argument that certain systems and rules have to be in place for long time > 50-70 years (if not hundreds) to produce positive externalities of a stable environment.

  • Bernard says:
    12 Aug12 August 15:18

    Adam Daniels pleading he is ‘underpaid’ and grabbing for a bigger bonus, plus the creation of IAGL and its profits don’t look so clever now.
    How many years’ of IAGL profits is that?

    When Adam Daniels incorrectly boosts he has created a new currency (he hadn’t) and all the other guff we have to set through as shareholders he should consult tax advisors first.

  • Lady London says:
    12 Aug12 August 16:26

    So amusing.

    And yet same old, same old from HMRC.

    AGL took the trouble to protect themselves against HMRC feeling thenselves a bit short in future, and so casting round for fat corporate targets whom they can mount a campaign to try to scare into paying tax they shouldn’t really. But figuring that the threat of huge cost and huge waste of management time needed to fight off even spurious claims by HMRC, or perhaps the subtle threat of life being made difficult in other ways by HMRC for a corporate or industry sector they’re targeting… all scare tactics that sadly sometimes work.

    AGL took the precaution of getting a formal decision from HMRC on its current practice so this makes it harder for HMRC to try their scare tactics.

    So now we have what AGL so tactfully calls HMRC’s “emerging view”. In other words it’s a try-on by HMRC. Having given their decision previously, HMRC is now trying to change their mind.

    The fact that AGL makes sure to pay VAT on any end product that is subject to it, such as wine or other goods, further strengthens AGL’s position.

    So I think HMRC will lose this unless they come up with something new, and AGL is right.

    Of course the question of VAT on flights keeps rearing its ugly head as a long term project of HMRC and it may be that HMRC will dust this one off next.

    When offshore owners and businesses who tax base is offshore do huge parts of their business in the UK without paying proportional amounts into the UK under various tax headers and not just Amazon, Vodafone, Google etc, I really wish HMRC would focus on that far more significant problem for the future funding of the UK instead.

    • BJ says:
      12 Aug12 August 17:24

      If they charged VAT on premium cabin fares only the income might well exceed APD. They could then abolish APD in all cabins so would be a huge vote winner amongst economy travellers who’d end up paying neither VAT or APD.

      • Throwawayname says:
        12 Aug12 August 17:57

        I fly in premium cabins and would be fine with that, I already jump across to CDG/MAD/CPH/wherever before catching a long haul flight in order to avoid the APD and the hassle of getting to/around London!

      • TGLoyalty says:
        12 Aug12 August 18:16

        Pretty sure air travel is under a global agreement not to charge value added taxes.

        Since so many routes are run under strict approvals and formal mutual agreements trying to change that will really upset the apple cart.

        • Throwawayname says:
          12 Aug12 August 18:22

          VAT may not be workable because of the inputs being all over the place (each fuel supplier working within the tax framework of their home country), but Argentina does charge some kind of special APD which is dependent on the fare level, hence it almost always makes sense to redeem miles when buying tickets originating from there and going beyond SAO/RIO/SCL/ASU.

      • John says:
        12 Aug12 August 23:47

        They can charge APD equivalent to what VAT would be without calling it VAT, and reduce the APD on economy to £0. Of course suppliers would not be able to claim input

    • Ken says:
      12 Aug12 August 21:08

      The zero rating of public transport (which includes passenger aircraft) is not a HMRC decision, it’s derived from an act of parliament.

      It’s a political and practical decision and would only realistically be changed on a pan European basis, so hardly likely in the medium term.

    • Andy says:
      13 Aug13 August 09:12

      > So now we have what AGL so tactfully calls HMRC’s “emerging view”

      Hardly an emerging view when it’s been known about for a year… but of course AGL would try to play down it’s impact

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