INTEGRATED: What effect will VAT changes have on customer loyalty programmes?

Michele Martin assesses how tax changes could hit some incentive schemes

Michele Martin assesses how tax changes could hit some incentive schemes

Financial services companies could be in for a shock this summer when

the cost of running certain customer loyalty schemes is set to rise by

pounds 17.50 in every pounds 100.

The increase is the result of a little-known change in the way VAT is

assessed and is expected to be implemented this July. But despite the

significant sums involved, few marketers seem to have worked out what it

will mean.

‘The proposals are so vague, we’re not sure about the implications yet,’

Steve Toomey, the finance director of Air Miles, says. ‘It’s all very

complicated - that’s why nobody knows about it,’ Richard Watson, the

senior VAT partner at the accountant, Price Waterhouse, adds.

The tax changes will hit so-called ‘trading stamp’ programmes, an

anachronistic term for cumulative customer loyalty schemes of the kind

run either independently by retailers, such as Shell’s Select, American

Express’s Membership Rewards and Safeway’s ABC card promotion, or

external promoters. It is this latter category, dominated by Air Miles,

that will be most severely affected.

Announced in last year’s Budget, the legislation will effectively re-

prioritise who pays VAT in the promotional chain.

Responsibility currently falls on the promoter to charge tax at the

stage where a customer redeems his points for gifts, allowing the

retailer to pay nothing. However, under the new system, VAT will be paid

by the retailer when he buys his points from the promoter.

For most businesses, this will lead to little more than an

administrative rethink over how tax returns are assessed. There will be

virtually no impact on costs, since the extra 17.5p in the pound can be

claimed back in the usual way.

However, problems will arise for tax-exempt businesses that can neither

charge nor claim back VAT. These will have no choice but to shoulder the

extra costs themselves, with those most vulnerable including health,

education and financial companies. Businesses on the front-line include

the Air Miles participant, NatWest Card Services and its Access, Visa

and Visa Gold cards.

In theory, the changes could provoke such companies to abandon external

incentive schemes altogether. Watson comments: ‘This change brings

trading stamp schemes into line with other marketing techniques which

already have VAT imposed. It may lead to a reappraisal of how the

marketing spend is allocated.’

But promoters argue that participants will keep things as they are,

possibly off-setting additional costs with lower-value prizes.

‘If costs did go up, there are many ways retailers could absorb them and

even then a lot would still find us good value when it came to

generating incremental business,’ Toomey says.

Companies have until 30 April to discuss these and other minor changes

with Customs and Excise. And though the deadline for implementing the

new rules has yet to be set, a reprieve beyond the summer is unlikely.

So whether at the helm of a financial services company or not, it still

may be a good time for marketers and promotional experts to brush up on

their VAT skills - or get a good accountant.