Loyalty Points or Discounts? Understanding the VAT Impact

A recent Advocate General opinion in the ECJ Case C‑436/24 Lyko Operations AB, raised important VAT questions for loyalty schemes. It clarified how loyalty points should be treated for VAT purposes, with important implications for businesses running rewards programmes.

Although the AG’s Opinion is not binding, it often provides a strong signal of how the Court of Justice of the EU (CJEU) might decide.

What the case was about:

Lyko, a Swedish retailer, runs a loyalty scheme where customers earn points on purchases. Points can only be redeemed alongside a new purchase but cannot be transferred and have no independent monetary value.

The question posed to the court was if these points count as VATable vouchers or are they simply discounts?

The distinction determines when VAT is due and how much. Vouchers can trigger VAT at issuance or redemption depending on their type, whereas discounts are treated as part of the original sale. Misclassifying loyalty points can lead to incorrect VAT accounting, potential penalties, and compliance headaches.

Key insights from the AG’s opinion:

• Loyalty points do not qualify as vouchers under the EU VAT Directive.
• They are effectively discounts on future purchases, because they cannot be redeemed independently.
• Part of the original purchase price may need to be allocated to the points, even though customers appear to receive them “free of charge.”

What this means for businesses:

• How a loyalty scheme is structure directly affects the VAT treatment.
• Accurate VAT accounting requires allocating value between the sales and the reward.
• Clear programme terms and having systems to correctly track points issued and redeemed are essential.

Bottom line: Loyalty points remain a powerful marketing tool but VAT rules mean they are more than just freebies. Businesses should review their loyalty programmes to ensure compliance and avoid unexpected VAT liabilities.