Author: Charles de Wet (PwC)
National Treasury announced in the 2016 Budget Review that the VAT treatment of loyalty programmes and the provisions relating to vouchers will be reviewed. This article looks at some of the more complicated aspects related to the implementation of VAT on loyalty programmes that ought to be considered as part of this review.
Loyalty programmes are exceedingly common in the retail industry and serve as a very useful tool for businesses. These programmes provide an incentive for loyal customers to make additional purchases by rewarding them with benefits and they also aim to attract new customers.
An equally important objective is that it allows businesses to identify trends in customer spending and to explore their product offerings thereby maximising efficiency in ordinary business processes.
More recently loyalty schemes have used technology to extend their reach. Instead of requiring customers to carry around traditional cards or vouchers to access benefits, an increasing number of loyalty programmes have been made accessible to anyone who has a mobile device.
The data collected from mobile users can be used to customise the content that the user is provided with and thereby enhancing the retail experience experience for end-users.
At first glance, loyalty programmes appear to be a straight forward concept which should not create any tax complications, especially if we don’t consider the complexities and possibilities that loyalty programmes create with the increasing use of mobile technology.
This is also evident from the discussion paper released by SARS in 2014 on the VAT treatment of loyalty programmes. The objective of the discussion paper was to “promote discussion between SARS and stakeholders with a view to –
i. identify and understand the current difficulties experienced, if any, in applying the provisions of the VAT Act;
ii. identify areas in the VAT Act which may require amendments to address the difficulties identified, if any; and
iii.adopt a policy which will result in the consistent application of VAT principles for all loyalty programmes”.
While current tax regulations provide for a range of different loyalty programmes currently available in the South African market, SARS has noted that stakeholders operating loyalty programmes interpret and apply the relevant provisions in the VAT Act differently.
In context, goods or services supplied by a vendor in an enterprise is subject to 14 per cent VAT.
On this basis, and to the extent that the legislative requirements are met, loyalty programme operators may have a VAT obligation when clients receive a benefit when purchasing their goods or services.
However, loyalty programme operators who treat the benefit as a discount may not have a VAT obligation.
A review of the VAT treatment of loyalty programmes is long overdue. The discussion document has only catered for a limited number of loyalty programmes. SARS have identified two main types of loyalty programmes:
i. the exclusive programme which is usually administered in-house where the relevant entity acts as the only stakeholder to the loyalty programme. It is the responsibility of the loyalty programme operator to keep record of the loyalty points earned and subsequently redeemed by each member; and
ii. the multiple party programme which is more complex as a result of the fact that there are multiple entities involved in the programme. A customer becomes a member of the loyalty programme by entering into a Membership Agreement with the loyalty programme operator who provides different benefits for each vendor in the service provider pool and the extent to which a barter transaction has taken place.
A programme that requires further attention is loyalty programmes where businesses have formed partnerships with companies in other industries to entice customers with value-added offers (i.e. 50 per cent off a meal at a food outlet when a customer purchases clothing for more than a specified amount at a retail outlet). These programmes not only foster brand loyalty, but they also promote cross-selling in an extremely competitive market, especially considering our current economic environment.
It is clear that the discussion paper requires a more flexible working model with relevant concessions in respect of its VAT treatment to ensure that there is not an anomalous result.
National Treasury announced in the 2016 Budget Review that the VAT treatment of loyalty programmes and the provisions relating to vouchers will be reviewed.
It is both evident and concerning that due to ambiguity regarding VAT treatment of loyalty programs, there are potentially significant tax risks for businesses that operate loyalty programmes. This is said having regard to National Treasury’s proposal which seeks to address potential anomalous tax implications and SARS no longer accepting the “no loss to fiscus” argument.
On a positive note, it is significant to see that SARS and National Treasury are cognisant of the advancement of loyalty programmes in the commercial environment. They are taking steps to align the VAT law to hopefully ensure that VAT is not a cost.
With that objective in mind, this is an opportunity for industry to put forward their case and to ensure that their current operations, especially with regards to loyalty programmes, falls within the current VAT regulation structures. They should also consider the VAT structures’ effect on commercial viability.