'Refer-a-friend' discount found to be subject to VAT

In the recent First-tier Tribunal (FTT) case of Simple Energy, an appeal brought by the parent company of Bulb Energy, the FTT has ruled that a ‘refer-a-friend’ credit given on a customer’s utility bill was not a discount for VAT purposes, and was instead part of the taxable value of Bulb’s supply of domestic energy to the customer.

This, combined with other market intelligence, suggests that HMRC may be running a concerted campaign to identify and assess for VAT on credits it believes were incorrectly treated as a discount. 

The Simple Energy case

Domestic gas and electricity provider Bulb Energy ran a ‘refer-a-friend’ promotion scheme where it gave its customers an online link to pass on to a friend, which they could use to sign up to be a customer of Bulb. Where the friend signed up, they and the referring customer both received a £50 credit on their energy account as a reward.

A dispute arose over the correct VAT treatment of one of these credits. Bulb treated both as a discount on the customer’s energy bill, accounting for VAT on the discounted value of the customer’s energy bill.

While HMRC accepted that the credit for new customers who signed up was indeed a discount, it took the view that the credit for existing referring customers was not a discount. HMRC argued that the referring customer had actually provided a service to Bulb – and that that service was a non-monetary consideration used as part payment against their energy bill. It assessed Bulb for VAT on the value of the referral credits given to referring customers. 

The FTT has found in favour of HMRC, deciding that the referral credit for existing customers was part of the value of its supply of energy to them.

The FTT accepted HMRC’s argument that, to ‘earn’ the credit, existing customers were required to do something that went beyond their normal obligations as a customer. Bulb specifically asked them to share the online link ‘in an engaging and personal way’ with people they knew fairly well (friends, relatives, colleagues etc) and gave them social media prompts to help with this. Customers were discouraged from sharing the link randomly. This seems to be because Bulb thought existing ‘good customers’ would have friends who would also be good customers, so they wanted the offer to be specifically targeted towards individuals who were likely to be reliable customers.

This contrasts with the credit given to new customers for signing up – all those customers had to do to get the credit was to sign up for a new energy account. The tribunal thought that was a normal part of being a customer, so wasn’t a ‘service’ provided to Bulb. 

What does this mean for other businesses? 

The conclusion that a private customer is supplying a ‘service’ to its energy provider is surprising, and unlikely to be something that most businesses operating in consumer markets would have routinely identified as a VAT risk. It is therefore possible that the Simple Energy decision will be appealed further.

We also understand that a similar appeal from a different type of business is about to be heard at the FTT, so further developments in this area are expected in the near future.

Meanwhile, this type of customer reward scheme is widely used in consumer markets, so it is important that businesses that use them review their VAT position. VAT may be at risk on any scheme that requires customers to do something beyond the normal customer experience in order to obtain a credit or a free gift.

The appeal also highlights the wider VAT implications of ‘non-monetary consideration’ where goods or services are sold in exchange for other goods or services. Although no money changes hands, VAT may still be due on both supplies in a barter transaction, possibly requiring a complex valuation exercise to calculate the tax payable.

These arrangements are easy to overlook when preparing a VAT return, so businesses should review their activities to identify any risk areas and quantity the VAT potentially at stake. 

For more information, please get in touch with your usual RSM contact.