Proud to be celebrating 170 years in business
How are 'Refer a Friend' Schemes Treated for VAT Purposes? Guideline Ruling
With a view to generating new client introductions, many public-facing businesses operate so-called 'refer a friend' schemes. In an important decision, the First-tier Tribunal (FTT) pondered the consequences of such arrangements in terms of VAT.
An energy company provided new customers with a personalised electronic referral link that they could send on to anyone. When recipients clicked on the link, they were taken to a web page where they could choose to switch their energy supplies to the company. In that event, the company provided both the referrer and the new recruit with credits against their energy charges.
HM Revenue and Customs (HMRC) argued that a successful referral amounted to the provision of a service by the referrer to the company. That service, it contended, was non-monetary consideration for the company's supply of energy to the referrer. The credits provided reflected the value placed by the company on that service. It followed, HMRC contended, that the energy provided to a successful referrer was subject to VAT at its undiscounted value.
For its part, the company argued that the activity involved in sharing a link is minimal and insufficient to constitute a service of any kind. Doing so provided no immediate benefit to the company and was not directly connected to the provision of credits. Such credits were gratuitous and generated not by a referrer but by a recruit agreeing to switch energy suppliers.
There were, the company asserted, too many uncertainties between the sharing of a link and the provision of credits to a referrer. From its customers' point of view, the credits represented a reduction in the price payable for energy provided. Whether they were described as discounts or rewards, VAT was chargeable on the basis that the credits served to reduce the value of the energy supplied.
Rejecting the company's appeal, however, the FTT found that there was a clear and direct legal link between what was required of a referrer – making a successful referral – and the company's side of the bargain – the provision of credits. The service provided by successful referrers was non-monetary consideration given by them for energy supplied to them by the company.
For further information or to speak to one of our experts, please get in touch