Avios flight points may be taxed, warns HMRC

British Airways Avios members may have to pay VAT on tickets bought with Avios points as a result of HMRC’s review of the airline’s VAT treatment

Sara White, Editor, Accountancy Daily

The airline group told shareholders in the latest interim management report that HMRC is considering changing the VAT treatment of its Avios points scheme which gives members access to free flights and upgrades based on credits earned. In recent years the Avios scheme has been extended to a number of other benefits, giving access to cheaper car hire and shopping discounts.

This extension of the scheme triggered the HMRC review and it is now considering ‘whether to charge the tax on membership of the Avios programme’. The tax authority is in talks with British Airways to address the issue.

British Airways said that ‘at 30 June 2023, HMRC has issued protective notices of VAT assessments for the 19 months ended September 2019 to Avios Group (AGL) Limited, a controlled undertaking of the group trading as IAG Loyalty’. They also confirmed that none of the VAT notices were due for payment.

IAG Loyalty accounts for VAT depending on the nature of the goods or services for which Avios are redeemed, the vast majority of which are flights, and zero-rated. It added that the VAT accounting continued to be ‘based on historical rulings issued by HMRC’.

HMRC has not confirmed whether it considers its emerging view to be retroactive or only prospective in nature. The Group expects further developments in this matter during the remainder of 2023, which may include HMRC issuing an update to its emerging view. This follows talks with HMRC and IAG Loyalty during the first half of 2023.

British Airways stressed that ‘given the early stages of HMRC’s enquiries there remain a number of possible scenarios that could eventuate. The Group has reviewed HMRC’s emerging view with its legal and tax advisors and considers it has strong arguments to support its VAT accounting, including having received rulings previously from HMRC on the matter, and therefore does not consider it probable that an adverse ruling will eventuate’.

Accordingly, the Group does not consider it appropriate to record any provision for this case at 30 June 2023. It added that any ‘disclosure of a potential range of exposures, associated with the aforementioned possible scenarios that could eventuate, could prejudice seriously the position of the Group in its ongoing engagement with HMRC’.

If the Group is unable to reach agreement with HMRC it said it would take the case to the First Tier Tribunal (FTT).

If this were to happen, British Airways said it would ‘need to pay, without admission of liability, to HMRC the total amount of assessments issued at the time of application to the independent tax tribunal, which will be recoverable, in part or in full, should the Group be successful in the case’.

Until HMRC further progresses its enquiries, it is not possible to determine the payment required, if any, but any potential payment may result in a material cash impact on the company.

During the first half of 2023 British Airways issued 66.4 billion Avios, a 14% increase from the first half of 2022. It also added new ways for members to collect points with over half of members using an online shopping portal, ‘Avios Balance Booster’ leading to half a billion Avios issued in the first few weeks. From July British Airways Executive Club members earn Avios, based on spend instead of the distance they fly, making it simpler and more transparent.