UK VAT: ‘refer a friend’ schemes may attract VAT liability, tribunal rules

In a recent ruling, the First-tier Tax Tribunal found that a ‘refer a friend’ scheme operated by energy company Bulb was a “service” provided by the referrer to that company, and should therefore be treated as non-monetary consideration for the supply of energy which gave rise to additional VAT liabilities for the company.

Tax expert Jake Landman of Pinsent Masons said: “This decision imposes a potentially significant additional VAT cost if the scheme has not been established to recognise the non-monetary consideration. Although Bulb went into administration after this appeal was commenced, the administrators have decided to proceed with the appeal thus far. It will be interesting to see if they pursue a challenge to the Upper Tribunal after this decision.”

The refer a friend scheme operated in a fairly standard pattern, albeit that the amounts on offer were probably higher than most. When a customer signed up to Bulb, they were provided with a personalised referral link. The customer could forward that link to anyone they wished. If someone clicked on that link and signed up to become a customer of Bulb, both the referrer and the new customer would get a referral amount credited against their energy bill. For most of the period under review, the amount was £50 if both gas and electricity were switched, or £25 if only one fuel type was switched. There were some other conditions that had to be met – for example, both customers remaining with Bulb for a specified period.

It was open to customers to extract the referral amounts as cash, but less than 1% of customers did so. There was no limit on the number of referrals that a customer could make – the Tribunal recorded that the majority of customers made between one and three, but a small minority made so many referrals that the value of the credits exceeded their energy supply costs.

Bulb accounted for VAT on the basis of the payments received from the customer, i.e. after deducting the value of the referral credits. Where a customer requested to be paid in cash for their referrals, these amounts were not deducted from the consideration received from that customer for their energy and therefore more output VAT was paid in respect of those few customers.

HMRC challenged Bulb’s approach to dealing with the credits. It submitted that the referral was the provision of non-monetary consideration to Bulb, so that the value of that service should be treated as additional consideration given by the customer for the energy supplied to them. If that was correct, all parties agreed that the value to be attributed to that non-monetary consideration was the value of the referral credit.

The FTT found in favour of HMRC. The principal reasoning focused on the contractual reciprocity between Bulb and the referring customer. They found that there was a direct legal link between what the referring customers did and Bulb’s obligation to reward customers who had shared their referral codes and that this was articulated in the terms and conditions of the supply. There was also a direct link between the actions of the referring customer and the credits because without the referral, no credit was given. Similarly, the amount of the credit given was directly proportional to the services provided by the referring customer, i.e. the number of times they shared the link and it was acted upon.

Having reached that conclusion, the FTT considered whether there were any factors the pointed away from that position, but rejected them all. The fact that there were uncertainties – such as no control over whether their friends chose to sign up – and conditions to be met, such as passing credit checks, did not alter the nature of the services provided. The FTT also found that it was entirely rational to treat the discount that a customer received when they signed up to have their energy supplied by Bulb differently, because the referral arrangement required them to do something that was outside of their obligations as a customer.

VAT expert Bryn Reynolds of Pinsent Masons said: “The size of the referral fees in this case make it clear why the scheme was so successful. Such referral schemes, generally with a smaller referral fee, are widespread. Whilst Bulb is an energy supplier, the principles of this case will be relevant for any other retailer who offers a similar referral scheme”.

“This scheme involved a ‘positive’ act on behalf of the customer, by specifically forwarding a link. It is not difficult to see how the principles could be extended to other common features of customer relationships, such as providing access to your personal data,” he added.