Two Loyalty Models Two VAT Treatments

Two Loyalty Models, Two VAT Treatments

There are two broad ways businesses structure their loyalty programs from a VAT perspective:

1. Supplier-Funded Loyalty Programs

In this model, the same business that issues the loyalty points is also the one that redeems and funds them.

What this means for VAT:

• The loyalty points are treated as a discount given by the supplier.
• VAT is charged only on the net amount after the loyalty discount is applied.
• The issuance of points does not create a separate taxable event, since no payment is made in return for the points.

Example:
A customer earns loyalty points during a purchase and later redeems them for AED 10 off their bill. The supplier applies the discount and charges VAT on the reduced amount.

Result: Lower VAT liability and a clear treatment aligned with supplier-funded discount principles.

2. Third-Party Funded Loyalty Programs

In some setups, loyalty points are issued centrally (such as by a parent company or a separate marketing entity) but redeemed at other businesses or branches within the group.

In such cases, the discount is not funded by the supplier issuing the invoiceit’s covered by another entity.

What this means for VAT:

• VAT must be charged on the full invoice value, even if a discount is given through loyalty redemption.
• The discount is not deductible from the VAT base, since it is not funded by the supplier.

Example:
A customer redeems points worth AED 10 during a AED 200 purchase. The supplier still charges VAT on AED 200, not AED 190.

Result: Higher VAT liability due to the nature of third-party-funded discounts.

What About Expired Loyalty Points?

Most loyalty programs come with an expiry period typically 12 to 24 months. But what happens when a customer never redeems their points?

From a VAT perspective, the expiry of loyalty points does not trigger any tax liability. Why?

• No product or service is supplied
• No money is exchanged
• No benefit is transferred to the customer

Conclusion: Expired loyalty points are outside the scope of VAT. No VAT is due and nothing is reported.

Why This Matters More Than Ever

As loyalty programs become more technologically advanced and multi-channel in nature think mobile apps, online redemptions, and cross-brand schemes the underlying VAT treatment often gets lost in the operational details.

However, incorrect VAT classification of these transactions can lead to:

• Overpayment or underpayment of VAT
• Misstated VAT returns
• Fines or disputes in FTA audits
• Reputational damage with customers or shareholders

How Crowe UAE Can Help

At Crowe UAE, we specialize in helping businesses design, review, and optimize loyalty programs for both commercial success and tax compliance.

Our Indirect Tax Advisory team offers tailored services including:

• Strategic reviews of your loyalty program structure
• Identification of VAT risks and cost exposures
• Clarification of supplier-funded vs third party-funded models
• Customized VAT guidance for retail, healthcare, e-commerce, and more
• Staff training to ensure operational teams understand VAT impacts
• Documentation and support in case of FTA queries or audits

Whether you're planning to launch a new loyalty program or reassessing an existing one, getting the VAT treatment right is non-negotiable.

Final Thoughts

Loyalty programs are fantastic tools for building long-term customer relationships but only when backed by the right tax strategy.

The source of the discount, the point of redemption, and the design of the program all play critical roles in determining how VAT should be applied.

As the VAT environment in the UAE matures, businesses that proactively address these nuances will avoid penalties, improve their margins, and build lasting customer trust.

• Reach out to Crowe UAE to review your loyalty program’s VAT treatment and stay ahead of regulatory expectations.