Loyalty programmes: VAT clarified

The number of loyalty reward programmes have increased drastically over the last few years. Although the programmes vary, the business rationale is more or less the same: they encourage sales, they aim to retain existing customers and attract new customers, and they assist businesses in monitoring spending trends so they can develop and implement focused marketing campaigns.

25 Nov 2021 5 min read Tax & Exchange Control Alert Article

At a glance

  • Loyalty reward programs have increased in number and serve the purpose of encouraging sales, retaining existing customers, attracting new customers, and monitoring spending trends for targeted marketing campaigns.
  • Interpretation Note 118 (IN 118) issued by the South African Revenue Service clarifies the value-added tax (VAT) treatment of participation in points-based loyalty programs, excluding loyalty points used as discounts on future purchases.
  • IN 118 outlines the characteristics and structures of loyalty programs, along with their VAT implications. It specifies that fees for program membership are subject to VAT, while VAT is payable on the total sales consideration of goods or services, but not on the loyalty points themselves. Redemption of loyalty points incurs VAT on the total sales value, and the settlement between the program operator and the redemption partner falls outside the scope of VAT.

There has always been a degree of uncertainty regarding the value-added tax (VAT) treatment of loyalty programmes, specifically where the loyalty points are issued and redeemed as part-payment for goods or services.

The South African Revenue Service issued Interpretation Note 118 (IN 118) on 4 November 2021 to clarify the VAT implications resulting from participation in points-based loyalty programmes. IN 118 does, however, not deal with loyalty points issued where such points are regarded as a discount on future purchases.

IN 118 specifies the characteristics of a loyalty programme as follows:

  • membership to a loyalty programme is open to any customer or to the public as a whole;
  • members are entitled to be allocated a reward in the form of loyalty points based on the value of goods or services acquired from certain entities;
  • the member is not liable for any additional payment before becoming entitled to loyalty points, other than paying a membership fee, where applicable;
  • members may in some instances pay less for goods or services than other customers, but they will not pay more;
  • loyalty points allocated have a value attached to them, whether specific or notional; and
  • the loyalty points can be redeemed by the member for goods or services with the value of the loyalty points as payment for goods or services.

IN 118 identified two main structures of loyalty programmes:

  • The exclusive programme – which is administered in-house where the supplier is the only stakeholder to the loyalty programme.
  • The multiple entities programme – where there are multiple loyalty partners involved. A customer becomes a member of the loyalty programme by entering into a membership agreement with a loyalty programme operator, which administers the programme. Various suppliers become partners to the loyalty programme. The member earns loyalty points on purchases made from loyalty partners. The member is then entitled to redeem the loyalty points on future purchases from a redemption partner.

VAT implications

IN 118 explains the VAT implications of the various transactions under a points-based loyalty programme as follows:

  • Any fee paid by a member to participate in the loyalty programme is subject to VAT.
  • When a member makes a purchase of goods and services which results in loyalty points being awarded, VAT is payable at the applicable rate on the total sales consideration of such goods or services. The loyalty points are awarded for no consideration and the value on which VAT is payable is therefore nil.
  • Any points fee which the loyalty partner pays to the loyalty programme operator equal to the monetary value of the points awarded, is a manner of monetising the loyalty points and falls outside the scope of VAT.
  • When loyalty points are redeemed for goods or services, VAT is payable by the redemption partner on the total sales value of the goods or services, including the consideration settled by way of the redemption of the loyalty points.
  • The settlement by the loyalty programme operator of the redemption cost with the redemption partner equal to the value of the loyalty points redeemed, comprises the payment of money which falls outside the scope of VAT.

IN 118 also sets out the VAT implications of related transactions as follows:

  • Where loyalty points are sold to a customer for a consideration, such loyalty points comprise a voucher as contemplated by section 10(18) of the Value-Added Tax Act 89 of 1991 (VAT Act) (commonly known as gift vouchers). The sale of such vouchers is not subject to VAT but VAT is payable at the applicable rate when the voucher is redeemed for goods or services.
  • The transfer of loyalty points between members has no impact on the VAT liability of the loyalty programme operator, the loyalty partner or the redemption partner.
  • The awarding of loyalty points under an employment incentive scheme is not subject to VAT but constitutes a taxable fringe benefit for VAT purposes.
  • The conversion of loyalty points in one programme into loyalty points in another programme comprises the redemption of the loyalty points in the first programme and the issue (sale) of loyalty points in the other programme. The sale of the loyalty points in the second programme comprises section 10(18) vouchers and therefore neither the redemption nor the sale attracts VAT.
  • The expiry of loyalty points issued but not redeemed has no VAT implications.

IN 118 does not deal with the VAT implications of tokens, vouchers or stamps as contemplated by sections 10(18) and 10(19) of the VAT Act, as loyalty points are generally issued for no consideration. Accordingly, section 10(18) will only apply in instances where the loyalty points are issued for a consideration. IN 118 specifically states that section 10(20) vouchers, being vouchers issued for no consideration which entitles the holder to a discount of goods or services purchased from another vendor, do not apply in the context of points-based loyalty programmes that fall within the scope of the interpretation note.

IN 118 achieves neutrality for all the participants concerned where the programme operates in the manner described in the interpretation note. However, it should be noted that the interpretation note stipulates that where the loyalty programme operator reimburses the redemption partner an amount which is less than the value of the points redeemed, there is no deduction available to the redemption partner for the difference. In such case the redemption partner will pay VAT on a higher amount than the actual consideration received for the supply, which is contrary to the operation of the VAT system.


IN 118 provides useful clarity on the VAT implications of points-based loyalty programmes. However, IN 118 does not deal with the VAT implications of loyalty programmes which operate in any different manner. It is therefore advisable to consider the VAT implications of the underlying transactions of loyalty programmes where they do not operate in the same manner as those described in IN 118.

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