The appellant ("LMUK" ) operated a loyalty card programme. Card-holding customers ("collectors") would swipe LMUK's card during purchases at participating retailers ("sponsors") and receive points which could be redeemed at participating businesses ("the redeemers") for goods or services, or for a price reduction in goods or services. Whenever a redeemer accepted loyalty points, it became entitled to payment from LMUK for accepting those points. Those payments were less than the compensation paid to LMUK by the sponsors for issuing points to the collectors as customers of the sponsors.
The Court found that the payment of LMUK to a redeemer was consideration for a supply of services by the redeemer to LMUK itself, rather than representing third-party consideration for a supply of goods or services by the redeemer to the collector. Accordingly, LMUK was entitled to a deduction of input VAT (the British equivalent of an ITC) on the payments made by it to the redeemer. Lord Reed SCJ stated (at paras. 80-81):
In accepting points, which have no inherent value, in exchange for goods or services, the redeemer is acting in a manner which is only explicable because of its agreement with LMUK, under which LMUK will pay it for doing so. LMUK pays it for doing so because its business is dependent on redeemers accepting points in exchange for the provision of goods and services. The only economically realistic explanation of LMUK's behaviour is the value to LMUK itself of the redeemers' acceptance of points in exchange for the provision of goods and services.