Vouchers and Loyalty Points under UAE Law

From a VAT standpoint, companies can organize their loyalty programs in two main ways:

1. Loyalty programs funded by suppliers

According to this concept, the company that creates the loyalty points also funds and redeems them.

What this implies for VAT

The supplier considers the loyalty points to be a discount.
Only the net amount after the loyalty discount is applied is subject to VAT.
Since no money is exchanged for the points, their issuance does not result in a distinct taxable event.

Example: When making a purchase, a consumer accrues loyalty points, which they can then exchange for AED 10 off their bill. After applying the discount, the provider charges VAT on the lower amount.

Reduced VAT liability and transparent treatment in line with supplier-funded discount principles are the outcomes.

2. Loyalty Programs Funded by Third Parties

Loyalty points can be awarded centrally (by a parent company or a different marketing organization, for example) and then redeemed at other companies or branches within the group.

In some situations, the discount is paid for by another organization rather than the supplier that sent the invoice.

What this implies for VAT

Even if a loyalty redemption results in a discount, VAT must still be applied to the entire invoice value.
Since the supplier does not fund the discount, it is not deducted from the VAT base.

For instance, when a consumer spends AED 200, they redeem AED 10 worth of points. VAT is still charged by the provider on AED 200 rather than AED 190.

As a result of the nature of third-party-funded discounts, there is a higher VAT responsibility.

What About Loyalty Points That Have Expired?

The majority of loyalty programs have a 12- to 24-month expiration date. What occurs, though, if a consumer never uses their points?

When loyalty points expire, there is no tax obligation from a VAT standpoint. Why?

No goods or services are offered.
There is no transaction of money.
The customer receives no benefit.

In conclusion, VAT does not apply to expired loyalty points. Nothing is reported, therefore no VAT is owed.

Why This Is More Important Than Before

The underlying VAT treatment frequently gets lost in the operational intricacies of loyalty programs that are becoming more technologically sophisticated and multi-channel in nature, such as cross-brand schemes, online redemptions, and mobile apps.

On the other hand, improper VAT classification of certain transactions may result in:

VAT payment errors or overpayments
Inaccurate VAT returns
FTA audit penalties or disagreements
Harm to one’s reputation among shareholders or customers

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.