Under the revised Section 23 of FRS 102, which applies to accounting periods beginning on or after 1 January 2026, loyalty points that give a customer a material right are a separate performance obligation. Part of the price of the original sale is allocated to the points and held as a contract liability, then recognised as revenue when the points are redeemed or expire. Points that are expected never to be used are released in line with the pattern of redemptions.

Why does a loyalty point defer part of the sale?

Paragraph 23.33 explains the logic. When an option gives a customer a material right, the customer is in effect paying the business in advance for future goods or services. A shopper who spends £100 and receives points worth money off a later purchase has bought two things: the goods taken home today, and a right to a discount tomorrow. Recognising all £100 as revenue on day one would overstate revenue now and understate it when the reward is used.

The result is that revenue for the original sale is split. The share relating to the goods delivered is recognised immediately; the share relating to the points sits on the balance sheet until the business fulfils that promise. This is the same five step model that governs all revenue under the revised Section 23; the 2026 FRS 102 amendments guide summarises the wider changes.

When does a reward count as a material right?

Paragraph 23.31 says an option to buy additional goods or services for free or at a discount is a separate performance obligation if it gives the customer a material right that it would not receive without entering into the contract. Paragraph 23.32 lists the typical forms: sales incentives, customer award credits or points, contract renewal options and other discounts on future goods or services.

The test has a clear limit. If the option only lets the customer buy future goods at a price that reflects their stand alone selling price, it is not a material right and nothing is deferred. So a voucher for 10% off that is handed to everyone walking past the shop, purchase or not, is not earned by the sale and does not affect its revenue. Points that can only be earned by buying, and that give value the customer would not otherwise get, usually are a material right.

How is the price split between the goods and the points?

Paragraph 23.65 requires the transaction price to be allocated to each performance obligation on a relative stand alone selling price basis. Paragraph 23.67 says the allocation is made in proportion to the stand alone selling prices determined at contract inception.

Points are rarely sold on their own, so their stand alone selling price normally has to be estimated. Paragraph 23.71 sets the method for options: the estimate reflects the discount the customer would obtain on exercising the option, adjusted for any discount the customer could receive without exercising it and for the likelihood that the option will be exercised. In practice that means the face value of the reward, reduced by the expected proportion of points that will never be redeemed.

How does it work in numbers?

Illustration only. Ignoring VAT, a retailer sells goods for £100 and the customer earns 10 points. Each point gives £1 off a future purchase. From its redemption history the retailer expects 80% of points to be used.

Item Stand alone selling price Allocated price
Goods £100.00 £92.59 (100/108 of £100)
Points (10 x £1 x 80%) £8.00 £7.41 (8/108 of £100)
Total £108.00 £100.00

At the point of sale the retailer recognises revenue of £92.59 and a contract liability of £7.41. Next year customers redeem 4 of the 8 points expected to be used. The retailer releases 4/8 of the liability, £3.70, to revenue. If expectations change, the estimate is updated and the release adjusted. When the scheme rules say points lapse, any balance left is released, because paragraph 23.33 recognises revenue when the future goods are transferred or when the option expires.

What happens to points that are never used?

Unused rights are known as breakage. Paragraphs 23.129 and 23.130 deal with them. If a business expects to be entitled to a breakage amount in a contract liability, it recognises that expected breakage as revenue in proportion to the pattern of rights exercised by customers. If it does not expect to be entitled to breakage, it recognises the breakage amount only when the likelihood of the customer exercising the remaining rights becomes remote.

The estimate is subject to the constraint in paragraph 23.46: amounts are included only to the extent it is highly probable that the business will be entitled to the cumulative revenue recognised once the uncertainty is resolved. A new scheme with no history may therefore need to assume high redemption until data builds up.

What if another business supplies the rewards?

Many schemes are run with partners. A coffee chain may let customers spend points on cinema tickets, or a retailer may belong to a scheme run by a separate operator. Paragraph 23.36 then requires the business to decide whether its promise is to provide the reward itself, as principal, or to arrange for another party to provide it, as agent. Under paragraph 23.40 an agent recognises revenue only for the fee or commission it expects to be entitled to for arranging the reward. The principal or agent guide explains the control indicators.

VAT follows its own rules rather than the accounting split. HMRC’s VAT Notice 700/7 covers loyalty schemes in section 11. Paragraph 11.4 says payments by a business to a third party reward supplier usually represent third party consideration, so the reward supplier’s VAT is not generally reclaimable by the paying business. Paragraph 11.8 says a charge made by a separate scheme promoter to a participating supplier is consideration for a taxable supply. The deferral of revenue in the accounts does not by itself change when VAT is due on the original sale.

How does it show in the accounts and the tax computation?

Paragraph 23.125 requires a contract liability where the customer has paid before the business transfers the goods or services. The deferred points balance is therefore a contract liability, and paragraph 23.128 allows another description to be used in the balance sheet if users can still distinguish it from trade receivables and contract assets. It is not a provision for the cost of rewards; the liability is measured by reference to the revenue allocated, not the cost of supplying the reward. For more on presenting liabilities see liabilities and equity under FRS 102.

For corporation tax, section 46 of the Corporation Tax Act 2009 requires trading profits to be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. The revenue deferral therefore normally flows through to the timing of taxable profit.

The revised Section 23 applies for accounting periods beginning on or after 1 January 2026 under paragraph 1.37(b), with early application permitted provided all the Periodic Review 2024 amendments are applied together. Paragraph 1.39 requires retrospective application, subject to the transitional reliefs in paragraphs 1.40 to 1.68.

What mistakes come up most often?

  • Recognising the full sale price as revenue and accruing only the cost of future rewards. That approach measures the obligation at cost and does not follow paragraphs 23.31 to 23.33.
  • Valuing points at face value with no allowance for expected non redemption, which overstates the deferral and ignores paragraph 23.71.
  • Releasing breakage on day one, rather than in proportion to redemptions or when redemption becomes remote, contrary to paragraph 23.130.
  • Treating every discount voucher as a material right, including offers anyone could get without buying.
  • Grossing up revenue on rewards supplied by partners where the business is only an agent.
  • Forgetting to update redemption estimates each year end as scheme data changes.

Loyalty points sit alongside other revenue timing questions such as subscriptions and licences and gift cards, all of which turn on when control of what was promised passes to the customer.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.