Is tax on Avios forcing the British Airways move to revenue-based loyalty?

Back in December, we shared news on boardinggroup.one that British Airways was making a fundamental change to its frequent flyer programme. Instead of awarding Avios and elite status based on distance flown and fare class, it would soon switch to a spend-based system, where customers earn rewards based on how much they spend. The official line? It’s a modernisation effort, rewarding BA’s most valuable customers.

But with IAG’s latest full-year results highlighting a £557 million ongoing VAT dispute with HMRC, another possible reason for the shift comes into focus. Could this move be about tax, not frequent flyers?

What’s VAT, and Why Does It Matter Here?

For those outside the UK and Europe, Value Added Tax (VAT) is a consumption tax applied to goods and services at each stage of production or distribution. In most cases, businesses charge VAT to customers, collect it, and then pass it on to the government.

For airlines, VAT is a complicated issue because international flights are generally VAT-exempt, but many services – like seat selection, checked baggage fees, and loyalty programmes – may still be taxable. The key dispute between British Airways and HMRC (the UK’s tax authority) centres around how VAT should be applied to Avios transactions.

British Airways has been issuing Avios without charging VAT, but HMRC argues that under certain circumstances, VAT should have been collected and paid. This disagreement has already resulted in a £557 million assessment, which BA has had to pay to continue its legal fight.

Could the VAT Dispute Explain the Loyalty Programme Overhaul?

One way BA might be future-proofing itself against further tax liabilities is by making its loyalty programme more VAT-compliant. By moving to a spend-based system, where Avios and Tier Points are earned directly based on how much a customer spends, British Airways could be:

• Making VAT calculations more straightforward – A direct link between spend and rewards ensures clearer tax treatment than a mileage-based system with complex fare multipliers.

• Reducing potential tax exposure – The move may help BA avoid further VAT disputes, as revenue-based Avios earnings could be easier to classify for tax purposes.

• Aligning loyalty points with taxable transactions – If HMRC considers certain Avios-related activities taxable, shifting the programme to direct purchases rather than distance flown could help BA apply VAT in a way that’s less likely to be challenged in future.

But There Are Other Reasons for the Change

To be fair, VAT concerns aren’t the only reason BA is making the switch. The airline has plenty of business incentives for transitioning to a revenue-based programme, including:

1. Aligning with Global Trends – Airlines like Delta, United, American Airlines, and Qatar Airways have all moved to spend-based elite qualification in recent years. BA is simply following the industry trend.

2. Rewarding High-Spenders Over Frequent Flyers – Under the new model, elite status will be far harder to earn for economy travellers who fly frequently, while those booking expensive fares, upgrades, and BA Holidays will climb the status ladder much faster.

3. Boosting Revenue from Extras – Customers can now earn Tier Points on British Airways Holidays and Sustainable Aviation Fuel (SAF) contributions, a clear push to drive spending beyond just flights.

4. Simplifying the Programme – BA claims the new system is easier to understand – instead of a complex matrix of mileage bands, fare class bonuses, and regional differences, it’s now simply “£1 spent = 1 Tier Point”.

Coincidence or Convenient Timing?

The VAT dispute and the loyalty overhaul happening simultaneously raises big questions. While British Airways is presenting the shift as a customer-focused improvement, it’s hard to ignore the financial and regulatory factors at play. The timing strongly suggests that tax compliance could be playing a role in reshaping the programme – even if BA will never officially admit it.

For frequent flyers frustrated by the change, this might not just be about rewarding the right customers – it could also be about British Airways keeping the tax authorities happy about Avios.