HMRC loses case over Tesco Clubcard VAT treatment

Tesco has won a dispute at the First Tier Tribunal (FTT) against HMRC over whether the supermarket giant is entitled to a refund on the VAT charged by third parties relating to its Clubcard loyalty scheme, with reference to the similar Aimia VAT case over the Nectar reward scheme

Tesco plc and Tesco Freetime Ltd, both subsidiaries of Tesco Holding Ltd, have won a case against HMRC relating to the proper treatment, for VAT purposes, of one feature of the well-known Clubcard loyalty scheme.

HMRC is seeking to recover £63m in VAT refunds from Tesco and has previously refused Tesco’s claims for further VAT refunds amounting to £103m.

Tesco Freetime has been dealing with Partner Boost, a feature of the Clubcard scheme, which is attempting to recover the VAT it has paid to third parties as part of this feature.

The case report states: ‘The question in this appeal is whether the company which contracts with the Deal Partners and pays them the agreed charges for the provision of goods or services in exchange for Reward tokens is entitled to recover, as input tax, the VAT included in those charges.’

Under the Clubcard scheme, Tesco’s customers receive points for goods purchased and can use the points to acquire further goods and services for a reduced costs. For example, they can use the points against the cost of groceries or with Clubcard Boost can get up to four times the points voucher value to use at various restaurants etc.

Both HMRC and Tesco refer to the previous Aimia VAT case where in 2013 the Supreme Court ruled that Aimia (formerly known as Loyalty Management UK or LMUK), operators of Sainsbury’s Nectar loyalty scheme, are entitled to recover VAT on payments made by suppliers under the scheme.

The report said: ‘In the LMUK litigation, as in this case, LMUK claimed that it was entitled to deduct as input tax the VAT element of the payments which it had made to the redeemers on the basis that the payments were the consideration for the redeemers’ supply to LMUK of the services for which it had contracted with them; and that supply was made to LMUK for the purposes of its business.

‘HMRC argued that the supply was made to the collector, not LMUK, and that the payment by LMUK to the redeemer represented third party consideration for the supply made by the redeemer to the collector, and that any VAT charged on such a supply was therefore not deductible by LMUK as input tax.’

One of Tesco’s lawyers said that ‘it would be a remarkable outcome if the tax treatment of the Clubcard and the materially identical Nectar schemes were to differ.

HMRC argued that the exchange of vouchers for rewards is just ‘mechanics’ and that a VAT refund should be refused on the basis that the Clubcard programme is ‘essentially a gracious scheme’ in the members pay nothing for the benefits.

Judge Colin Bishopp dismissed HMRC’s argument saying: ’ The underlying theme of their argument is that the Clubcard Member is getting “something for nothing”, a supply from the Deal Partner “essentially for free”, as their skeleton argument puts it, and there is correspondingly untaxed consumption.

‘In my judgment both of those premises—“something for nothing” and untaxed consumption—are demonstrably false.’

He continued saying ‘In my judgment it necessarily follows that the VAT it incurs when paying for the redemption services is recoverable input tax in its hands.’

For these reasons the appeal was allowed.

An HMRC spokesperson said: ‘HMRC is carefully considering the FTT’s decision.’

Tesco Freetime Ltd and Tesco PLC v Revenue and Customs [2017] UKFTT 614 (TC) is available here

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