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VAT - input tax

Every little helps - input tax is recoverable on provision of Tesco Clubcard rewards

The Upper Tribunal (UT) has found that input tax is recoverable on payments to third parties for the provision of goods or services supplied to Tesco customers in exchange for Clubcard points. What are the details?

The scheme. Tesco operates a popular customer loyalty scheme whereby customers can collect Clubcard points on their shopping. The points are converted into vouchers to spend at Tesco or exchanged for goods/services provided by third parties (Deal Partners). Tesco recovered input tax on the VAT element included in the charges for the provision of goods or services in exchange for reward tokens from the Deal Partners.

HMRC’s argument. HMRC argued that the Tesco customer gets the goods/services for free, which is not taxed. The First Tier Tribunal (FTT) dismissed this argument on the grounds that is not the economic reality. The FTT decided that the reward scheme is funded by the Tesco customer’s taxed payment when shopping at Tesco.

Appeal. HMRC appealed to the UT on the grounds that the Deal Partner fee is paid by way of third party consideration for supplies of rewards made by the Deal Partners to Clubcard members as opposed to Tesco. Therefore, it is not consideration for a supply made to Tesco and no part of the VAT element of the Deal Partner fee can be deducted as input tax. 

Decision. The UT dismissed the appeal on the basis that both the contracts and economic reality suggests that Tesco pays the Deal Partner fee as consideration for Deal Partners agreeing to honour rewards that Tesco has provided to customers in the course of its business. The purpose of the scheme is to benefit Tesco, by encouraging customer loyalty. Tesco is required to enter into a business relationship with the Deal Partners to fulfil its contractual obligations. The appeal was dismissed and input tax is deductible on the fees paid to the Deal Partners.

Tip. Make sure you ask clients whether their business offers any promotion schemes so that you can help them recover the VAT costs.

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