These appeals relate to the VAT treatment of one feature of the well-known loyalty scheme operated by the Tesco group of companies, the Tesco Clubcard programmed. In its simplest and  original form,  a member of  the programmed (‘a  Clubcard  Member’) who buys goods in a Tesco retail shop and presents his or her membership card  when paying is credited with a number of points,  commensurate with the scale  of his or her purchase. Goods so purchased, at their full retail price and paid for in cash or by credit or debit card, are sometimes referred to as ‘premium goods’. At three-monthly intervals, the points acquired in this way are translated into vouchers, which can be used against the cost of a subsequent purchase from Tesco. Goods bought in exchange in whole or part for vouchers is sometimes known as ‘redemption goods’. The Clubcard scheme was introduced in 1995 with the aim, like other similar schemes, of increasing customer loyalty and sales.


In 1999, the feature of the scheme to which this appeal relates was introduced. The option of using the vouchers to make a purchase from a Tesco store or online continued, but a Clubcard Member could instead have the vouchers converted to Reward Tokens, which could then be used to make a purchase from a third party, known as a Deal Partner. Because the Reward Tokens have a greater face value than the vouchers for which they are exchanged, this feature of the scheme is known as Partner Boost. The question in this appeal was 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 the input tax.

The core of the appellants’ argument is that the various agreements, when properly analysed, show that the Deal Partners are making supplies to Free time, leading to an input tax credit in its hands. The most important agreement, in the context of this case, is that between free time and each of the Deal Part nears: it imposes on the Deal Partner an obligation, owed to free time, to make a supply of fulfillment services for consideration paid by free time. It is immaterial to that analysis that the reward itself is consumed by the Clubcard Member; the supply to Free time of fulfillment services enables it, in turn, to fulfill its own obligations to Stores to operate the Partner Boost programmed and to discharge its obligation to make good to the Clubcard Member the reward to which he has become entitled. Those vouchers have value in his and, after the surrender, free time’s hands. Without the supplies made to it by the Deal Partners, Free time would be unable to discharge its own contractual obligations.

The essence of HMRC’s case was two-fold: that the Clubcard scheme is gratuitous, in that the Clubcard Member pays nothing for the points, the vouchers or the benefits, whether of reduced-price redemption goods or of rewards he eventually receives; and that the amounts paid by Free time to the Deal Partners are third-party consideration for the supplies of rewards made by the Deal Partners to the Clubcard Members and, as such, they are not entitled to recover input tax.


Having considered the facts, the tribunal found that there was a supply by the Deal Partners to Free time and that they were entitled to deduct the input tax. The tribunal, therefore, found for the appellant.


This is an interesting case in that it shows that if properly constructed, the contractual terms can permit input tax deduction for a supply ‘consumed’ by a third party.

Tesco Free time Limited and Tesco PLC v Revenue and Customs TC/2015A) 4342