In Tesco Freetime Ltd and Tesco Plc v HMRC1 , the First-tier Tribunal (FTT) confirmed that the taxpayer was entitled to recover, as input tax, the VAT on facilitation fees charged by third parties for the provision of goods or services to Tesco’s customers on the redemption of vouchers under the Tesco Clubcard scheme.


Under the Tesco Clubcard scheme, a member customer earned points on purchases from Tesco, or a third party partner (Reward Partners), when they presented their membership card. These points were converted into vouchers that could be used either to pay for goods in store or online at, or converted into a “reward token” which the customer could use to make purchases from Reward Partners. A typical example would be a free meal at a restaurant.

When tokens were redeemed with Reward Partners, the Reward Partners would invoice Tesco Freetime for a percentage of the value of the tokens redeemed. The question for determination in the appeal was whether Tesco Freetime could recover the VAT charged by the Reward Partners on the amount invoiced for redeeming the tokens as input VAT.

Tesco argued that the various agreements, when properly analysed, showed that the Reward Partners were making supplies to Tesco Freetime, leading to an input tax credit. It relied on the Supreme Court decision in Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd) v HMRC (LMUK)2 , which considered the Nectar programme.

HMRC argued (1) that the Tesco Clubcard scheme was gratuitous, in that the Clubcard member paid nothing for the points; and (2) that the payments by Tesco Freetime to the Reward Partners were third-party consideration for the supplies of rewards to the customer.

FTT decision

The FTT allowed Tesco’s appeal.

The underlying theme of HMRC’s argument, that the Clubcard member was getting “something for nothing” and that there was correspondingly untaxed consumption, was rejected by the FTT.

The FTT recognised that the provision of points to a Clubcard member did not amount to a taxable supply and similarly, the conversion of points into vouchers did not amount to a taxable supply. However, in the FTT’s view, that was not the question which had to be determined. The relevant question was whether the customers bore the economic burden of the scheme and in the view of the FTT they did. It was clear to the FTT that the scheme was funded by the customers’ taxed payment, since a proportion of what the customers paid for their shopping went towards the cost to Tesco of operating the scheme. 

Much of the argument before the FTT related to the similarities and differences between the Tesco Clubcard arrangements and those of the Nectar scheme. The FTT accepted that there was no meaningful distinction between the arrangements between LMUK and the redeemers on the one hand and Tesco Freetime and the Reward Partners on the other. On this basis, and in the light of the dicta of Lord Reed in LMUK, the FTT dismissed HMRC’s contention that the payments were third party consideration.


Given the Supreme Court’s judgment in LMUK, this decision is not surprising. However, due to the amounts at stake and HMRC’s desire to distinguish LMUK, an appeal seems likely.

The decision is available to view here.