In HMRC v Tesco Freetime Ltd and another [2019] UKUT 18 (TCC), the Upper Tribunal (UT), in dismissing HMRC’s appeal, held that VAT incurred on fees paid by a subsidiary of the Tesco Group to third party suppliers, as part of a loyalty scheme, was deductible for VAT purposes.


Tesco ran a loyalty scheme. Participating customers who purchased goods from Tesco Stores Ltd (TSL) (the principal retailer of the Tesco group) were provided with points which were translated into vouchers and could be used to obtain discounts on Tesco goods. In addition, a feature called the “Partner Boost” enabled participating customers to exchange their vouchers for tokens (Reward Tokens) issued by Tesco Freetime Ltd (TFL) (another company of the Tesco group), which could be used to acquire goods or services from third parties (Deal Partners). TFL paid Deal Partners a sum calculated as a percentage of the face value of the Reward Tokens redeemed (the Deal Partner Fee).

UT decision

The issue for the UT to determine was whether TFL was entitled to deduct the VAT paid on the Deal Partner Fee as input tax. This depended on whether the fee constituted “consideration for a supply of services” to FTL. 

The UT referred to Marriott Rewards v HMRC [2018] STC 1144, and observed that regard should be had to both the terms of the contract between FTL and the Deal Partners and the commercial and economic reality of the arrangement as a whole.

In the view of the UT, the fact that the substantive obligation imposed on the Deal Partners involved the supply of services to participating customers, did not preclude a finding that it also amounted to the supply of services to TFL.

The UT concluded, however, that the contractual arrangements reflected the economic reality. The purpose of the Partner Boost scheme as a whole was to benefit TSL by promoting customer loyalty and TFL operated its own separate business, which consisted in procuring Deal Partners to accept Reward Tokens in exchange for the provision of Rewards. TFL was required to do so in order to fulfil its contractual obligations to TSL. The UT concluded therefore that the only economically rational explanation of TFL’s behaviour was the value to TFL itself of the Deal Partner’s acceptance of Reward Tokens in exchange for the provision of goods and services to participating customers. 


This case provides useful guidance on how to structure loyalty programmes in a manner which allows for input tax recovery. Due to the amounts at stake and the popularity of similar loyalty programmes, it is anticipated that HMRC will seek to appeal the decision to the Court of Appeal.

A copy of the decision can be viewed here.