The FTT has concluded, in Kumon Educational UK Company Ltd v HMRC7, that a reward payment made by a company to its franchisee/instructor should be treated as a contingent discount and, as such, be deductible for VAT purposes.


Kumon Educational UK Company Ltd (Kumon) provides educational services to 5 to 17 year olds. It franchises its teaching methods to individual instructors who each pay a licence fee   (the Franchise Fee), which is calculated by reference to each pupil. The instructors are assessed on an annual basis, each receiving a “reward” based on three principal criteria: (i) the number  of students taken on and retained (ii) the number of students obtaining higher levels of achievement, and (iii) the instructor’s own technical level of training.

Kumon argued that these rewards were linked to the Franchise Fee and therefore fell within the definition of a “contingent discount” set out in VAT Notice 700 at 7.3.2(c), specifically: “if you offer a discount on condition that something happens later (for example on condition that the customer buys more from you) then the tax value is based on the full amount paid. If the customer later earns the discount, the tax value is then reduced and you can adjust  the amount of tax by issuing a credit note”. It argued that given that the number of students taught by each instructor was a fundamental element of the Franchise Fee, the reward should be treated as a contingent discount only payable on the net amount of the Franchise Fee actually paid.

HMRC argued that there was no direct link between the rewards paid and the Franchise Fee, as the rewards paid were linked to supplies which were not part of the Franchise Fee and included other services such as the quality of the teaching provided. It argued that the reward did not reduce the Franchise Fee by a set amount and there was therefore no reduction in the value of the supplies to which the Franchise Fee related as a result of the reward payments.

HMRC refused to make a repayment of output VAT and Kumon appealed to the FTT.

FTT decision

The FTT disagreed with HMRC’s position that the reward payments were entirely separate from the supplies made by Kumon in return for the Franchise Fee. In its view, the obligations placed on instructors (for example, to promote the Kumon method and teach it to a particularly high standard) could not be separated from the commercial bargain on which the Franchise Fee was based.

The reward paid to instructors for procuring and retaining more students was considered a “core” part of the activities for which the Franchise Fee was paid.

In the view of the FTT, although the basis for calculating the rewards was complicated, it was based on clear criteria and was ascertainable in any given case. It criticised HMRC for not  being able to provide a description of what the separate supply, to which it alleged the rewards related, actually was.

The FTT concluded that the rewards paid by Kumon to its instructors should be treated as a contingent discount, deductible for VAT purposes from the value of the Franchise Fee charged to the instructors and that Kumon was entitled to reclaim the relevant VAT paid. Kumon’s appeal was therefore allowed.


The FTT focused on substance, rather than form, when considering the VAT deductions made from payments for services. It highlighted the fact that if a reward payment is not completely separate from the supply (the activity the payment relates to) then the payment received is likely to be treated as a discount and therefore deductible for VAT purposes.

The decision can be read here.