Value Of Loyalty

Customs win their appeal in Tesco plc v Commissioners of Customs and Excise.

TESCO OPERATED A scheme whereby customers could earn points on their purchases, and the points would eventually be converted to vouchers to be redeemed in Tesco. Tesco claimed that the vouchers were granted for a consideration, and that their cost should be disregarded for VAT. The court disagreed, saying that the customer was paying for the goods, not the points or vouchers, so no part of the price paid by the customer was consideration for the vouchers.

Under Tesco's Clubcard scheme, customers who join earn points when purchasing goods from Tesco. These points are converted into vouchers, which are sent to the customer, who can redeem them in Tesco. Three other schemes also exist. Under a third party scheme, the third party retailer allocates Clubcard points to its customers, and agrees to pay Tesco the amount of the discount which the customer would receive on using the vouchers to purchase goods from Tesco and an administration charge.

There is also a Tesco Personal Finance Ltd scheme whereby Visa cards are issued to customers, which when used to buy goods, entitle the user to Clubcard points on the value of the goods bought. Finally, a special promotions scheme operated whereby customers buying certain goods could earn extra points, and those extra points would be funded by the supplier.

Tesco claimed that the vouchers were granted for a consideration wihin the meaning of paragraph 5 of Schedule 6 to the VAT Act 1994, and that the cost of the vouchers, i.e., the Clubcard points, should be disregarded for VAT. It accepted that when the vouchers were redeemed, the value of the vouchers should be included in its receipts, as if they were cash.

Customs disagreed, so Tesco appealed to the VAT tribunal.

The tribunal ruled that in respect of the Clubcard points customers considered the vouchers not to be gifts, but that the price paid at the till went towards obtaining the vouchers. Therefore the vouchers were granted for consideration for paragraph 5, as claimed by Tesco. The same applied to the third party retailer's scheme. However, the tribunal decided that payments made by the third party to Tesco were the consideration to be disregarded under paragraph 5.

In respect of the Tesco Personal Finance scheme, the tribunal held that while customers accepted that the price paid went towards vouchers, so that the vouchers were to be regarded as granted for consideration for paragraph 5 purposes, the consideration which fell to be disregarded was the amount Tesco received from cardholders, not the amount payable by Tesco Personal Finance to Tesco. Finally, with respect to special promotions, the tribunal concluded that the customer was not necessarily aware that vouchers related to special promotions, and so held that paragraph 5 did not apply to special promotions vouchers.

Both Tesco and Customs appealed the tribunal's decision.

(Roderick Cordara QC and Paul Key for the taxpayer; Christopher Vajda QC and Philippa Whipple for Customs.)

Mr Justice Ferris said first that in principle there was no distinction between points and vouchers. He then examined relevant case law, including Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509, Boots Co plc v Commissioners of Customs and Excise [1990] STC 387, Kuwait Petroleum (GB) Ltd v Commissioners of Customs and Excise [1999] STC 488, and Commissioners of Customs and Excise v Primback Ltd [2001] STC 803.

Taking first the basic Clubcard scheme, Mr Justice Ferris said that he believed that the tribunal had asked itself the right question in respect of the scheme, but reached the wrong answer. He accepted that there was a contract between Tesco and Clubcard members under which Tesco was obliged to give points and convert points to vouchers. However, he said that the customer was not buying points or vouchers, but rather Tesco undertook, to encourage the customer to return, to accept a voucher as part of a future purchase payment. The judge said that he so concluded because the price was the same whether or not it was paid by a Clubcard holder or a non-holder. The cost of the scheme was borne by Tesco rather than the customer, and no choice was offered to the customer, i.e., the customer could not choose to pay a smaller price instead of receiving the points.

If Tesco were to issue a VAT invoice when the goods were purchased, it would have to record the whole price paid by the customer as being paid for the goods.

Furthermore, while a customer probably considered it worthwhile to participate in the Clubcard scheme, he did not necessarily have in mind that he bought points as well as goods when buying items, and was even less likely to consider that part of the price he paid was attributable to those points.

With regard to the third party scheme, the judge concluded that no part of the price paid by the customer to the third party could be regarded as the necessary consideration, because the points and vouchers were supplied to Tesco's customers, rather than to the third party. This led the judge to reason that what was granted for the consideration was not a 'token, stamp or voucher' within paragraph 5 of Schedule 6, but a service provided by Tesco to the third party, i.e., a promotional scheme to assist the third party to increase its turnover. He compared the circumstances to those in the Boots case, where the cost of the promotion was borne by the manufacturer of the goods to which the coupon related.

The judge also said that were points and vouchers to be treated differently according to what they related, this would make for a very complicated situation.

Next the judge considered the Visa card scheme. He said that the schemes whereby points were awarded to customers using the Visa card as a Clubcard, and where extra points were issued for using the Visa card, were indistinguishable from the basic Clubcard scheme.

Finally, with regard to special promotions, the position was the same as with third party retailers, so a supplier who reimburses Tesco for the nominal value of points allocated on a special promotion of that supplier's goods is paying not for points or vouchers but for the provision of promotional services, so paragraph 5 of Schedule 6 does not apply.

The judge allowed Customs' appeal, and dismissed that of Tesco.

Tesco joins the already long list of VAT cases concerning the issue of vouchers to customers. Mr Justice Ferris appeared to have no difficulty in reaching his decision for Customs, and equated the circumstances especially with those in the Boots case. In each aspect of the case, the judge emphasised the fact that the points and vouchers were issued direct to the customer by Tesco, and these were treated in the same way by Tesco, regardless of how the customer obtained them.