Fees paid by a subsidiary to third party suppliers

Tesco ran a loyalty scheme Clubcard. Participating customers who bought goods from Tesco received points that were translated into vouchers that could be used to obtain discounts on Tesco produce. Another feature the ‘partner boost’ allowed customers to exchange their vouchers for reward tokens issued by Tesco Freetime. They could use these to acquire goods or services from third parties – known as deal partners. Tesco Freetime paid deal partners a fee calculated as a percentage of the face value of the reward tokens redeemed.

The appeal concerned whether Freetime was entitled to deduct the VAT paid on the deal partner fee as input tax.

The First-tier Tribunal found for the taxpayer so HMRC appealed.

The issue was the extent to which the sums Freetime paid to deal partners constituted consideration for a supply of services. The Upper Tribunal said this depended on the terms of the contract between Freetime...