Tesco wins legal fight against paying Clubcard VAT

Tesco has won its long-running battle with the HMRC over paying VAT on Clubcard partner offers.

The supermarket has successfully appealed against paying out more than £60m in VAT and could stand to claim over £160m in back-payments, after winning a dispute that dates back to October last year.

HMRC claimed VAT should be payable on Tesco Clubcard’s rewards with external partners - such as Pizza Express vouchers - because the customer was getting “something for nothing”.

But after four days of deliberation, tax tribunal judge Colin Bishopp this week dismissed HMRC’s argument and ruled customers were funding the Clubcard scheme through their purchases at Tesco, which are subject to VAT.

The ruling will put Tesco Clubcard on a par with the reward scheme used by its rival Sainsbury’s - Nectar - which does not pay VAT on partner offers.

The HMRC attempted to claim back VAT on Tesco’s Clubcard partner offers for the period beginning 1 September 2002 and ending 25 February 2017. The body wanted to claim back £63m and was also fighting for the right to refuse to pay £103m in back claims.

The Clubcard partner offers are operated by an external company called Tesco Freetime, which has negotiated deals with more than 500 external companies including restaurant chains, cinema operators and theme parks.

The deals often represent a higher value than Clubcard points would have at Tesco. For example, £10 worth of Tesco Clubcard points would be worth £40 at Pizza Express.

The HMRC argued customers were getting “something for nothing” that effectively represented untaxed consumption. It argued the company should pay VAT on transactions to cover the shortfall.

But Judge Bishopp said the cost of running the Clubcard scheme was effectively built into the price of Tesco’s products, which are subject to VAT.

He also rejected HMRC’s counter-argument that certain customers did not use Clubcard and paid the same price - citing plastic bags as an example.

“Until they were compelled by law to charge for them, retailers commonly handed over plastic carrier bags to their customers in order that they could conveniently carry their purchases home. The bags were ‘free’ to the customer in the same sense as the points in this case are ‘free’: the price of the goods was the same whether or not the customer took a bag,” he said.

“But it is an untenable proposition that the customer did not pay for the bag; the price charged for the goods included an element, small though it might have been, reflecting the cost to the retailer of providing it.”

The decision means Tesco’s partner offers will not be subject to VAT in future, and it will also be eligible to claim £160m in back-payments from HMRC.

Tesco did not confirm whether it would pursue this amount but said it “noted the decision” on reclaiming costs. “We work hard to provide customers with great value and a range of offers through Tesco Clubcard,” a spokesman said.