Tesco Plc v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judge | Mr Justice Ferris |
| Judgment Date | 21 October 2002 |
| Neutral Citation | [2002] EWHC 2131 (Ch) |
| Docket Number | Case No: CH/2001/APP/010756 |
| Court | Chancery Division |
| Date | 21 October 2002 |
[2002] EWHC 2131 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Ferris
Case No: CH/2001/APP/010756
Mr. Roderick Cordara QC and Mr. Paul Key instructed by Dario Garcia, Solicitor, of Becket House, 1 Lambeth Palace Road, London, SEl 7EU
Mr Christopher Vajda QC and Miss Philippa Whipple instructed by the Solicitor for Customs & Excise of New King's Beam House, 22 Upper Ground, London, SEl 9PJ for the Commissioners of Customs & Excise
Hearing dates : 1st to 4th July 2002
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Hon Mr Justice Ferris
Mr Justice Ferris
This appeal from a decision dated 24th August 2001 of the VAT and Duties Tribunal sitting in London concerns the proper treatment for the purposes of value added tax of vouchers issued by Tesco plc pursuant to its Clubcard scheme.
As the Tribunal recorded in its decision, Tesco has some 692 retail stores with a product range in some of those stores of around 25,000 lines. About 50% of its turnover is of goods which are standard rated for VAT purposes. Most of the rest, principally food items, is exempt.
The basic Clubcard Scheme
The operation of the basic Clubcard loyalty scheme is described in paragraphs 15 to 17 of the Tribunal's decision. Its main features may be summarised as follows:
a) Customers are invited to join the scheme by completing a form in return for which they are issued with a Clubcard which they must sign. There is no charge for this.
b) Promotional literature describes how Clubcard points and vouchers can be acquired by customers in return for purchases in Tesco stores, Tesco filling stations and in certain other ways mentioned later. The literature contains such statements as "You'll earn 1 point for every £1 you spend" "Earn 150 points or more each quarter and we'll send your Clubcard Vouchers along with your statement and points balance" and "For example, 150 points will give you £1.50 in Clubcard Vouchers".
c) Points are awarded to customers who purchase goods in the relevant outlet and present a Clubcard when making payment. Each customer receives a till roll receipt giving details of the purchases made and of "points [earned] this visit".
d) Each quarter Tesco sends to each Clubcard member a statement of the points earned by the member during the quarter and the number of points converted, at the rate of one penny a point, into vouchers. These vouchers, with a face value expressed in pounds and units of 50 pence are sent to the member with his statement. Odd balances of less than 50 points are carried forward to the next quarter.
e) On later purchases of goods the member can redeem his vouchers at their face value by tendering them in payment, or part-payment, for the goods purchased.
f) The terms and conditions of the Clubcard scheme do not describe points as being "purchased". Rather they are described as "earned" "given" "qualified for" or "awarded". Vouchers are described as "rewards". They cannot be exchanged for cash or gift vouchers. Their only use is in payment for goods subsequently purchased.
In addition to the basic Clubcard scheme just described certain variants exist and, like the basic Clubcard scheme itself, were the subject of the Tribunal's decision. These variants, which I describe under the following sub-headings, are the third party retailers scheme, the TPF scheme and the special promotions scheme.
The third party retailers scheme
Tesco sometimes enters into arrangements with third party retailers under which the third party allocates Clubcard points to its customers who tender a Tesco Clubcard at the time of payment for goods or services acquired from the third party. The points so allocated are included in the customer's quarterly Clubcard statement and converted into vouchers in the same way as points earned in respect of purchases from Tesco itself. These vouchers are redeemable in the usual way on the making of future purchases from Tesco, but not in payment for future purchases from the third party retailer.
In each case such arrangements are governed by a formal agreement between Tesco and the third party retailer in question. The Tribunal received evidence of three agreements made between a Tesco subsidiary and B&Q plc, Norweb plc and Going Places Leisure Travel plc respectively. While the agreements are not in any standard form they all have the same essential features which the Tribunal described (in paragraph 21 of its decision) as follows
"(a) The rate at which customers will be entitled to Tesco Clubcard points is defined.
(b) The Third Party Supplier is granted the right to operate the Clubcard Scheme in its business during the term of the agreement.
(c) Tesco undertakes to assist the Third Party Supplier in various ways in the proper operation of the Clubcard Scheme during the term of the agreement.
(d) Tesco undertakes to honour in accordance with the terms of the Clubcard Scheme the redemption of points awarded to customers for purchases of Premium Goods or services from the Third Party Supplier.
(e) The Third Party Supplier undertakes to pay defined fees to Tesco. These fees in all cases include, but are not limited to, an element equal to the face value of the points acquired by Clubcard members through transactions with the Third Party Supplier. In one case this is described as a reimbursement. These fees also include an additional element payable quarterly, which in two cases is defined as a fixed sum (£300,000 and £150,000 respectively) and in one case is a variable fee of 60p per call to the Tesco call centre relating to the participation of the Third Party Supplier in the Clubcard Scheme.
(f) The Third Party Supplier gives various undertakings relating to the proper operation of the Clubcard Scheme."
The TPF Scheme
Tesco Personal Finance Ltd ("TPF") is a joint venture company owned by a Tesco subsidiary and the Royal Bank of Scotland ("RBS"). It is part of the RBS VAT group but not part of the Tesco VAT group. As part of its business TPF carries on a credit card operation, issuing to its customers a TPF Visa card which can be used, like any other Visa card, at any outlet linked with the Visa network. In addition the TPF Visa card can be used as a Tesco Clubcard. Thus a customer purchasing goods from Tesco, or from a third party retailer within a scheme of the kind just described, may produce a TPF Visa card at the time of payment. The cost of the goods will be charged to the customer's Visa card account.
Under the arrangements which exist between Tesco and TPF the customer will also earn Clubcard points when he uses the TPF Visa card in this way. In the first place the customer will be credited with the number of Clubcard points appropriate to the cost of the goods purchased, without the need to produce a separate Clubcard. In addition the customer will be awarded an additional half a point for every £1 paid by the use of the TPF Visa card. Thus most purchases made at a Tesco store and paid for with a TPF Visa card will entitle the customer to one and a half points for each £1 spent.
No formal agreement exists between Tesco and TPF but the Tribunal was satisfied that the Clubcard scheme operates in relation to TPF as follows:
a) A TPF Visa card holder is entitled to Clubcard points as described above;
b) TPF periodically pays Tesco amounts calculated to reimburse Tesco for the costs incurred by it in support of the joint venture business of TPF;
c) The reimbursement does not, however, extend to the full face value of the points or vouchers acquired by the holders of TPF Visa cards. Instead it represents only 93% of that face value, that being the estimated rate of redemption of vouchers issued to Clubcard holders.
The special promotions scheme
Sometimes a supplier of goods to Tesco may agree with Tesco that, during a particular period or in respect of a particular product line, extra Clubcard points, over and above the standard one point for each £1 spent, will be awarded to customers purchasing goods originating with that supplier and tendering their Clubcards at the time of payment. An arrangement of this kind will enable in-store promotions to be mounted based upon such offers as four bonus points on each purchase of a particular product.
The Tribunal did not have before it evidence of any particular example of such arrangements, although it must have accepted that they existed in some cases. There was no evidence of the terms agreed between Tesco and the supplier in any particular case. However it seems to me to be an inevitable inference that the arrangements between Tesco and the suppliers in question must include provisions for the cost of the promotion, including the cost of the additional points awarded, to be borne by the supplier. The customer will, of course, be made aware that additional points are to be awarded in respect of the purchase, this being the inducement which underlies the promotion, but he will not be told anything of the arrangements between Tesco and the supplier in question.
The VAT problem - general considerations
A voucher scheme such as the basic Clubcard scheme gives rise to actual or potential VAT consequences at two separate stages. The first is that at which the vouchers are issued. This is the stage at which the customer acquires the goods or services which entitle him to the vouchers. (I ignore the fact that, under the Tesco scheme, when goods are purchased what the customer is given is points which are only subsequently converted into vouchers. This is a matter to...
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