Reward enhances supply

Franchisees paid royalty fees to the taxpayer to use its training manuals and other support services. The franchisees were entitled to a reward payment from the taxpayer based on their previous year’s performance.

The taxpayer claimed the rewards should be treated as contingent discounts against the franchise fees on the basis there was a direct link between the rewards and the royalties.

HMRC said each reward was a separate supply from taxpayer to franchisee. There was no link between royalties and reward payment because the taxpayer supplied the same service irrespective of whether the latter sum was handed out.

The taxpayer appealed.

The First-tier Tribunal concluded there was a link between the two payments meaning the reward was a contingent discount and should be viewed as an enhancement of the basic service rather than a separate supply.

It would be artificial to separate franchise royalties and...