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Saturday, 27th April 2024 |
| VAT and credit cards |
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| The UK High Court has upheld a claim by a major UK retail group that part of the total payment by credit card customers in their shops can be attributed to the handling of a credit card transaction and should not attract VAT. The decision, if it is not overturned on appeal, could add approximately 0.4p.c. to gross margins. |
The Debenham Group have won an important tax case in the UK High Court. Debenhams claimed that 2.5p.c. of the total consideration paid by their credit card customers related not to the purchase of the goods that the customer had selected, but related to a fee paid to a separate company within the Debenham Group for handling the credit card transaction.
Whereas VAT (usually at the UK rate of 17.5p.c.) was payable on the goods which the customer purchased, Debenhams claimed that no VAT was payable on the sum paid which related to the credit card handling fee. This is because the EU 6th VAT directive provides an exemption for “the granting and the negotiation of credit and the management of credit by the person granting it”. It is generally accepted that services supplied by a credit card company fall within that exemption. No VAT is chargeable on an exempt service.
Debenhams had notices on their doors, and elsewhere prominently in the store, and on their counters drawing attention to the fact that where goods were to be paid for by a credit card, there would be a charge of 2.5p.c. levied by Debehnams inhouse credit card company for handling the transaction. This was so whether or not the credit card used was one issued by Debenhams (a store card) or issued by anybody else.
However the notices went on to reassure the customer that the total payable, between the price for the goods and the price for the credit card, would be no different than the total charged for the goods on a transaction not involving a credit card. In other words, a credit card customer got the goods 2.5p.c. cheaper but was charged 2.5p.c. for using his credit card, compared to a cash customer.
The till receipt handed to the customer for signing contained a similar statement that constituted a contract separately with Debenhams for the goods, and with their credit card company for handling the credit card aspects of the transaction.
As can be seen from the outline given above, Debenhams went to considerable lengths to ensure that as far as possible English contract law was complied with and that the transaction, if analysed from the viewpoint of contract law, would constitute two supplies ie a supply of goods by Debenhams Retail and a supply of credit card services by their credit card company. The customer would have contracted separately with each company.
The analysis under English contract law was one of the grounds on which the Revenue challenged Debenhams claim to exemption. They suggested that the customers were unaware or were indifferent, to the notices by Debenhams regarding the charge to the credit card company. They pointed out that the total price payable would be no different (a factor which would rob the matter of interest for most people) and that indeed where goods were returned and Debehnams made a refund, the total price paid was refunded and not just the net price apportioned to the goods as opposed to the credit card handling charge.
The Revenue also produced evidence that a Revenue official had made a purchase in the shop and had challenged the till roll receipt given on the basis that he was not willing to make a separate payment to the credit card company. The transaction was nonetheless proceeded with by the cashier. There was also evidence produced that not all the cashiers understood the references on the notices in the store to the credit card handling charge.
The judge’s comments on these pieces of evidence was: “In any system involving hundreds of thousands or even millions of transactions occasional slip-ups are inevitable, particularly when they are sought”. The judge upheld Debenhams view that a customer using a credit card contracted separately for the goods and for the credit card handling facilities.
It is apparent from the evidence that Debenhams had been very careful to ensure that they fully met the requirements of contract law to bring about this result.
The Revenue attacked Debenhams claim under a variety of other headings including that it was artificial and involved tax avoidance. These arguments were rejected by the judge.
The case has considerable implications. If the judgement stands, then Debenhams would not have to account for VAT on 2.5p.c. of their credit card turnover. Nowadays credit card turnover must be a large part of turnover in any large retail outlet. Were the judgement applied in Ireland where the VAT rate is generally 21p.c. on most transactions it would add over .5p.c. to the gross margin of a store.
Despite their victory in the High Court, Debenhams case is not yet safe. One specific ground on which the Revenue attacked their claim was not considered by the court as it raised issues that are currently pending for hearing before the European Court of Justice in other cases. This was the question of whether or not the supply of the credit card facilities was ancillary to the main supply of the goods being purchased with the credit card.
If it were, then the two transactions would be amalgamated into a single transaction and the VAT treatment of the main transaction, the purchase of the goods, would be applied to the consideration on the entire transaction. This outcome is provided for in the EU 6th VAT directive and in domestic law in Ireland and in the UK. This argument may yet prove a serious obstacle to Debenhams claim.
There is a further difficult to quantify threat to the Debenhams claim and that is the fact that the European Court of Justice tends to view VAT matters without much regard to issues such as contract law in member states. The ECJ tends rather to focus on the basic principles underlying VAT, as set out in the 1st VAT Directive. The application of these basic principles can be unpredictable in their outcome in particular cases. In consequence the Debenhams decision is one which businesses with major credit card usage cannot ignore, yet it is also a decision which they cannot safely take as assuredly the correct interpretation of the law. |
Terry O’Neill is a Partner in KPMG VAT Department.
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| Article appeared in the October 2004 issue.
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