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Credit card VAT puzzle Back  
A number of recent cases in the UK have examined whether part of a customer’s payment being attributed to a ‘credit-card handling charge’ allows that amount to be considered exempt for VAT purposes. In a retail context, VAT exemption can increase a taxpayer’s bottom line.
The Debenhams case
Debenhams Retail accept credit cards from customers. Debenhams created a new company, DCHS and through notices throughout their stores, and at tills, advised customers that 2.5% of the sum paid by the customer when making a credit card purchase was being paid by the customer to DCHS for card handling services. However the total price payable was identical whether the transaction was a credit card transaction or a cash transaction. DCHS subcontracted the carrying out of its functions back to Debenhams Retail. Debenhams claimed that the 2.5% payable to DCHS was in respect of an exempt supply for VAT purposes, and accordingly that VAT did not have to be accounted for on that part of the sum paid.
John McGlone

The UK Court of Appeal took a different view holding that the customer did not enter into any contract with DCHS in relation to the 2.5%. The Court rejected the contention that the notices in the stores and the till slips created a contract between the customer and DCHS. In the Court’s view, the payment purportedly made to DCHS by the customer was in fact part of the consideration for the goods sold by Debenhams Retail, and that the customer was making the payment to DCHS on the direction of Debenhams Retail who was the party primarily entitled to it. On that analysis, DCHS had not rendered any service nor was the 2.5% “card handling fee” a payment by the customer for any card handling service supplied to the customer but was a VATable part of the consideration for the goods sold.

The Bookit case
The Bookit case in the UK also involved credit card sales where a related company was involved as agent. The UK Appeal Court arrived at quite a different conclusion to the Debenhams case. No reference was made to the Debenhams case in the judgment in the Bookit case.

BookIt acted as agents for Odeon Cinemas in making sales of cinema tickets over the telephone and internet. BookIt was a member of the Odeon corporate group. Where a credit or debit card was used by a customer in obtaining tickets through BookIt, an additional fee was charged by Bookit to the customer. This was argued to be in respect of card handling services. It was this fee only, and not the separate fee obtained for acting as a ticket sales agent, that Bookit claimed was exempt from VAT.

Bookit obtained credit card details from a customer, transmitted these to the relevant credit card companies, obtained payment from the credit card companies, and made payment to Odeon Cinemas. The Court of Appeal concurred with the earlier finding of the VAT Tribunal that the arrangement between Bookit and the customer should be considered a supply (in VAT terms) by BookIt to the customer, separate and distinct from the supply (of cinema admission) by Odean Cinemas to the customer. This was in contrast to the Debenhams case where the Court found that no contract or supply existed between DCHS and the customer.

Because the services supplied by Bookit had the effect of causing payments to be made by credit card companies, the Court of Appeal held that the service was an exempt service, being concerned the transfer of monies.

There are elements of the judgment which are difficult to reconcile with the judgment in the Debenhams case. However, there are also important differences in the fact pattern, compared to the Debenhams case. BookIt charged an additional fee to a card holder, compared to the amount which a cash customer would have paid directly to Odeon Cinemas, had they thought to purchase a ticket by cash at the cinema counter. BookIt directly carried out its own activities and did not subcontract them back to Odeon Cinemas. There was therefore a commercial and legal reality to BookIt’s claim to provide services to the customer.

The Scottish Exhibition Centre case
The Scottish Exhibition Centre (“SEC”) provided a variety of services to concert promoters. They provided the use of a hall, and they also provided ticket sales services as agent of the concert promoter. They also sold tickets on their own behalf since typically, 50% of the total tickets for a concert were allocated to SEC in payment for the use of the hall and for their distribution services. Where tickets were purchased from the centre by telephone using a credit or debit card, an additional card handling fee was charged (typically 10% of the ticket price). The SEC claimed that this fee was in respect of an exempt service for VAT purposes. The Scottish Court of Session concluded that there was a supply of card-handling services provided by SEC to the customer which was separate and distinct from other supplies made by SEC to the concert promoters. Again, following BookIt, the Court agreed that the card handling services was an exempt service.

Relevance of cases
The cases above have in two incidences gone to the UK Court of Appeal, and one case to the High Court level only. None have gone to the House of Lords in the UK (leave to appeal to the House of Lords has been refused in the case of Debenhams and BookIt) or to the European Court of Justice. To some degree the cases must therefore be treated with an element of caution. Subject to that however, they do serve to highlight the possibility that in some retail contexts a reduction in overall VAT cost can be achieved by an appropriate organisation of the commercial activity insofar as it concerns payment by the customer with ‘plastic’.

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