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CJEU to be asked to rule on whether card handling fee payments trigger VAT liabilities

Out-Law News | 11 Sep 2014 | 11:48 am | 3 min. read

The UK First-tier Tax Tribunal will ask the EU's highest court for a ruling on whether companies that impose card handling fees and are involved in the processing of transactions can benefit from an exemption to the application of VAT on those services.

The precise wording of the questions that the Court of Justice of the EU (CJEU) will be asked have yet to be set, but a tax specialist said the CJEU's verdict in the case will be of significance to all retailers.

The First-tier Tax Tribunal case concerns a dispute between Bookit Limited (Bookit), a subsidiary of Odeon Cinemas Holdings Limited (Odeon) the cinema chain, and HM Revenue and Customs (HMRC). Bookit provides card processing services for Odeon and retains a handling fee for cinema tickets booked online or by phone. 

In providing its services, Bookit engages in a complex process that involves requesting, verifying and processing credit and debit card transactions, liaising between Odeon's customers and a bank card service provider. At the end of this process customers' banks pay Bookit which passes on sale funds to Odeon, less what those banks have deducted as a service charge and what it levies as a card handling fee. 

HMRC claims Bookit owes more than £2 million in VAT payments, but Bookit has argued that the services it provides are exempt from VAT under EU tax laws. 

Under the EU VAT Directive, businesses that supply goods and services are generally required to account for VAT on those supplies. However, a number of exemptions apply to that rule. The Directive states that certain transactions, including payment services, do not trigger VAT liabilities, although transactions in relation to debt collection services are not exempt from VAT. However, the Directive requires EU countries to ensure that abuse does not result from the application of any VAT exemptions. 

HMRC said that the payments exemption should only apply where a transfer or a payment has actually been performed. It has argued that Bookit "does not transfer funds and it doesn’t execute an order for the transfer of funds" and is "not functionally involved in the transfer of payments or the transfer of funds". 

Bookit's involvement in the processing of card handling fee payments is only "preparatory and technical" in nature and merely "designed to assist the ultimate payment which takes place through the payment card system", HMRC has argued. It claimed it is "irrelevant" that Bookit "receives funds into its account" as part of the payment process. 

HMRC said that third parties that "execute operations relating to the transfer of funds" on behalf of either banks or retailers can be said to be supplying services that trigger VAT. It said that Bookit "was operating outside the card payment system" and that its services therefore do not qualify for VAT exemption because the transactions it is involved in the processing of relate to transactions between consumers' banks and its own bank and "are limited to transactions within the card payment system itself". 

Tribunal judge Jonathan Cannan said that HMRC's arguments "are at least reasonably arguable" and that he did not feel he could determine the scope of the payments exemption to VAT "with complete confidence", without clarification from the CJEU. 

"It is not clear to me as a matter of principle what factors distinguish: the provision of financial information without which a payment would not be made but which do not fall within the exemption, from data handling services which functionally have the effect of transferring funds and which the CJEU [in a previous case] identified could fall within the scope of the exemption," the judge said. 

However, judge Cannan said it was his non-binding view that Bookit could not be said to be providing debt collection services. 

In addition the judge said that "contractual arrangements" between the Odeon and Bookit for the supply of card handling services "reflect economic reality" and are not "artificial". He said the Odeon and Bookit were entitled to structure their contracts to "limit their tax liability" and that structuring the contracts to ensure that Bookit's services were being provided to Odeon and not to Odeon's customers were within the bounds of what are allowed under the VAT Directive and do not constitute an abuse of those rules. 

VAT specialist Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said whether and the extent to which VAT applies to card handling services "has long been an area of contention". 

“It is the commercial reality today that electronic transactions are frequently processed by third-parties, and the CJEU should seize this opportunity to provide clarification on the precise scope of the payments exemption under the VAT Directive in this case," Mellor-Clark said. "With at least two other cases turning on similar points of law currently awaiting hearing before the UK Upper Tribunal, and with the prevalence of electronic payments being greater than ever, the important of this reference to the CJEU is obvious to all. Commercial and technical developments such as electronic wallets and payment via Near Field Communications and apps on mobile devices will only increase the need for certainty in this area.”