Fraudulent use of a bank card does not impact on taxable amount for VAT purposes, rules CJEU

Electrical goods retailer Dixons had argued that it did not need to account for VAT where products purchased with fraudulent cards were ultimately paid for by the card issuer under a guarantee scheme. However, the Court of Justice of the European Union (CJEU) said that this amount was still a "consideration" for the purposes of the VAT rules, even though it was ultimately paid by another party.

VAT expert Suzanne McMahon of Pinsent Masons, the law firm behind Out-Law.com, said that the CJEU's decision was "very clear" and should "provide certainty for retailers".

"The decision is so clear, it is difficult to see any more mileage in this when it is returned to the First Tier Tribunal," she said.

"The CJEU could not have been clearer in its dicta. This decision should therefore provide certainty to businesses who accept cards as a means of payment. If businesses have claims stood over behind Dixons, it is likely that HMRC will now reject these or invite withdrawal of appeals," she said.

The case concerned a £1.9 million claim for overpaid VAT submitted to HM Revenue and Customs (HMRC) by Dixons Retail Group, the parent company of retailers Dixons, Currys and PC World. It had previously accounted for this amount as VAT due on the sale of goods which had been paid for with fraudulent cards between 2005 and 2008. Dixons had received payment through the banking and acquiring system from the relevant card issuer and had not been obliged to repay this once the frauds were discovered, so it argued that there was no 'underlying supply' on which VAT would be chargeable.

In many cases, when goods are paid for using a credit or debit card the retailer enters into an agreement with a merchant acquirer rather than the card issuer. The acquirer, for example Streamline, then settles the transaction with the cardholder's bank. Merchant acquirers are usually obliged to pay the retailer regardless of whether they can recover the amount from the cardholder, with the cost of providing this 'guarantee' met by issuing banks through interchange fees.

The card frauds took on a variety of forms including identity theft or card cloning, but in every case the retailer was unaware of the fraud at the time of the sale. The CJEU said that, because of this, the transactions were not 'theft' in the sense that the fraudster was free to use or dispose of the goods after purchase in the same way as any other customer. Just because the supply of the goods was unlawful did not prevent it from being a transaction for VAT purposes, it said.

Moving on to the question of whether the payment received by Dixons from the merchant acquirer was a "consideration" for the goods, the CJEU said that what was needed was a "direct link" between the goods supplied and the consideration received. Although the sales in question involved two transactions, the service provided by the merchant acquirer was that of "guaranteeing payment for the goods" and did not "change the taxable amount".

"It is not a requirement of [the VAT rules] that, for a supply of goods or services to be effected 'for consideration', the consideration for the supply must be obtained directly from the person to whom the goods or services are supplied," the CJEU said in its ruling.

"Consequently, the fact that payment of the price of the goods supplied by Dixons within the framework of the transactions at issue in the main proceedings was made by third parties, in the case in point AmEx and Streamline, cannot lead to the conclusion that that payment does not constitute the consideration obtained by Dixons for the supply of those goods," it said.

"It is important that the focus was on whether a fraudulent payment took a transaction out of the VAT net, not whether the transactions themselves were fraudulent," said VAT expert Suzanne McMahon. "The CJEU dismissed out of hand the submission by Dixons that there was no distinction between the facts in this case and the situation where goods are stolen."

"It was clear to the CJEU that a purchaser has paid the price agreed; and even if this was paid to the supplier via the card issuer, under a guarantee with the merchant acquirer, this cannot change the taxable amount. The Court was very definitive that the only logical conclusion was that the payments received, and retained by Dixons, were consideration for a supply of goods. It was therefore correct that VAT should be accounted for by Dixons on the full amount," she said.