Upper Tribunal rules on the VAT liability of payment handling fees

Tax law experts Steph Bashford and Bryn Reynolds of Pinsent Masons said the decision of the Upper Tribunal (UT) (22-page / 483KB PDF) highlights how narrowly the UK tax tribunals consider the financial services exemptions to VAT.

VAT is a tax on certain supplies of goods and services and is calculated by reference to the value of those supplies. A supply of goods or services is "taxable", unless the VAT legislation specifies that it is exempt. All taxable supplies are standard rated, 20%, unless the VAT legislation specifies that it is subject to a lower rate. 

The case before the UT concerned a dispute between Silverdoor and HM Revenue and Customs (HMRC).

Silverdoor is a property intermediary company that has agreements with a number of accommodation providers, including hotels and serviced apartments. Under those agreements it acts as a reservation agent, arranging bookings for clients and promoting the accommodation.

Silverdoor charges a commission to the accommodation providers for its services. Most of its clients have accounts with the company and payment is dealt with through their accounts, without any additional fees being charged on top of the cost of the accommodation. However, where clients pay the company using a corporate credit card, Silverdoor charges a fee of 2.95% of the total cost of the accommodation. The fees are to compensate Silverdoor for the costs it incurs in relation to card payment processing.

Silverdoor did not account for VAT on the fees on the basis that it considered them to be exempt from VAT. HMRC disagreed and assessed the company for around £109,000 in unpaid VAT.

The First-tier Tribunal (FTT) previously considered the case and ruled in HMRC’s favour, but Silverdoor filed an appeal to the UT. To succeed with its appeal, Silverdoor had to demonstrate two things: first, that the fees it imposed are consideration for a supply which is separate and distinct to any other supply it makes, or which is made by the accommodation suppliers, and second, that they were payment for it providing a financial service as an intermediary – i.e. that it acted as an intermediary in providing services related to “the issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money”.

In upholding the decision of the FTT, the UT found against Silverdoor on both issues.

On the first issue, the UT agreed with the FTT’s finding that the company was providing a reservation service to clients. In doing so, it rejected the company’s argument that there was only one service which the company provided, and that was to the accommodation providers to whom it was acting as agent, in much the same way as a real estate agent acts for the seller of property.

The UT dismissed this analogy, pointing out that the company separately enters into contractual arrangements with clients, and provides them with a tailored service – including by selecting a range of suitable properties from its database to fit its clients’ parameters, checking the availability of the properties, and arranging the booking.

In doing so, the UT found, the company provides its clients with reservation services, which can be paid for by using a credit card.  and the provision of those credit card services are inseverable to the reservation services –  i.e. they cannot be provided separately by the company to its clients.

Accordingly, the UT concluded that the FTT had been right to find that the credit card payment service was a service ancillary to the principal service, and not a service in its own right. As a result, it deemed that the payment of the fees was consideration for the reservation services, and thus subject to VAT in the usual way.

The UT noted that the fact that the company separately earned commission from the accommodation providers for providing the reservation services and only charged the credit card fees where it incurred this additional processing cost did not change the position.

The determination of the first issue against Silverdoor was fatal to its appeal, but the UT nevertheless went on to consider the second issue the case raised. It found that even if the fees were for a separate and distinct service – i.e. for providing card processing facilities – Silverdoor had not provided them in the capacity of an intermediary providing financial services.  

In coming to this conclusion, the UT rejected the company’s argument that, in its role of taking payment by credit card, it is bringing together a party providing financial services through the extension of credit and the client wanting to make use of those services. In the UT’s view, the merchant acquirer itself does not extend credit – the card issuer does – and rather the funds transfer by the merchant acquirer to the company is simply part of the mechanism by which the credit is provided.

Further, and as the FTT found, the UT determined that to constitute an intermediary, a company has to do more than simply issue a payment request directing a client to a webpage operated by a merchant acquirer, where payment can be taken. It also found there to be no contract between the client and the merchant acquirer, pursuant to which any services were provided.  

Bashford said: “The decision of the UT – and the FTT before it – is not surprising given recent EU case law which has determined that additional charges made by a supplier for making payment in a particular manner should be treated as additional consideration for the main supply, rather than an exempt financial service. That said, the approach applies a very restrictive interpretation of the financial services exemption.”

Reynolds added: “It’s also notable that the suggestion by the UT that the decision in the case of Telewest has been superseded by the Court of Justice of the EU decisions in the cases of Bookit and NEC will concern many given that it is a well-established principle that, absent deeming legislation, two separate suppliers cannot make a single supply. The complication in this case is that the original outside-the-scope service for nil consideration is transmuted into a supply by way of the consideration for the payment charge. The decision in the case of Everything Everywhere prevents a more comprehensive analysis as to the appropriate apportionment of said consideration between the elements and provides a short-cut to the decision in this case. This should have no impact on the Telewest decision.”