Date of issue: 6th July 2004

Customs Setback Over Vat Avoidance Scheme

Despite suffering a setback in their bid to prevent high street retailers engaging in VAT avoidance schemes, Customs and Excise is expected to continue its campaign against such practices and seek changes in EC law.

So says chartered accounts Clement Keys, Birmingham, which has been monitoring developments in Customs and Excise's tribunal case against Debenhams.

At a VAT and Duties Tribunal last year, Debenhams lost its case against assessments issued by Customs and Excise for the payment of VAT on credit and debit card 'handling fees'. However, this decision was overturned when Debenhams successfully appealed to the High Court and, as a result, card handling fees are now judged to be exempt from VAT.

"Debenhams has been championing the cause of some 70 high street retailers who have adopted the scheme and has come into conflict with Customs and Excise which claims this avoidance of VAT could cost the UK Exchequer £330 million," says Steven Simmonds, Director of VAT Services at chartered accountants Clement Keys, Birmingham.

Retailers are reducing their VAT bills by treating part of the payment for goods made by credit or debit card as a card handling fee, which is exempt from VAT. The scheme is not universally available however, since its use of a captive card handling service company puts it out of reach of smaller retailers.

"This practice has been running for some time and most consumers are only aware of it when they read the wording on their till receipt," adds Steven.

"Most of us don't take any notice because we are not disadvantaged in any way - the amount paid remains the advertised price, regardless of whether we pay by cash, cheque or card."

Till receipts of participating retailers indicate that 2.5% of the total payment has been made, on the customers' behalf, to the card handling company in return for it processing payment by credit or debit card.

Following the Court of Appeal ruling retailers can continue to take advantage of the scheme, but they have been warned that Customs and Excise intends to challenge the decision and it is seeking support from other EU member states to secure a change in the law.

"We are watching developments in this case very closely because any reversal of the current ruling will impact heavily on those retailers currently charging card handling fees," says Steven Simmonds.

"If Customs and Excise is successful in its appeal, it will demand payment of the amount of VAT underpaid plus interest."