Date of issue: 1st February 2005

VAT AND CARD HANDLING FEES REMAIN UNRESOLVED

The debate over the legality of a card handling fee levied by some retailers to reduce the amount of VAT they pay rumbles on, as Customs and Excise has declared it will take the case to the Court of Appeal.

"Last June, a High Court judgement in part overturned a VAT and Duties Tribunal decision which had been decided in favour of Customs and Excise, so card handling fees were ruled to be exempt from VAT," says Steven Simmonds, Director of VAT Services at chartered accountants Clement Keys, Birmingham.

"However, the High Court has not reached a final decision on the matter and since it remains subject to ongoing litigation in higher courts Customs is fighting on."

The issue concerns a scheme used by Debenhams and up to 70 other major retailers whereby customers paying for goods by credit card are charged a 2.5% card handling fee as part of the total amount.

The scheme does not disadvantage consumers in any way because the price paid remains the same irrespective of the payment method. The benefit is to the retailers, who are claiming the 2.5% handling charge is exempt from VAT because it constitutes a supply of financial services.

Customs and Excise considers VAT should be accounted for on the full price paid for standard-rated goods and will put on hold any claims by retailers operating a card handling scheme. Existing claims and any subsequent claims lodged by these retailers will not be repaid until the liability for VAT has been finally determined by the courts.

"Any reversal of the existing ruling by the Court of Appeal could impact heavily on retailers who have been using a card handling scheme," adds Steve Simmonds.

"Retailers should be aware that returns which account for VAT on less than the full price paid by the customer will be deemed incorrect and that, ultimately, Customs will raise assessments for under-declared VAT and may levy a penalty as well as interest on the amount owed.

"We are also aware that Customs and Excise are also attacking the Card Handling Service Companies set up by Debenhams and the like by maintaining that they are providing standard rated not exempt services and forcing these companies to register and account for VAT."