Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

VAT Finance Manual

Money (including transfer of money) and related services: examples of services and products not falling within item 1: payment handling/processing

The CJEU judgments in two UK cases: Bookit Ltd (Bookit) (C-607/14) and National Exhibition Centre Ltd (NEC) (C-130/15) held that fees charged for card processing services that enable a customer to pay by debit or credit card are taxable and do not qualify for exemption as a transaction or transfer in payments (ref Article 135(1)(d) PVD and item 1 Group 5 Schedule 9 VATA 94).

Background

Bookit, a wholly owned subsidiary of the Odeon Cinema Group, arranged the sale of cinema tickets and charged each customer a separate fee for telephone and internet bookings with payment made by customers using credit and debit cards.

NEC owns and operates the National Exhibition Centre and hires the venue to third party promoters to put on events and sells tickets for those events.  NEC charged a booking fee when customers bought tickets for events taking place in an NEC venue and paid using a debit card in the case of remote payment or by credit card in all cases.

Both NEC and Bookit claimed that the fee charged was exempt from VAT as a transaction concerning payments under Article 135(1)(d). They considered that the effect of their actions in transmitting the card data to the merchant acquirer resulted in a transfer of funds.

The Court’s Decision

The CJEU’s reasoning in both cases was on the whole the same and particular reference was made to its judgment in Everything Everywhere (C-276/09) which made clear that additional charges invoiced by a provider of services to its customers for the facility to pay by a certain method including by credit or debit card do not constitute consideration for a supply that is distinct and independent from the principal supply of services for which that payment is made.

In determining whether the services at issue came within the scope of the exemption, the court made the following points:

  • In order to be characterised as an exempt payment transaction, the service at issue must be, viewed broadly, form a distinct whole, fulfilling the specific, essential functions of a transfer and, therefore, have the effect of transferring funds and entail  changes in the legal and financial situation.
  • Whilst a card processing service that results in the execution of a payment or transfer and may be regarded as essential to its execution, that does not mean the service itself is exempt
  • The services at issue in this case were mainly technical and administrative and involved obtaining and transmitting information. The obtaining of card data for the cardholder, the transmission of such data to the merchant acquirer, the receipt of authorisation codes and retransmission of an end of day settlement file including the authorisation codes cannot together or individually be treated as performing a specific and essential function of a payment or transfer transaction.
  • Neither Bookit nor NEC assumed any liability or responsibility in relation to the fulfilment of the legal and financial changes.

Implication of the Judgments

The CJEU’s judgments have provided definitive guidance on whether a service of credit or debit card processing is exempt from VAT. The judgments were unequivocal in their conclusion that the exemption for transactions concerning payments and transfers does not extend to payment handling/card processing services and a clear distinction was made between the actual execution of a payment and services that were peripheral to this such as technical and administrative services.

With regard to the exemption, the judgment emphasised the points previously referred to in Sparekassernes Datacentre (SDC) (C- 2/95) which stated that “ a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. It is characterized in particular by the fact that it involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks and, in some cases, between the banks. Moreover, the transaction which produces this change is solely the transfer of funds between accounts, irrespective of its cause”.  Therefore, the service under consideration has to cause the actual transfer of ownership of the funds concerned.

The CJEU in Everything Everywhere clearly stated that the payment handling /processing charge represents additional consideration for the principal supply and the VAT chargeable should be at the same rate as the goods or services supplied. This principle was also emphasised in Tierce Ladbroke (C-231/09) and Derby SA (C-232/09). The CJEU gave its judgment by reasoned order and concluded that the services of an agent acting on behalf of a principal who operates a business of taking bets which consists in the agent taking bets in the name of the principal, recording the bets, collecting the monies and paying out any monies due constitute a single supply of betting agency services and are not exempt as transactions or transfers in payment.

Therefore, when determining whether the exemption does apply it is important to understand the purpose and nature of the service within the payment process and its position in the actual supply chain. Due consideration must be given to the economic and commercial reality when determining whether there is a principal supply for which the card processing charge is additional consideration or whether the card processing charge constitutes a service that is distinct and separate from the principal and causes the actual transfer or ownership of the funds concerned.

If you receive questions concerning the liability of payment services please contact the Financial & Commodities VAT UoE