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HMRC internal manual

VAT Finance Manual

Credit, debts and related services: credit and related services: credit and other payment cards - introduction and operation

Credit cards normally operate under various ‘umbrella’ names (VISA, Master card) but may be issued by more than one bank or credit-card company.

There are several parties involved in the operation of a credit card:

  • the cardholder
  • the ‘issuer’ of the card
  • the card scheme (e.g. VISA, Master card)
  • the retailer (known as the ‘merchant’) and
  • the acquirer.

Explained very simply, the cardholder goes to the retailer and purchases goods and/or services, using his/her credit card to pay. The merchant records the transaction (either manually or electronically) and produces a receipt which the cardholder signs, or the cardholder is required to enter their PIN. The details of the sale are now passed to the acquirer who pays the merchant the value of the goods and/or service. The acquirer now passes the details of the sale to the issuer, via the card scheme, which pays the acquirer the value of the goods and/or services. Finally, the issuer issues a statement to the cardholder, who pays the issuer in full on receipt of the statement or pays on an instalment basis, interest being charged on the outstanding balance.

There are various charges made between the parties. For example, the acquirer may charge the merchant, the issuer paying the acquirer less any commission, and the charging of interest to the cardholder where the amount is not paid off in one go. The issuer may also charge the cardholder an annual fee.

Both the annual fee and interest are consideration for exempt supplies of credit or advances of money by the issuer to the cardholder.

Merchant charges made by acquirers to retailers are also consideration for exempt supplies, as are the issuers’ commission - see VATFIN3160.

NB - For the liability of card handling services please see VATFIN2320.