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HMRC internal manual

VAT Finance Manual

Credit, debts and related services: credit and related services: summary of liabilities of various services associated with credit, debit and payment cards

For the liability of card handling services, please see VATFIN2320.

General liability table

### Service ### Customer belonging in UK ### Customer belonging in EU (non-business) ### Customer belonging in EU (business) ### Customer belonging in non EU
Membership/joining fees and annual subscriptions (cardholder) exempt exempt O/S O/S-R
Credit charges (interest) exempt exempt O/S O/S-R
Joining fees/service charges (merchants) exempt exempt O/S O/S-R
Merchant fees (discounts) exempt exempt O/S O/S-R
Interchange fees inc. issuer’s reimbursement fees exempt exempt O/S O/S-R
Interchange fees inc. issuer’s reimbursement fees exempt exempt O/S O/S-R
Rental of imprinter/terminal S/R S/R O/S-R O/S-R
Rental of imprinter/terminal rental when provided as an integral part of other exempt card services exempt exempt O/S O/S-R
Sales of imprinters/terminals (or other related goods) S/R S/R O/S-R O/S-R

O/S-R = outside the scope with recovery of input tax

S/R = standard rate of VAT

O/S = outside the scope without recovery of input tax

Credit card commission charged by the card issuer to the retailer etc

Some credit card issuers either charge retailers and other outlets participating in their schemes commission or deduct it from the amounts reimbursed to them. Such commission is sometimes referred to as the ‘merchant charge’. This commission is exempt under Note (4) to Group 5. This interpretation was confirmed in the Court of Appeal case of Diners Club Ltd and Another (‘DCL’ - [1989] STC 407).

According to the Court, DCL and Cardholder Services Ltd (CSL) were companies that operated ‘credit’ card schemes (although the way the scheme worked was more akin to a charge card). The holders of the cards used them to acquire goods or services from retailers. In the scheme the cardholders were liable to DCL for all the charges - defined as meaning all debts - incurred through use of the cards. Under the contract between DCL and the retailers, DCL agreed to purchase and the retailers agreed to sell and assign all cardholder accounts created by the use of the cards, less a discount. CSL operated a similar scheme.

The issue was whether the companies (DCL and CSL) made exempt supplies for VAT purposes when they made a payment, less a discount to retailers.

In dismissing the appeal the Court of Appeal concluded that the supplies were exempt. There was clearly a supply in the form of the transfer of money to the retailer when a payment was made and therefore a supply that fell within item 1 (in conjunction with Note (4)). The consideration was the discount and it was for the benefits which the scheme operated by the credit card company confers on the retailer, which include the service of providing the payment which is assured by the credit card company.

Credit, debit and charge card management services

The management of credit, debit and charge card transactions requires sophisticated systems for the processing of transactions, the computation of amounts due between the various parties, the prevention of fraud and the authorisation of individual transactions. Increasingly these functions are subcontracted (‘outsourced’) by card issuers and acquirers to specialised companies that may offer a comprehensive service.

Only the management of credit by the person granting that credit will gain the exemption. Management of credit by a third party (i.e. other than the person granting the credit) will be taxable. Some management of credit services may include a payments and/or transfer service. For more information on this, see VATFIN2260.

For the liability of card handling services please see VATFIN2320.