Am I making VAT exempt supplies if I supply payment processing services?
| In Spring 2024, the Upper Tribunal dismissed the appeal of the taxpayer, SilverDoor Ltd (TC08554), in a case concerning the VAT treatment of a Merchant Acquirer fee that it charged to its customers. HMRC had assessed for under-declared VAT on the basis that the fee charged for the use of a credit card was further consideration for a standard rated taxable supply of reservation services and not a VAT free charge. SilverDoor’s appeal was dismissed with the Upper Tribunal finding that the finance exemption should be strictly interpreted and the payment processing services provided by SilverDoor did not meet the conditions set out in case law for exemption to apply, such as having the effect of transferring funds and involving changes in the legal and financial situation. |
How payment handling/processing services should be treated to avoid costly consequences
As we see a greater move towards digitalisation of services and a move away from cash payments, we are noticing a greater number of queries around payment processing services and how these should be treated for UK VAT purposes.
What is the issue?
The VAT treatment of financial services is a particularly complex area of UK VAT law. The starting position for any supply between UK businesses is that this is subject to the standard rate of VAT (currently at 20%), unless an exception applies.
There is a VAT exemption applicable to certain supplies of financial services. Exempt supplies are not subject to VAT, and a supply that is exempt is not a taxable supply. Therefore, any VAT incurred on costs directly relating to exempt supplies is not recoverable. There is therefore a significant impact on the VAT profile of a business if its services fall within exemption or not. Making exempt supplies can be beneficial when supplying services to consumers or other exempt businesses, as not having to account for VAT that would be a cost to the customer helps keep prices lower, however, businesses that make exempt supplies are unable to reclaim VAT they incur on their costs, making those purchases more expensive.
It is important to note that the financial services exemption is applied narrowly. Further, the VAT treatment of payment processing/ handling services has been the subject of high-profile VAT caselaw in cases such as Bookit (C-607/14) and National Exhibition Centre (C-130/15) (NEC). The courts ruled in favour of HMRC, and 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. What was key in the courts’ mind was that in order to be characterised as an exempt payment transaction, the service in question must:
- have the effect of transferring funds, and
- entail changes in the legal and financial situation.
A card processing service that results in the execution of a payment or transfer does not automatically fall within exemption itself.
How Crowe can help
We are seeing greater interest and increased scrutiny from HMRC in relation to payment handling/processing services and it continues to be an area of frequent dispute. Incorrectly categorising such transactions as exempt supplies can have costly consequences for businesses, not only in terms of VAT assessments but also interest and penalties.
Please contact Robert Marchant or your usual Crowe contact to discuss your VAT position further.
