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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, reports on a recent High Court case on the VAT treatment of credit card handling charges.

Introduction

A case which could cost the Treasury in excess of £1 million was won by Bookit Ltd in the High Court recently. The case considered whether a 'card handling fee' levied on tickets booked over the telephone or Internet for Odeon cinemas, should be VAT exempt. On 28 July 2005, the High Court held that such a fee was exempt.

Bookit operates call centres that take bookings for its parent company Odeon plc, and charges a card handling fee for dealing with payments made by customers. The additional [50p] fee is only applicable when the customer is paying by credit or debit card, and is booking via the telephone or Internet. HM Revenue & Customs (HMRC) argued that the fees charged for this service should be subject to VAT, but the High Court decided that such treatment was inconsistent with European and domestic law.

The decision opens up the possibility that any 'card handling fee' charged for the many services that can be booked remotely - by phone or Internet - could now qualify for exemption. As such, businesses that have been charging VAT may be able to get a refund going back three years (subject to the 'unjust enrichment' provisions).

The VAT Tribunal had earlier decided in favour of HMRC, holding that whilst Bookit was providing a distinct booking service to Odeon, the card handling services provided by Bookit to cinema-goers did not qualify as "intermediary services" for the purposes of the VAT exemption in Item 5, Group 5, Sch 9, VATA 1994. The chairman contended that an intermediary service must involve an element of "negotiation", which he defined as involving a "distinct act of mediation".

The Decision

The High Court saw it differently, holding the card handling services provided by Bookit are exempt from VAT pursuant to Article 13(B)(d)(3) of the Sixth Directive and Items 1 and 5 of Group 5 of Schedule 9. Whilst the High Court doubted that the services performed by Bookit for the cinema-goer are strictly acts of negotiation, it was of the view that as Note 5 of Item 5 did not incorporate any reference to "negotiation", this was not enough to justify the rejection of Bookit's claim to exemption. Following the decisions in SDC and FDR, the court found that Bookit did transfer monies sufficient to effect a change in the legal and financial situation of the customer.

Distinguishing from Debenhams case

Please note that the Bookit case should not be viewed in conjunction with the recent Debenhams case also concerned with card handling fees (Debenhams lost in the Court of Appeal on 19 July 2005, which ruled that it was responsible for declaring VAT on 100% of any money paid by a customer, regardless of any card handling fee). The cases can be distinguished by three key factors as follows:

1. In Bookit’s case, the card handing fee is an additional charge on top of the ticket purchase price;

2. There is a contract between Bookit and the customer (by express terms either on the internet or telephone) (cf. no contract between card co and customer in the MC arrangement);

3. Bookit is effecting a change in the financial and legal character of the transaction.

HMRC have 28 days from the date the decision is handed down to lodge any appeal with the Court of Appeal. We shall have to wait and see what they do (there has been no announcement from them thus far) but this should not stop affected business from lodging protective claims with HMRC in the meantime.

August 2005

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


VAT Solutions (UK) Ltd
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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc