CJEU: third party card handling services ‘cannot be VAT exempt’

The Court of Justice of the European Union (CJEU) found that the complex chain of services provided by wholly owned subsidiary, Bookit Ltd, on behalf of Odeon when a card payment was made were insufficiently connected with the actual transfer of ownership of the underlying funds. As such, Bookit did “no more than provide technical and administrative assistance” in relation to the transaction, meaning that it could not benefit from the exemption from VAT applicable to payment services.

The CJEU reached a similar conclusion in a case involving the NEC, which sold tickets for concerts and other events on behalf of unconnected third party promoters and charged a booking fee, which it claimed was exempt from VAT.

VAT and indirect taxes expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the practical effect of the judgments was seemingly to exclude from the payment services exemption “most suppliers of outsources and delegated services”.

“It is likely that these judgments will send shivers through the rapidly expanding fintech world,” he said. “The CJEU clearly seems to be aiming at a very narrow interpretation of the exemption, apparently limited to those parties actually transferring the funds in question.”

“One is left wondering whether the requirement to interpret the exemption strictly is actually depriving it of its practical use for today’s transactions. Has the mass introduction of technology into this space caused a fundamental narrowing of this exemption compared to the handling of money and payments in earlier years? One wonders how this sits with the apparently more generous exemptions bestowed upon bitcoin by HMRC in earlier guidance: there may well be a very clear VAT distortion between transactions conducted via bitcoin and those using traditional currency and means,” he said.

The CJEU had been asked to rule on a referral from the UK’s first-tier tribunal, in relation to a £2 million dispute between Bookit Ltd and HM Revenue and Customs (HMRC). Bookit, which is wholly owned by Odeon Cinemas, provides card processing services for the cinema chain and retains a handling fee for cinema tickets booked online or by phone.

Bookit had argued that its complex processes which involve requesting, verifying and processing credit and debit card transactions, liaising between Odeon’s customers and a bank card service provider and passing on the ultimate proceeds of the sale, less bank service charges and its own handling fees, fell within the scope of the exemption from VAT for payment services, as set out in the EU’s VAT directive. HMRC disagreed, stating that as the actual transfer of funds was carried out by a ‘merchant acquirer’ bank in conjunction with the credit and debit card issuers, Bookit at no point actually transferred funds on behalf of Odeon’s customers.

Although stating that the actual question of whether the services provided by Bookit were themselves a taxable supply or merely an ancillary service was a matter for the UK courts, the CJEU sided with HMRC in its interpretation of the role Bookit played in the transaction process.

“[I]n order to be characterised as a transaction concerning transfers … the services at issue must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a transfer and, therefore, having the effect of transferring funds and entailing changes in the legal and financial situation,” the CJEU said in its judgment.

“There is no dispute, given [the description in this case], that [Bookit] does not itself directly debit or credit the accounts concerned, and that it does not act by accounting entities, and that it does not even instruct such debit or credit, since it is the purchaser who, by using his or her payment card to make a purchase, decides that his or her account will be debited in favour of a third party … [It] is not apparent from the order for reference that [Bookit] assumes any liability as regards the achievement of the changes in the legal and financial situation that are characteristic of the existence of an exempted transaction of transfer or payment,” it said.

The CJEU added that extending the scope of the exemption in order to cover the circumstances of this case “would be at odds with the purpose of the exemption for financial transactions, which is to alleviate the difficulties connected with determining the tax base and the amount of VAT deductible and to avoid an increase in the cost of consumer credit”.

“If a card handling service, such as that at issue in the main proceedings, is subject to VAT, there are no such difficulties,” it added.