Card-charge ploy was 'VAT avoidance'

By THIS IS MONEY
Updated: 06:54 EST, 18 July 2005

A HIGH Street store scheme which could have potentially cost the Treasury billions of pounds was found to be VAT avoidance by the Court of Appeal today.

More than 70 major retailers were asking customers who use credit or debit cards to agree to pay a 2.5% 'card-handling fee', even though the price for the goods was exactly the same as it would be for a cash sale. The retailers would then be exempt from paying VAT on the 2.5%.

An independent VAT tribunal ruled against the scheme operated by Debenhams Retail Ltd in 2003 but this was overturned by High Court judge Mr Justice Lindsay in June last year.

A spokesman for the Treasury said at the time that more than 70 major retailers were asking customers for the 2.5% fee at a cost of £300 million to the taxman.

He added: 'If every High Street retailer used the scheme and if they increased the card handling fee to 5% or 10%, the costs would run into billions.'

But today Lord Justice Mummery, Lord Justice Mance and Sir Peter Gibson reinstated the VAT Tribunal decision in the Debenhams test case.

Lord Justice Mance said the Customs appeal should be allowed because Debenhams Retail is responsible for 100% of any money paid by a customer.

He said the creation of a subsidiary for handling the card purchases was for no other reason than for creating a tax advantage.

Any suggestion that the extra costs of handling card transactions justified the tax advantage was undermined by the fact that customers were charged the same for cash or card transactions and the 2.5% paid to the subsidiary company by Debenhams Retail was five times in excess of the amount needed to cover any costs.