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VAT Exemption for Payment Services
 Article 
Author
Dario Garcia
Date
16 June 2016

VAT Exemption for Payment Services

Review of ECJ Decisions in Bookit Limited (Case C-607/14) and National Exhibition Centre Limited (Case C-130/15) ("NEC")

In two judgments given together on 26 May (without recourse to an opinion from the Advocate General), the ECJ has provided further guidance on the VAT treatment of payment card processing services, in particular whether they are exempt from VAT as transactions concerning transfers. 

The Transactions 

In the Bookit case, Odeon cinema tickets could be purchased by phone or online through Bookit (acting as Odeon's disclosed agent).  Where card payment was made, an additional and disclosed card handling fee was levied by Bookit.  Bookit, not being the principal supplier (that was Odeon), argued that the handling fee fell under what is now Article 135(1)(d) of the 2006 VAT directive which exempts:

"Transactions including…payments, transfers…but excluding debt collection". 

This is given effect in UK law by item 1 of Group 5 of Schedule 9 to the VAT Act 1994, the wording of which is not identical but which must, in view of the requirement for conforming construction, be given the same effect. 

The facts in NEC were not materially different: NEC as agent for event organisers using its facilities, would sell tickets to the event as agents.  An additional and disclosed 10% booking fee was required for card payments. 

It can therefore be seen why the two cases were heard and decided together and, having dispensed with the usual course of obtaining the Advocate General's opinion, it may be inferred that the Court did not find the cases particularly difficult to deal with, especially in light of earlier authority. 

It is important to understand what the cases are not about. 

The cases do not concern suppliers who themselves impose an additional charge when card payment is made.  In such cases, even if it is separately described and itemised, the additional charge is to be regarded merely as further payment for the underlying principal supply (i.e. that supply for which payment is due) and not payment for a separate financial transfer service which could be exempt from VAT. 

The ECJ dealt with such cases in Everything Everywhere Limited (formerly T-Mobile) Case C-276/09 [2011] STC 316.  In this case additional charges levied by EE for accepting, for example, card payments, were to be treated as further payment for the underlying telecom services. 

What we are concerned with in Bookit and NEC are charges made by third parties for securing the movement of the purchase price from buyer to seller (Odeon/NEC) through the card payment cycle. 

The credit card payment cycle

A reminder of the classical analysis of the credit card payment cycle is useful.  The key thing to remember is that, to be exempt from VAT, a participant in the card payment cycle must be acting as a principal in its own right, i.e. itself owing and being owed a debt and so bearing counterparty default risk.  It is not enough that it simply arranges or provides the technical means for payments to be made between those owing and being owed, without itself being at financial risk. 

The classic analysis of the card payment system is given in Re Charge Card Services [1989] CH.497 C.A.  Its application to the VAT system was confirmed also by the Court of Appeal in Diners Club Limited [1989] 2 ALL ER 385

In simple cases there are four participants:

  1. The card paying customer
  2. The issue of the card to the customer ("issuer")
  3. The retailer
  4. The retailer's acquirer bank ("retail acquirer")

The retailer holds the goods out for sale.  If it accepts payment by card the customer is immediately discharged of any ongoing obligation under the contract of sale to make any payment.  The retailer discharges the customer on the basis that a new debt in the same amount is now owed to him from acquirer bank: the acquirer bank is not paying a customer's ongoing debt as agent but assuming a new debt on its own account.  Under a system of agreements between banks (interchange), the issuer becomes liable to pay the acquirer bank (again a new debt) and, finally, the customer has to pay his monthly credit card bill to his issuer (he may of course do so over time). 

The payment cycle is therefore completed: debts rise and fall as they are substituted by new ones.  Payment of each debt by each bank is not conditional on itself receiving payment.  The banks act as principal debtors in their own right and are exposed to counterparty default risk accordingly. 

As payment systems have developed and become automated, various service providers stand between the banks and between them and the retailers/customers, to ensure that the correct authorised payments are cleared and settled.  It is the treatment of these service providers which has been the subject of ECJ jurisprudence, culminating now in Bookit and NEC.

It will be seen, in this classic analysis, that the card payment cycle involves a change in the legal and financial situation of each of the banks, and this is precisely how the ECJ explained the scope of VAT exemption in its leading decision in SDC – Case C-2/95 [1997] STC 932.

To be a "transaction concerning transfers", a service had to have the effect of transferring funds and entail changes in the legal and financial situation of the participants.  This, it will be seen from the analysis above, is clearly the case for the banks. 

An exempt service has, however, to be distinguished from a mere physical or technical service provision, such as making a data handling system available to a bank. 

It is this distinction which has defeated the claims of Bookit and NEC to exemption, as it had done for a similar claim relating to the SWIFT system in the Nordea decision of the ECJ, Case C-350/10 [2011] STC 1956

SWIFT services are electronic messages by means of which financial institutions can effect payments to each other.  In this sense, Nordea triggered payments but took no financial position or risk itself in respect of them.  Accordingly, it did not change its legal and financial position; its service was a mere technical one and so did not qualify for exemption. 

Likewise, in the present cases, neither Bookit nor NEC took a financial position.  Bookiit secured transaction authorisation from card issuers and then batched card transactions and transmitted them to the various card issuers who in their turn paid Odeon's acquirer bank.  Bookit then collected the amounts from those acquirer banks and paid them over to Odeon.  It was accepted that Bookit's role was essential in a causal sense for the payments to be made, however the Court said that:

"…it is not apparent…that the provider of such a service assumes any liability as regards the achievement of the changes in the legal and financial situation…"

Bookit did "…no more than provide technical and administrative assistance". 

Unsurprisingly, the Court repeated this precise formulation in the NEC decision. 

Conclusion

To be confident that its supplies in a payment cycle are exempt, a participant must change its own legal and financial situation: it must itself owe and be owed debts and carry the counterparty default risk corresponding to that. 

If provision is of no more than a platform through which obligations and entitlements ascertained are valued and settled it is not altering its legal and financial position in the requisite sense.

Had either Bookit or NEC guaranteed payment or taken on an unconditional payment obligation (i.e. one not depending on receipt itself of payment) one could with some confidence predict that the result would have been different.