Tribunal rules against high street tax avoidance scheme

The independent VAT Tribunal today ruled in Customs favour to stop large, high street retailers operating a "major VAT avoidance scheme" and gaining an "unfair competitive advantage" over their smaller competitors.

HM Customs and Excise said today that many major retailers have been trying to cut the amount of VAT they pay. Customs said that when customers pay for goods by credit or debit card, small print on the receipts asks them to agree to pay a 2.5% "card handling fee", even though the price is exactly the same as it would be for a cash sale.

More than 50 high street retailers are operating this avoidance scheme, marketed to them by large accountancy firms, while more were awaiting the outcome of this tribunal hearing, in which a test case was taken against Debenhams.

Retailers have set up wholly owned subsidiary companies who claim to provide VAT exempt card handling services to customers for 2.5% of the price of the goods. So while the customer pays exactly the same amount whether paying by cash or card, VAT would only be paid on 97.5% of the price of the goods for those paying by card.

Retailers claim that this 2.5% should be exempt from VAT in common with other financial services. But Customs have said that this is "blatant VAT avoidance" and today the independent VAT and Duties Tribunal issued their decision, agreeing with Customs, that retailers must pay VAT on the full retail price of goods sold in their stores.

John Healey, Economic Secretary to the Treasury, said: "This decision sends a clear message to all tax avoiders that we are determined to clamp down on their schemes. If it had been allowed to carry on, this one scheme would have cost the country £200 million a year.

"We will not allow taxpayers to be cheated in that way, and we will not allow small businesses who cannot afford to run these sorts of schemes to be undercut by the big retailers who can."

The "card handling companies" to which the 2.5% fee is payable are the retailers' own subsidiaries companies.

Customs has pledged to continue to "vigorously tackle" VAT avoidance schemes which erode revenue and give an unfair competitive advantage to those businesses that can afford to adopt them.

(GMcG)