With shop tills ringing as the festive season is in full swing, a recent ruling from the Court of Justice of the European Union (CJEU) has made it clear retailers will still have to account for VAT even where goods are paid for with a bank card that is later found to have been used fraudulently say Harris & Co accountants Northampton who provide accountancy services to many retailers.
The ruling was handed down at the end of November in a case brought by Dixons Retail Group, which includes Currys, Dixons and PC World. The consumer goods retailer argued that it did not need to account for VAT where products purchased with fraudulent cards were ultimately paid for by the card issuer under a guarantee scheme. The CJEU has confirmed that the amount paid was still a ‘consideration’ for VAT purposes even though it was paid by a third party.
The case concerned a £1.9m claim for overpaid VAT which Dixons submitted to HMRC. It had previously accounted for this amount as VAT due on the sale of goods which had been paid for with fraudulent cards between 2005 and 2008. Payment had been made via the banking and acquiring system from the relevant card issuer, and Dixons had not been obliged to repay this once the frauds were discovered, so it argued that there was no "underlying supply" on which VAT would be chargeable.
However, the CJEU found that the physical transfer of goods to a purchaser who fraudulently uses a bank card as a means of payment is a supply of goods for VAT purposes. Also, according to the CJEU, the fact that the cost is ultimately borne by the card issuer rather than the customer does not prevent the payment being treated as consideration for that supply.
In its ruling the CJEU stated: ‘It is not a requirement of [the VAT rules] that, for a supply of goods or services to be effected “for consideration”, the consideration for the supply must be obtained directly from the person to whom the goods or services are supplied.’
Suzanne McMahon, Senior Associate at law firm Pinsent Masons who specialises in VAT, said:
‘It is important that the focus was on whether a fraudulent payment took a transaction out of the VAT net, not whether the transactions themselves were fraudulent. The CJEU dismissed out of hand the submission by Dixons that there was no distinction between the facts in this case and the situation where goods are stolen.’
The CJEU argued that a purchaser had paid the price agreed; and even if this was paid to the supplier via the card issuer, under a guarantee with the merchant acquirer, this cannot change the taxable amount.
The case will return to the UK First-Tier Tax Tribunal for the ruling to be applied, but McMahon said the CJEU’s decision was ‘very clear’, making it likely the tribunal will conclude that the income was subject to VAT and HMRC was correct to reject Dixons" claim.
‘The CJEU could not have been clearer in its dicta. This decision should therefore provide certainty to businesses who accept cards as a means of payment. If businesses have claims stood over behind Dixons, it is likely that HMRC will now reject these or invite withdrawal of appeals.’