VAT and payment processing services

The ECJ has held that card processing services provided to enable a customer to pay for a service by debit or credit card cannot be regarded as an exempt supply of a transaction concerning payments or transfers: Bookit Ltd v HMRC and HMRC v National Exhibition Centre Ltd (ECJ, 26 May 2016). The services in these cases amounted to no more than technical services of communicating information and no aspect of that service was specific to and essential for the function of effecting payments or transfers.

Moreover, the European Court of Justice (ECJ) recommended that the domestic courts should additional critically review whether the supplies in these cases were, in economic and commercial reality and notwithstanding the contractual arrangements, no more than ancillary to the main supplies of tickets.

Background

In 2006, the Court of Appeal held that the services of Bookit, a card handling company, in dealing with a customer's advance booking of cinema seats fell within the exemption from VAT for transactions concerning payments or transfers in article 13B(d)(3) of the Sixth VAT Directive. The fact that Bookit obtained all necessary security information from both the customer and the customer's card issuer and transmitted them to the bank effecting payment was sufficient to qualify for exemption according to the Court.

Fast forward to 2014 and the First Tier Tribunal (FTT) decided that it was necessary to refer the question of the correct treatment of Bookit’s services to the ECJ: Bookit Ltd v HMRC [2014] UKFTT 856. In a rerun of the earlier 2006 case, the FTT held that questions as to the factual correctness of the earlier decision and, in addition, subsequent decisions of the ECJ on the scope of the exemption, made it uncertain whether the 2006 Court of Appeal decision remained correct. A further reference on similar facts was made by the Upper Tribunal in 2015 in the National Exhibition Centre case.

Credit card booking services

Bookit was a wholly owned subsidiary of Odeon (but not VAT grouped) and appointed by Odeon as its agent to deal with credit card bookings. Bookit charged each customer a transaction fee on credit card bookings and claimed that such fee was exempt from VAT as a credit card handling fee.

In 2006, the Court of Appeal held that these charges fell within the exemption for transactions concerning payments. However, part of the factual analysis of that decision was that Bookit was instrumental in providing the relevant authorisation codes for card payments to the merchant acquirer (ie the bank responsible for processing card payments on behalf of a retailer). It was accepted before the FTT that was not the case and that the merchant acquirer obtained the authorisation codes directly from card issuers and not from Bookit. Bookit still transmitted the various authorisation codes and other card information to the merchant acquirers as an end of day process, however.

HMRC sought to argue that Bookit’s service was not one that fell within the exemption for transactions concerning payments since either (a) the service was simply one of providing information, not effecting the transfer of funds and/or (b) the arrangements were abusive. The FTT rejected the argument that the arrangements were abusive, but decided to refer the question whether the fee charged was correctly described as a “transaction concerning payments and transfers” to the ECJ.

The NEC case concerned a “booking fee” levied by the NEC for tickets. NEC owns and operates the National Exhibition Centre and typically hires the venue to third part promoters to put on events. NEC would sell tickets for such events through its own box office on behalf of promoters, both in person and via a ticket booking hotline and online site. For this, NEC would charge promoters a facility fee. In addition, tickets sold would typically have a “booking fee” added to them which was payable by the customer purchasing the ticket.

Between 1999 and 2002, customers paying in person were not charged a booking fee unless they paid by credit card. Credit or debit card payments made for phone or online bookings would be subjected to a booking fee, however. NEC treated the booking fee as exempt from VAT as a “transaction concerning payments” under Article 13B(d)(3). HMRC disagreed and assessed the booking fee to VAT. In 2013, the FTT upheld NEC’s appeal against HMRC’s assessment. The FTT considered that the booking fee was correctly described as a “card processing fee” and as such exempt from VAT. The Upper Tribunal agreed that the payment was correctly described as for a “card processing fee” but referred the question whether such a fee was exempt from VAT to the ECJ.

Ancillary service?

Although the issue was not referred to it, the ECJ sought to emphasise by way of preliminary observations that the domestic courts must first critically analyse whether the supply by Bookit/NEC to a person buying a ticket using a card actually constitutes a service distinct from and independent of the sale of the ticket. If not, then the supply should attract the same VAT treatment as the ticket.

The court was at pains to emphasise that its 2010 judgment in Everything Everywhere makes clear that additional charges invoiced by a provider of services to its customers for the facility to pay by a credit card do not constitute consideration for a separate service. Making available to customers the facility to pay by card does not constitute for those customers an end in itself. In any event, the receipt of payment and handling of money are intrinsic to any supply provided for a consideration, including the provision of a method of payment. The fact that a separate charge is levied for such an “alleged financial service” is not decisive to the question whether there is only a single “economic transaction”.

Referring to its decision in Newey, the court stressed that it remains a matter for the domestic courts to determine whether the “material put before it discloses, having regard to the economic and commercial reality of the transactions concerned, the characteristics of a single transaction, the contractual structure of that transaction notwithstanding”.

The Everything Everywhere case was one that was referred to in both Bookit and especially in the NEC case. In particular, the judge in the NEC case considered and rejected its relevance, noting that: “there is an essential difference between that case and the circumstances of NEC’s case. In Everything Everywhere, the critical finding was that there was no distinct and independent payment handling service because that service was merely ancillary to the principal supply of telecommunication services. By contrast, as the FTT found, and which is not the subject of appeal, the service for which the booking fee is paid is distinct and independent from the supply of the tickets, as that supply is made by the promoter and not by NEC. There is thus no question of the supply made by NEC in return for the booking fee being regarded as ancillary to the supply of tickets. It is simply the nature of the supply for which the booking fee is the consideration that is in issue”.

It is noteworthy, therefore, that the ECJ seemed willing to countenance the application of the single supply rules in these cases, despite the clear difference in identity between the supplier of the main supply and the supplier of the supposed ancillary supply. That is something that UK courts have not been willing to do and it remains to be seen whether these preliminary observations affect that attitude in any way.

Looking at the judgment in the round, the ECJ did seem largely unwilling to countenance the supply of card processing as an entirely separate supply, suggesting that even if it was not ancillary to the ticket purchase itself, it might be seen as ancillary to another principal service provided by Bookit or NEC, such as the ability to purchase in advance or the ability to make a remote reservation.

Exempt supply of payment processing

Moving onto the question whether the card processing service (assuming it was a separate service) fell within the exemption for “transactions concerning payments and transfers” (now in Article 135 of the Principal VAT Directive), the court stressed that, as exceptions to the general charging of VAT, those exemptions should be interpreted strictly. In particular, the court noted that a “transfer is a is a transaction consisting in the execution of an order for the transfer of a sum of money from one bank account to another. It is characterised in particular by the fact that it involves a change in the legal and financial situation existing, on the one hand, between the person giving the order and the recipient and, on the other, between those parties and their respective banks”.

Since a transfer is merely a means of transmitting funds, it is the “functional aspects” which are decisive in determining whether a transaction amounts to a “transfer”. However, the wording of the exemption does not preclude it being, in principle, broken down into separate services with those services attracting exemption provided that “they form a distinct whole, fulfilling in effect the specific, essential functions of such transfers”, though it is necessary to distinguish such services from services which amount to a “mere physical or technical service”. Ultimately, “the test that makes it possible to distinguish a transaction that has the effect of transferring funds and bringing about changes in the legal and financial situation… which falls within the scope of the exemption concerned, from a transaction that does not have such effects and therefore, is outside its scope, is whether the transaction under consideration causes the actual or potential transfer of ownership of the funds concerned, or fulfils in effect the specific, essential functions of such a transfer”.

Turning to the particular services provided by Bookit and NEC, the ECJ rejected the contention that they fell within the exemption.

Firstly, the court stated that the mere fact that the service was essential for completing an exempt transaction did not warrant the conclusion that it is itself exempt.

Secondly, the obtaining of card data for the cardholder, the transmission of such data to the merchant acquirer, the receipt of authorisation codes and retransmission of an end of day settlement file including the authorisation codes cannot individually or taken together be regarded as performing a specific and essential function of a payment or transfer transaction. Neither NEC nor Bookit effects any transfers and neither does it instruct such a debit or payment, since it is the purchaser who by using their card to make the purchase makes that instruction. Nothing done by Bookit or NEC could be regarded as a specific function that is essential to the transfer of ownership of funds.

Thirdly, the court noted that neither Bookit nor NEC assumed “any liability as regards the achievement of the changes in legal and financial situation that are characteristic of the existence of an exempted transaction of transfer or payment”.

Taking this analysis into account, the provider of a card handling service such as that provided by NEC or Bookit plays “no specific and essential part in achieving the changes in the legal and financial situation that are the result of a transfer of ownership of the funds concerned” and can be regarded as doing no more than providing technical and administrative assistance for the obtaining of information and the communication of that information.

Finally, the ECJ noted that the services in these cases cannot by their nature be regarded as financial services falling within the exemptions in Article 135. Indeed, if these services were exempt then “any trader that takes steps necessary for the receipt of payment by debit or credit card is undertaking a financial transaction”, which would render that concept meaningless. Moreover, the purpose of the exemptions is to alleviate the difficulties of determining the application of VAT to financial services and avoid increases in the cost of consumer credit, whereas there are no difficulties in applying VAT to the services of the card handling services undertaken by Bookit and NEC.

Comment

The ECJ has, unlike the UK courts, largely steered clear of a lengthy technical and contractual analysis of the functions performed by Bookit and NEC in the payment process. The essence of the service provided by Bookit and NEC was to obtain and transmit information. Nothing either did effected the transfers of funds and nothing it did could be regarded as fulfilling any specific and essential function in the payment process. The fact that the payment would not have happened but for the involvement of Bookit and NEC was not sufficient.

In reality, the question whether the service forms a distinct whole and performs as specific and essential part of the exempt service is a notoriously difficult concept to apply - and one might argue that it provides a certain degree of latitude for the courts to adopt a subjective approach to the problem. However, it seems pretty clear that the ECJ was at pains to restrict the scope of the exemption for “payments and transfers”, concerned that if services such as those provided by Bookit and NEC qualified, then it would lead to an overly wide application of this exemption.

Finally, it is noteworthy that the court went out of its way to combine references to its earlier case law on payment services (Everything Everywhere), the scope of single supplies and the need to apply economic and commercial reality. The lower courts in Bookit and NEC had, of course, already rejected HMRC’s arguments based on abuse and earlier suggestions from the ECJ have indicated that arrangements must be “wholly artificial” to reject the contractual basis of the transaction in favour of the “economic and commercial reality”. It will, therefore, be interesting to see what, if anything, the UK courts make of this particular suggestion that perhaps in applying the single supply rule, the economic and commercial reality should play something of a wider role.

Update

For the decision of the Upper Tribunal to refer further questions to the ECJ concerning the scope of the VAT exemption for transactions concerning payments and transfers in the context of payment services provided to payors, see AXA Denplan and VAT exempt payment services revisited.