Fraudulent credit card transactions – possibility of reclaim?
Sean McGinness, VAT Manager
The UK Tax Tribunal has referred an appeal by Dixons against HMRC to the European Court of Justice (CJEU). The issue is whether VAT should be accounted for on credit card transactions which are found to be fraudulent, for example where a credit card has been cloned, or obtained dishonestly by the person using it.
HMRC argues that there has been a supply at the point the card is accepted for payment.
Dixons argues that the payment, which is ultimately made from the card provider, is compensation akin to that received under an insurance policy and therefore not consideration for a supply. This is on the basis that the retailer pays a fee to the card provider which contractually covers the retailer should they perform the necessary checks and the transaction still turns out to be fraudulent. The case is not considering the VAT treatment of charge backs (i.e. where a retailer has to pay money to the card company as it has not met its obligations when accepting the card).
What does this mean for retailers?
If Dixons are successful with their argument, the value of the cash retained by the retailer in these circumstances is not consideration for a supply and therefore the VAT accounted for as part of Daily Gross Takings (DGT) should be reduced.
As the Tax Tribunal has referred the issue to the CJEU they must feel there is merit in the arguments being presented. It is therefore recommended that any business which accepts credit cards at the point of sale considers what the value of the compensation received from the card provider is over the past four years to establish if it is worthwhile making a protective claim.
Additionally, it presents an opportunity for retailers to consider their retail schemes and whether they are maximising the DGT adjustments that they could be making as we often see businesses where standard or even bespoke adjustments agreed with HMRC in the past are not being made, resulting in too much output tax being accounted for.
Leisure industry
Whilst the CJEU referral is fundamentally about the supply of goods to customers, the case also raises the question of whether suppliers in the leisure industry who have supplied services eg cinemas, ticket agencies, and it is later discovered that the transaction is fraudulent, also have an opportunity to make a claim. Again, it may be worthwhile considering whether a protective claim could be submitted.
It should be noted that it is likely that the issue could take a few years to resolve. However, by making a protective claim now businesses are ensuring that they can maximise the claim for the past as it is only possible to go back four years from the current date for historic claims, and if businesses wait until the decision is made, older periods will then be out of time.
If you would like to discuss this further please contact Sean McGinness on 01962 735 350.
VAT Rate Shopping – Is this Avoidance?
Julie Park, Managing Director
There has been much coverage in the mainstream press and TV recently on the subject of perceived tax avoidance. The focus more recently has been on the amount of corporate tax and VAT businesses pay. The articles often demonstrated a lack of understanding about the fact that major multinationals have complex supply chains that include third party manufacturers, distributors etc, each taking a profit. Trying to make a connection between retail sales values in a jurisdiction such as the UK and the amount of corporation tax paid is therefore nonsensical.
A similar lack of understanding has arisen with VAT rate shopping. A number of B2C online businesses have been named for properly establishing in Luxemburg or France to take advantage of a reduced rate for certain sales of electronic services and infraction proceedings are looming against the Member States. Arguably this is an illogical approach given there is still such variance between standard rates within the EU – no level playing field regardless of how much tinkering is done around the edges.
The fact remains that businesses are free to properly establish themselves where they see fit within the EU and further afield. The suggestion that businesses should account for VAT where their customers are located is not unreasonable, but until the VAT system taxes transactions in this way as opposed to the place of establishment, it is a little naive to think businesses will risk being uncompetitive if operating online globally. VAT is arguably a cost etailers need to manage, and if they are able to reduce this by a few percentage points and still operate the business effectively in an overseas location, it is not difficult to see why they would do this.
The mechanics by which VAT is accounted for must be fit for purpose. Even if this is eventually achieved within the 27 EU Member States with a ‘one stop shop’, the EU is only a relatively small part of a much wider world, with VAT type systems pretty much everywhere but the US. Businesses still need to consider the question of how to account for VAT in the other 80+ countries worldwide where they may be trading, and they face an insurmountable VAT burden . For example, an online hotel bedbank businesses selling hotel rooms in every country worldwide potentially faces the following:
- VAT rules saying the supply is taxed where the hotel is located, regardless of where the business is etablished
- Multiple VAT registration liabilities – if it operates with a different legal entity selling global hotel rooms to consumers in its jurisdiction, the corporate group as a whole could technically be faced with 80+ VAT registrations worldwide per entity
- If the group has say 5 entities to cover broad global regions, 400 VAT registrations
- Each of the 400 registrations filing up to 12 returns per annum.
In practice it is unlikely such a scenario would arise but it demonstrates perfectly the fact that current VAT rules worldwide have not kept pace in a suitable way for a B2C online business. In summary they currently face being non competitive if not in a Member State with a low VAT rate, being non compliant depending on what they sell, or faced with a significant compliance burden. Until this changes, B2C businesses will surely continue to treat VAT as a P&L hit and seek to manage it in the most effective way possible, meaning they have a competitive business that contributes tax revenues.
First published in Tax Journal on Friday 2nd November 2012. If you would any further advice or assistance on this or any other VAT issue, please contact Julie Park on 01962 735350.
A positive side-effect to the VAT rate rise for retailers
We had a question from a client which raised an interesting point this week, one that was actually obvisous but not one we have come across before. It concerns the levels of commission stores operating the retail exports scheme will receive after the change of vat rate.
We are all aware that retailers will need to review prices post 4 January 2011 to reflect that a higher proportion of the ticket price will need to be paid over in VAT. However, there can be benefits. For example, some retailers operate a Retail Export Scheme. This is where the VAT is refunded to a traveller when they leave the country with goods purchased in the UK. Normally the customer is not refunded all of the VAT; the refund is less an administration fee. The fact that the administration charge is usually based on a percentage of the VAT refunded means that a rise in VAT charged will lead to more commission.
One other point; the commission itself is zero rated, which means that the VAT increase will not affect it at all!