On May 26, 2016 the Court of Justice of the European Union (CJEU) rendered judgment in two cases concerning the VAT treatment of card handling services. The CJEU ruled that the processing of debit and credit card payments, as dealt with in these cases, does not qualify for the VAT exemption for payment transactions.
1. The cases
In both UK cases, the taxable persons, Bookit Limited (“Bookit”) and the National Exhibition Center Limited (‘NEC’), process debit and credit card payments in respect of the sale of cinema tickets (Bookit) and in respect of the sale of tickets to events (NEC). For the provision of these services they receive a (separate) fee. The services provided by Bookit and NEC consist of requesting and obtaining the card details of consumers, transmitting this data to the merchant acquirer, which transmits the data to the issuing bank (card issuer), and the receipt of the authorization code ,via the merchant acquirer, whereupon Bookit and NEC can complete the sales transactions. At the end of the day a settlement file is retransmitted to the merchant acquirer, listing all the sales actually effected in the course of the day. Unlike NEC, Bookit uses the payment gateway of a third party to send the card details and the settlement files to the merchant acquirer.
The key question posed to the CJEU is whether the services performed by Bookit and NEC qualify as “transactions concerning payments and transfers”, which are VAT-exempt.
2. Analysis of CJEU judgment
Although the CJEU makes the reservation that the referring courts must review whether the services provided have to be regarded as ancillary services and as such possibly follow the VAT treatment of the main service, the CJEU does answer the questions posed by the referring courts. The CJEU reiterated its earlier case law, in which it ruled that a transfer is a transaction consisting in the execution of an order for the transfer of a sum of money from one bank account to another. Such a transaction typically entails a change in the legal and financial relationship between parties. The CJEU also reiterated that the VAT exemption may also apply in the case of transactions that do not actually qualify as a transfer, provided these transactions form a distinct whole that fulfills the specific, essential functions of such transfers.
Although the services of Bookit and NEC are essential for carrying out the payment or transfer, the CJEU ruled that the services are not VAT exempt. According to the CJEU, the processing of debit and credit card payments by Bookit and NEC in effect constitutes the exchange of information between a service provider and its merchant acquirer. For that reason the CJEU ruled that Bookit and NEC do not participate in a specific and essential manner in the legal and financial changes that comprise a transfer of the ownership of the funds concerned.
In the NEC case, a preliminary ruling was also requested on what the relevant principles are for applying the exemption for ‘debt collection services’.. The CJEU did not however deal with this question, given that it is has now been established that the services of the Bookit and NEC do not fall under the scope of the provision on the VAT exemption for payments.
3. Potential implications
In dealing with these cases, the CJEU has created more clarity about the scope of the VAT exemption for payments, more in particular with regard to the scope of the expression “specific and essential functions of transfers”. Based on the conclusions reached by the CJEU in these cases, it appears that this should be narrowly interpreted. The CJEU thereby provides further guidance on the VAT treatment of the various services in a chain of payment. The CJEU appears to be moving toward an interpretation that more elements within a chain of payment should be treated as VAT taxed. Depending on, for example, the VAT entitlement of the purchasers of the services involved, this could trigger a VAT benefit or VAT disadvantage. However, the actual activities comprising the provision of services within a chain of payment, as well as the manner in which they are contracted, remain crucial for determining the correct VAT treatment.
Despite the fact that in these cases the CJEU did not rule nor did it need to rule on the VAT treatment of the provision of services by a merchant acquirer, the CJEU appears to regard such services as VAT exempt, as the CJEU speaks about the specific and essential functions of the transfer of funds between the issuing bank and the merchant acquirer and subsequently from the merchant acquirer to the taxable persons. Such an assumption could affect the VAT treatment of the Dutch payment transactions.
Given that in the NEC case the CJEU did not further elaborate on the debt collection exception to the VAT exemption for payments, the Dutch practice on this will not change.
Both with regard to current methods of payment and the development of new methods of payment, it is important to assess the impact of the CJEU judgments.
The tax advisors of Meijburg & Co’s Indirect Tax Financial Services Group would be pleased to help you identify the potential implications of these judgments. Please feel free to contact one of them or your regular contact at Meijburg & Co.