Debenhams Refused Leave To Appeal In VAT Case

by Robert Lee, Tax-News.com, London

24 November 2005

Dozens of UK retailers may be forced to pay hundreds of millions of pounds in back value added tax bills after the House of Lords refused Debenhams leave to appeal in a case involving the use of credit and debit cards.

Debenhams was one of the first retailers in the United Kingdom to introduce a system which split payments from customers using credit or debit cards between the money for the goods and a 2.5% card-handling fee. By doing so, the retailer charges VAT on 97.5% of the price of the goods rather than on its full price.

In an earlier hearing in the Court of Appeal, Lord Justice Mance ruled that a subsidiary company, Debenhams Card Handling Services, was set up with the sole intent of avoiding tax. However, Debenhams argued that the revenues from card-handling services should be exempt from VAT because they are financial services, and therefore exempt under European law.

Other large retail groups, such as Tesco, Marks and Spencer, Boots, WH Smith and J. Sainsbury have all used similar schemes, and it is believed that about 90 retailers utilised this system, allowing them to avoid £550 million in tax.

HM Customs and Revenue has reportedly stated that it will pursue other retailers who used this type of scheme for outstanding value added tax.

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