UK Government Wins Key VAT Case Against Debenhams

by Robert Lee, Tax-News.com, London

20 July 2005

Retailers in the United Kingdom face having to pay back millions of pounds in value added tax after the government won a landmark case against the chain store Debenhams.

The Court of Appeal's decision overturns an earlier ruling in favour of Debenhams after the Treasury accused the company of evading VAT by setting up a system whereby debit and credit customers only paid VAT on 97.5% of the full price.

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. Other large retail groups, such as Tesco, Marks and Spencer, Boots, WH Smith and J. Sainsbury have all run similar schemes.

The Treasury has suggested that this represents an attempt to avoid paying VAT on the full price, but Debenhams argues that the revenues from card-handling services should be exempt from VAT because they are financial services, and therefore exempt under European law.

According to Lord Justice Mance, a subsidiary company, Debenhams Card Handling Services, was set up with the sole intent of avoiding tax.

It is expected that Debenhams will appeal the decision, although the firm is said to be considering its position.

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