UK VAT Authority Loses Outsourced Services Case

by Jason Gorringe, Tax-News.com, London

12 June 2001

The UK's Appeal Court yesterday finally threw out an appeal by Customs and Excise against a court ruling which overturned a 1999 budget measure. In the judgement last July, the Court of Appeal ruled that outsourced financial processing services were VAT-exempt. The court refused leave to appeal to the House of Lords, but Customs & Excise obtained permission from the House of Lords judicial committee to appeal anyway, and it is this final stage that has now been lost.

The Court of Appeal said Customs & Excise had contravened European law by trying to impose VAT on credit card services provided by FDR, an outsourced processing company, to banks.

According to Ernst & Young, which has been advising FDR, the Lords decision means savings of about £25m annually for FDR alone; they estimate that up to £600m of provisions held against the tax by credit card processing companies like FDR can now be released. Customs had agreed a stand-off with such companies whereby it was assessing, but not collecting, the tax.

In other cases, the tax had actually been collected; and will now have to be refunded.

Advisers were yesterday saying that the 1999 budget provisions were now redundant; but Customs & Excise said it still believed the 1999 wording reflected European law, but would have to 'consider' the ruling. Government hates to admit it's wrong!

Ernst & Young said that the ruling applies to all the activities that go into the outsourced services, from manufacturing the plastic cards to handing statements and redirects, and that the lack of clarity over taxation had been reining back the outsourced credit card services industry.

Recommended