Retailers risk wrath of HMRC

Retailers who set up card-handling schemes as part of a VAT avoidance
strategy are set to be on the receiving end of an unprecedented crackdown.

The schemes are being targeted by HMRC’s anti-avoidance unit, and it’s likely
retailers will have to pay more in tax than they avoided as part of an attempt
to punish those who enter into them.

When retailers were offered card handling schemes to avoid VAT on
transactions several years ago, they must have thought the idea was a clever
wheeze. Not only that, but given that all of their competitors were using them,
it would have been commercially dangerous not to follow suit.

The decision of 70 or so retailers to set up card handling subsidiaries,
which cream off 2.5% of any purchase and thus avoid VAT, looks less clever now
as HMRC seeks to prove a point by punishing those who used them with extra VAT

The move leaves many in a quandary. A test case on the issue involving
Debenhams is currently going through the courts, but Marks & Spencer and
Sainsbury’s are also thought to have, or have had, schemes.

In a letter earlier this year, Chris Tailby, head of HMRC’s anti-avoidance
unit, outlined the revenue’s attitude to such behaviour and made it clear that
he would be going after the supply of services from the retailer to its
card-handling subsidiary.

Subsidiaries will have used retailers’ premises, card machines and staff,
amongst other things, to supply their ‘card-handling services’. So HMRC
contends, how have those services the retailer provides been priced? Were they
at arm’s length prices?

If not, one indirect tax adviser says, the bill for the extra VAT chargeable
on those prices could be as much as that which was avoided – thought to be
around £300m for all 70 retailers involved .

Tailby makes a similar point: ‘When one looks at the support which the
retailer has to give the handler by way of staff, accounting, IT, we would
expect the value to be significant.’

HMRC also says that it intends to challenge the exemption from VAT of the
card handlers, which is the very basis of the scheme. ‘I must say I find this
approach attractive. Because if we do ultimately go after the handlers and the
supply is found to be standard-rated, it will result in more VAT being paid to
HMRC than has been avoided under the scheme. Where there are zero-rated supplies
to the customer, the facilitation fee will be wholly taxable, thus we get VAT on
the zero-rated supplies.’

So all those baby clothes and exempt essentials, of which 2.5% of the cost
went to the handler, will attract VAT. Would HMRC dare, many may be asking,
threaten retailers during what has been a tough time in any case?

They certainly would, according to those familiar with the issue, in that
they are hoping to prove that tortuous avoidance schemes they regard as abusive
will invite not only legal challenge, but also punitive penalties.

‘It is starting to dawn on retailers that the VAT in issue could amount to
more than they have avoided. And we have had letters from retailers asking us to
give undertakings that we will not collect more than was avoided in the first
place. Those letters have had a short answer, as I am sure you can imagine,’
Tailby wrote.

He added that, with the recent merger of Revenue and Customs, there might
also be scope for looking at how the schemes stack up from a corporation tax
point of view, so it may not end there.

Ernst & Young, the accountancy firm that devised Debenhams’ scheme, as
well as M&S, Debenhams and Sainsbury’s all declined to comment.

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