Taxation – Swords are drawn in VAT row

Customs & Excise has denied that its climbdown from a legal battle with credit card company FDR over imposing tax on its services to banks will lead to a flood of litigation.

FDR’s tax adviser, Ernst & Young, confirmed last week that Customs had backpedalled on its threat to charge VAT on the company’s services – a move which would have contravened a VAT tribunal decision last month.

Tax partner Peter Jenkins said: ‘The decision to allow FDR the fruits of its victory in the tribunal is very welcome, but legally speaking, Customs had no real alternative.’

The tribunal decision, made on the basis that taxing FDR’s services contravened EU law, cast doubt on a Budget measure that deprives banks and other financial services companies of VAT relief on outsourcing.

E&Y is now urging the government to scrap the measure which many fear could cost the financial services sector more than £120m a year.

Jenkins said: ‘It is quite clear that this measure will be equally ineffective in reversing other cases in Customs’ sights – CSMA, Continuum and Lloyds TSB – which were also decided on the basis of EC law.’

But Customs said it was appealing against the decision which, it added, did not affect the Budget measure which was made after consultation with EC countries. Customs also said the measure was fully compatible with EC laws.

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