VAT move ‘illegal’

Ernst & Young is preparing for a long legal battle against Customs & Excise after a VAT tribunal cast doubt on the legality of a Budget measure to impose VAT on outsourcing by banks.

The tribunal ruled last week that the services provided by FDR – which provides payment card, processing and clearing services to banks – were exempt from VAT under European law.

The decision throws into doubt a move in last month’s Budget to deprive banks and other financial services companies of VAT relief on outsourcing.

It is feared this could cost the sector more than #120m a year.

Ernst & Young, which represented FDR, is calling on the measure to be scrapped. Customs, however, is digging its heels in. It said it would continue to levy VAT while it decided whether or not to appeal. A decision could come later this week and experts are predicting the issue could end up in the House of Lords, or even the European courts.

Peter Jenkins, head of Ernst & Young’s indirect tax practice, said: ‘We are delighted that the decision is based on European law and as such takes precedence over any domestic law. This will be very welcome to other financial service companies which outsource services relating to credit, payment, loans, hire-purchase agreements and ISAs.

‘This case clearly shows that the Budget measure, misguidedly introduced without consultation, is seriously flawed and incompatible with European law and the case law of the European Court of Justice. Customs should withdraw it with immediate effect.’

Jenkins also warned that the extra costs imposed by the government measure could be passed on to consumers.

Tony Geeson, FDR’s finance director, said the decision was excellent news.

The tribunal quoted the European Community’s sixth directive and a European Court of Justice case, Sparekassernes Datacenter, as reasons for its decision.

The case is one of a growing number in which UK tax law is found to contravene EC directives and European Court of Justice decisions. Tax experts predict that most member states will be forced to modify their tax systems as the court develops more case law.

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