The next time you shop in the likes of Sainsbury’s, Safeway, Tesco, Marks & Spencer, Debenhams or Allders and pay with a credit or debit card, take a look at the fine print on the receipt they ask you to sign: you may find a cursory statement in the small print indicating that an amount between 1.8% and 2.5% of your final bill is payable to a card-handling subsidiary of the retailer (eg, Tesco Merchant Services Ltd).
In effect, you are entering into two separate contracts: one with the retailer for the sale of goods, the other with the special purpose subsidiary to process your payment. You may not see the statement if you pay by cash – but either way it won’t affect how much you pay.
Here’s how the scheme works. Take as an example a retail sale worth £100 of goods that attract standard rate VAT. Of that, typically £2.50 will be channelled via a subsidiary as a card handling charge, which is VAT-exempt. Hence the retailer effectively sells the goods at £97.50, the VAT component of which is £14.52, rather than the £14.89 it would otherwise have been. Hence, of the £100 collected from the customer, the retailer can hand over 37 pence less to Customs & Excise than would have been the case before introducing the scheme. For a retailer with retail sales of £1bn, the savings add up to more than £3.7m.
Several household names set up card-handling subsidiaries in 2000, acting on advice from Big Five firms and at least three leading tax counsels. But Jim Wilkinson, senior manager of the indirect taxes retail group at PwC, one of the Big Five accountancy firms that have advised retailers on this structure, says that the estimated £50m savings may be the thin end of the wedge. ‘The current cost to my mind must be in excess of £50m a year… it could be considerably more than that,’ he says.
With so much at stake it is not surprising that Customs & Excise is investigating. If this structure continues to spread throughout the retail industry, it could miss out on hundreds of millions of pounds of revenue. A spokesperson for C&E says the matter is in hand. ‘While we can’t comment on any of the retailers that are being looked into, there is current litigation that will probably go to VAT tribunal,’ she said. ‘There is no timescale set yet.’
PwC’s Wilkinson says C&E will argue that, as retailers are offering no discount to customers who pay cash, they are creating an artificial transaction: a ruling in 2001 by a VAT tribunal involving Halifax plc stated that if a transaction is an artificial construct the vatman can ignore it. But the tribunal’s decision has proved inconclusive as the High Court has ordered another hearing of the evidence.
Wilkinson is sceptical that C&E has a case, especially on the issue of providing no discounts for cash transactions. ‘That type of argument cannot stand up. Retailers expect to either get 97.5% or 100% of the value of the goods from customers depending on how they pay. There are underlying costs in a cash transaction that would restrict a retailer from being able to offer discounts,’ he says.
According to an industry spokesperson there are 50-60 retailers now following the lead of Debenhams and Marks & Spencer, the first companies to employ this structure.But the retailers themselves have issued mixed responses to our enquiries. Safeway sent Financial Director a brief statement saying that while accepting cards as payment was ‘a convenience to customers’, the new structure simply -brings significant cost savings to the company’.
But Peter Forbes, manager of financial operations for M&S UK retail, was more forthcoming.
‘You need to understand the motivation from our perspective. It is about making sure that M&S is properly set up terms of VAT. It’s about making sure that we pay VAT on appropriate sales,’ says Forbes.
‘We have set up a wholly-owned subsidiary company that is exclusively dealing with the handling of plastic transactions. This not only deals with the routing of the call to the bank at point of sale, but it also manages the settlement of all those transactions. The company provides a financial service therefore that is VAT exempt,’ he argues.
Forbes brushes Customs & Excise’s investigations aside as a minor inconvenience. ‘Well, we would be astonished if they [C&E] didn’t argue, wouldn’t we?’ he says. ‘We have a fantastic professional relationship with HM Customs & Excise and we briefed them that we intended to do this. One does not ask C&E whether you can do things. We told them ‘this is our research and this is what we are doing’. There is a very grown-up relationship between us.’
As Safeway does, Marks & Spencer argues that offering the customer value-added and convenient service is key. And Forbes is keen to dispel notions that millions of pounds of VAT savings are the main issue at stake.
‘We had planned to instigate the structure from the moment we started taking credit cards [November 2000]. The main reason why we didn’t take credit cards much earlier than we did was the significant cost to us of taking card payments. We are now providing a much richer service for our customers. As you will understand this is how we are preparing ourselves,’ he says.