Budget 2018 and the Finance Bill, as initiated on 19 October 2017, contained a small number of VAT-related measures. The principal measures are summarised below:
eBrief 100/17 provides a link to a new section of Revenue’s Tax and Duty Manual entitled “VAT treatment of Payment Services”. The section contains Revenue’s interpretation of the scope of the VAT exemption for services of negotiating or dealing in payments and transfers, commonly referred to as “payment processing services”. This guidance follows a number of recent Court of Justice of the European Union (“CJEU”) judgments regarding the scope and application of this exemption.
The guidance sets out the conditions for VAT exemption to apply to payment processing services, which are largely drawn from the decided case-law. In addition, the guidance clarifies that the status of the supplier and the means by which the service is supplied (i.e. electronically or manually) are not determinative of the VAT treatment of the service.
The guidance includes several examples to illustrate these principles. It confirms that VAT exemption applies to a bank’s service of transferring funds from one party’s account to another, as well the services of a merchant acquirer bank or financial institution that processes debit or credit card transactions on behalf of merchants. The key point is that these services effect the payment and bring about a change in the legal and financial position of the payer and payee. However, services involving the transfer of information regarding payments using a secure messaging system would generally not be exempt from VAT as that service does not actually effect the payment. In addition, services involving the provision of infrastructure and technology to enable a merchant to transmit credit card information to a merchant acquirer, but do of themselves effect the payment, would equally not qualify for VAT exempt.
The guidance is welcome in terms of clarifying the boundaries between services which effect a payment and those which provide the technology or infrastructure to provide information. However, with the continuing growth of financial technology (“fintech”) and new payment methods, the distinction between VAT exempt and taxable services will need to be closely monitored.
The CJEU’s ruling in Mercedes-Benz Financial Services (MBFS) (C-624/15) is relevant to providers of asset finance products, such as leases, hire purchase (“HP”) and in particular personal contract plans (“PCP”).
This case concerned a PCP car finance product offered by MBFS where the customer was required to pay an initial deposit and monthly instalments over the term of the agreement. The contract contained a provision which provided that, at the end of the term, the customer had the option to make a balloon payment (equal to approximately 40% of the initial value of the vehicle) in order to purchase the vehicle outright or alternatively, hand back the vehicle.
Under EU VAT law, an agreement for the hire of an asset which provides that “in the normal course of events”, ownership of the asset is to pass to the customer at the latest upon payment of the final instalment, is deemed to be an upfront supply of goods. Therefore, VAT on such supplies is due upfront when the asset is first handed over to the customer. This is the treatment that normally applies to hire purchase agreements. By contrast, an agreement for hire that does not provide that ownership is to pass “in the normal course of events” (e.g. an operating or finance lease) is regarded as a supply of a service and VAT applies as the rental amounts fall due.
The CJEU was asked to consider the meaning of “in the normal course of events” in order to determine whether the MBFS’ agreement should be considered to be a supply of goods (similar to a hire purchase agreement) or a supply of services (similar to a lease). It was held that in order for the agreement to be categorised as a supply of goods, two conditions must be satisfied. First, there must be a clause expressly relating to the transfer of ownership of the goods from the lessor to the lessee. This can include an option to purchase the agreement. Second, it must be clear from the terms of the contract that the ownership of the goods is intended to be acquired automatically by the lessee if performance of the contract proceeds normally, over the full term of the contract. For example, this would be the case where the exercise of the option to purchase under the contract is the only economically rational choice for the lessee. It was left up to the national court to apply these conditions to MBFS, but on the basis that the optional payment under the MBFS was a significant proportion of the value of the vehicle, the CJEU’s guidance would suggest that it should be regarded as the supply of a service.
Asset finance providers should carefully consider the VAT treatment of their supplies in light of the judgment as the designation of the contract as a supply of goods or services will have significant implications for the timing and amount of VAT due on such contracts.
This article originally appeared in the December 2017 edition of Accountancy Ireland and is reproduced here with their kind permission.