In a claim brought by Dixon, the UK First-tier Tribunal has referred questions to the Court of Justice of the European Union (CJEU) relating to the fraudulent use of credit or debit cards.
The scenario that will be considered by the CJEU is that a retailer:
- has accounted for VAT on the sale of goods but it is subsequently discovered that the customer has presented a card fraudulently without the authority of the issuing bank;
- has received the relevant payment from the card operator; and
- has not been obliged to repay the payments once the fraud is discovered.
In essence, the questions referred concern whether there was a supply by the retailer to the fraudster, and if so, whether the money received by the retailer was consideration in respect of that supply. Dixon claims the card operator payment was not consideration and is claiming refunds of output tax paid.
In our view, the arguments are evenly balanced. On the one hand, the main question in the case, namely "third party consideration," has been the subject of a recent flurry of cases including Baxi and LMUK which seem to favour the UK tax authority's wide and objective interpretation. However, on the other hand, the court may find it difficult to view a fraudulent transaction as a "supply" - someone has essentially stolen some goods - the cost of which falls on all of us in higher credit card fees. It is equally difficult to view the credit company as paying for such a supply "on behalf" of the fraudster.
Impact of the case
The CJEU will be asked to consider the meaning of basic concepts of VAT - supply and consideration - which will be of interest to VAT practitioners.
However, businesses will be more interested in the potential to make claims for recovering VAT. This does not just apply to UK businesses, but to businesses operating throughout the EU as well.
The advisers leading on this case believe there is a lot of money at stake for retailers (of course they would!). However, credit/debit card fraud (even with the "chip and pin" technology) is a major cost to business, although the cost is often hidden behind interchange and other fees. This may well be a matter which retail and banking sector businesses should add to the agenda for discussion with their advisers.
Even if the case is successful, many questions will remain…
The reaction to a successful outcome for Dixon could well differ between member states:
- There may be further legal questions to address, such as the application of unjust enrichment rules in different member states as to who should receive the benefit of a claim - the retailer, credit card company or card holder? Retailers will point out the fees they pay to their banks which "insure" against the risk of fraud so that it is reasonable for them to retain any VAT repayment.
- There will also be evidential questions to address in identifying relevant fraudulent transactions. This will presumably require cooperation between the credit card providers and retailers to work out the amount of fraudulent credit card transactions. This may favour the large retailers that are more easily able to persuade their bank to cooperate with them.
Retailers should consider mirroring Dixon's claim to reduce the daily gross takings or taxable amount on which they account for VAT. Retailers will need to find the balance between making a claim as soon as possible (to stop periods falling out of time) whilst avoiding expensive evidential exercises until the court clarifies the law and tax authorities indicate the level of evidence that they require.
Banks will also be interested to consider whether they may be able to reduce the cost of fraud in the future as well as whether they are entitled to share in any benefit obtained by retailers in the past.