On 28 August 2019, the First-tier Tribunal found in American Express Services Europe v HMRC1 that the taxpayer was making exempt payment services to a company located outside the EU and could therefore recover VAT. HMRC argued that the taxpayer was making these exempt supplies to a company established in the EU, so that it did not have input tax recovery. This case highlights the importance of correctly determining the recipient of a supply of services, which can effectively be done by looking at the contractual arrangements, and considering whether these are in line with the commercial and economic reality.


American Express Services Europe Limited (AESEL) is a card issuer, "an entity that issues American Express cards to persons (card members) who use them as a form a payment for goods and services, subject to terms and conditions of use." In that role, AESEL made supplies of payment services. There was no dispute that AESEL supplied the payment services to another member of the Amex Group but the parties disagreed about which one of two other members of the Amex Group received the services. AESEL believed that it supplied the payment services to American Express Travel Related Services Company, Inc. (TRSCo), which is established outside the EU so that it could claim input tax.

On the other hand, HMRC's view was that AESEL made exempt supplies of payment services to American Express Payment Services Limited (AEPSL) which was established in the EU, so that no input tax recovery was possible.

The judgment of the FTT

In support of their line of arguments, HMRC relied primarily on the phrase "on behalf of the acquirer" in the card issuer agreement to argue that AESEL should be regarded as not making supplies of payment services to TRSCo but as making them to AEPSL. The FTT did not agree with such viewpoint, and found that article 7.01 of the card issuer agreement described the fulfilment of a service that TRSCo provided to AEPSL, i.e., the service of processing and presenting charges. The FTT therefore rejected the notion that TRSCo was a mere conduit for the provision of the payment services by AESEL to AEPSL.

The FTT then had to decide whether the contractual position corresponded to the commercial and economic reality. The FTT found that the disparity in levels of consideration obtained by AESEL and TRSCo did not necessarily mean that the commercial reality departed from the contractual position. In a similar vein, the FTT did not accept that in order to provide a payment service to TRSCo, AESEL must make a payment to TRSCo. The settlement of amounts due, by way of making accounting entries to change the inter-company balances, was treated by the FTT as transactions concerning payments and transfers for the purposes of Article 135(1)(d) of the VAT Directive, in line with CJEU judgments.

In practice

Interestingly, unlike determining who the supplier is, there is no guidance in the VAT Directive on how to determine who the actual recipient of the supply is, which is quite surprising given that it is a fundamental aspect to the correct functioning of the VAT system. This case reiterates the requirement to have a two-stage approach, which starts by looking at the contractual position, and then consider whether it aligns with the commercial and economic reality. This judgment highlights the importance of having well drafted contracts, and the necessity to gather enough evidence from the business to support the contractual position.