This article was published in Tax Journal on 26 March 2021.
The payments market continues to evolve in response to technological developments and changes in consumer behaviour. ‘Buy now, pay later’ offerings have soared in use, and while consumers may think it’s just another payments service, the terms entered into between the parties suggest otherwise, leading to potential VAT issues. Online platforms have also begun offering virtual currencies. It remains to be confirmed whether they are in currencies in name only, but this and both platform/user and user/user transactions also require further consideration for VAT purposes. This, against a backdrop of the UK and EU reviews of the financial services exemption, suggests further technical change will follow.
Covid-19 has accelerated the trend for consumers to increasingly digitise how they live, work and play. In response, web and app-based platforms, fintechs, traditional and high-growth retailers are all developing new ways to attract and retain consumer spending in this area through ‘buy now, pay later’ and virtual currency offerings. In view of disputes over how payment services are treated for VAT purposes, this article considers how these new market offerings fit into the wider VAT picture.
Over the last 25 years, a number of cases have come before the UK and European courts seeking to clarify the nature of services that should fall under the exemption for payment transfer services (Directive 2006/112/EC , article 135(1)(d)). Sparekassernes Datacenter (Case C-2/95) (SDC) is the primary reference point. It established that to qualify for the exemption:
In 2009, More recent CJEU cases have built upon these principles and tended to limit the scope of the VAT exemption. Nordea Pankki Suomi Oyj (Case C-350/10) established that a service being essential to the completion of the payment transfer did not fall within the exemption if it was limited to the technical aspects of the transfer.
Bookit Ltd (Case C-607/14) determined that the exemption cannot apply if:
DPAS Ltd (Case C-5/17) held that a person that is not responsible for the ‘transfer or the materialisation in the relevant bank accounts ... but asks the relevant financial institutions to carry out those transfers’ cannot view their supply as exempt.
Bookit held that a ‘payment processor’ responsible for transmitting authorisation codes, preparing and sending settlement files, and receiving related payments and transferring them to merchants does not constitute a specific and essential role in changing the legal and financial situation. Bookit’s service was no more than an administrative service and it was therefore taxable for VAT purposes.
This interpretation is important in the context of the payments ecosystem. The rise of electronic payments, either in person through card/contactless payments or online, has resulted in significant changes to the payments chain. For instance, a retail card payment transaction involves a minimum of five persons: the customer; the merchant; the merchant acquirer (the payment service provider); the customer’s bank; and the card scheme operator (e.g. VISA/MasterCard). However, there may be additional businesses operating within this chain, such as independent sales organisations, acquiring banks and e-money issuers. The increased number of operators within the chain is partly due to the emergence of fintechs, which are disrupting the market for payment services, but which lack the necessary regulatory and market permissions to operate completely autonomously and therefore need to partner with others.
Given the increasing number of participants within the chain, the interpretation applied in Bookit has created uncertainty over whether all parties in the chain can apply the exemption.
When transactions are completed in milliseconds, but routed through a number of different parties, it can become difficult to determine whether each party has effected a legal and financial change, although they hold a legal and financial responsibility to at least one other party in the chain.
In addition, new commercial offerings have been created, particularly in the retail market, which add a new layer of complexity to the meaning of payments for VAT purposes.
The concept of enabling customers to ‘buy now, pay later’ (BNPL) is nothing new, but its application in the market is changing. While retail credit offerings previously focused BNPL largely on high value items (such as furniture, white goods and electronics), fintech operators are now broadening BNPL offerings into high volume markets (particularly clothing and other fast-moving consumer products). This is often advertised as an alternative payment mechanism to the typical merchant acquirer/payment offerings (such as debit/ credit card payment, bank transfer or e-wallet services). The customer has visibility only of the fact that their purchase is being made under deferred payment terms. But underpinning this transaction are separate agreements between the BNPL provider and both the merchant and customer. Where no direct payment is made by the customer for the BNPL services, there are three agreements – between the merchant and customer, merchant and BNPL provider, and customer and BNPL provider – but only two payments (between the merchant and BNPL provider, and customer and merchant) need be considered from a VAT perspective.
In this respect, the CJEU has affirmed, in Primback Ltd (Case C-34/99) and Chausseres Bally (Case C-18/92), that the value of the supply made by the merchant to the customer remains unchanged, regardless of how the third party is remunerated.
Neither case specifically confirms the VAT nature of the service provided by the third party to the merchant, although both cases reference that a supply exists and infer that the VAT exemption concerning credit may apply, most notably in Bally (at para 10):
‘The documents before the Court also show that the second transaction described above is exempt from VAT in Belgium pursuant to Article 13B(d) of the Sixth Directive, which allows Member States to exempt inter alia certain transactions relating to the granting and negotiation of credit and the management of credit by the person granting it, the negotiation of or any dealings in credit guarantees or any other security or guarantee.’
To date, litigation has not fully considered this presumption. However, the unique manner in which the new style BNPL offerings have been developed has begun to call this position into question, particularly where BNPL arrangements exist without the presence of any credit agreement (interest-bearing or otherwise).
Potential alternative analyses of the nature of the services could therefore include:
At this stage, the analyses are posed as questions, rather than answers. This is on the basis that, in theory, each could apply, depending upon the economic reality and contractual arrangements entered into by the parties involved.
Ultimately, BNPL has had a marked impact on the retail payments environment, even to the extent that the Financial Conduct Authority has begun to take an interest and is likely to impose regulation on the sector. It is established case law that the regulatory position does not pre-determine the corresponding VAT analysis; however, the impact of any regulatory direction will need to be considered carefully as it could narrow the field of potential scenarios that may arise for VAT.
Online communities – via social networks, gaming platforms or content sharing sites – are increasingly forming part of many people’s daily lives. To encourage engagement and loyalty to platforms, some platforms are introducing their own virtual currencies which can be bought to access products and services, either directly from the platform provider or from other users. These virtual currencies can often also be gifted or traded between users.
What are the VAT issues surrounding the issue, exchange and redemption of such virtual currencies? To answer that question, it is critical to define the virtual currency itself.
Hedqvist (Case C-264/14) established that transactions concerning virtual currencies, where they represent a means of payment, should be treated as equivalent to transactions concerning normal, fiat currencies. However, in order to be recognised as such, it is expected that the virtual currency could be used as an independent store of value and exchangeable for other stores of value, including other currencies, goods or services. Whether this test is met depends on the terms through which (and with whom) the virtual currency can be transacted. In this respect, the exchange value of the virtual currency is often unilaterally pre-determined by the platform to its own advantage, reducing the feasibility of the virtual currency as an independent store of value.
If the virtual currency is not a means of payment in its own right, alternative analyses should be considered, such as whether it should be treated as a voucher (potentially multi-purpose if there is capacity for the user to transfer the virtual currency to other users globally before any ultimate redemption), or whether purchasing the virtual currency is simply purchasing additional/enhanced content provided by the platform.
Furthermore, regardless of the treatment applied to the virtual currency itself, platforms should also take steps to understand and consider what in-platform transactions may be occurring between users, and whether it has an obligation to ensure that any charges to VAT that arise on such transactions are appropriately declared. It is no longer feasible to assume that users solely engage in online platforms merely for their own enjoyment: individuals are increasingly buildings careers and businesses on the back of their proficiency and reach within individual streaming, gaming and social platforms. As such, if platforms enable individual users to ‘purchase’ in platform content from other users with the virtual content, and for these content providers to cash out these virtual currency earnings, certain users may operate with such regularity and scale as to be treated as in-business for VAT purposes.
The platform may therefore be required to ensure that such transactions are being appropriately recorded for VAT purposes, and it should consider the rules concerning online marketplaces and electronically supplied services.
The UK and EU have separately announced reviews of the VAT treatment of financial services, with both referencing the rise of fintech business models as factor in needing to revisit the scope and applicability of the relevant VAT exemptions. Change is also already underway in relation to online marketplaces for goods, so it may be expected that services will follow soon after. Finally, regulatory reform is also likely in the UK in respect of BNPL following the Woolard Review, and the ongoing government review on fintech.
With both legislative and regulatory change on the horizon, tax professionals should work with retail, fintech and online platform operators to understand how they are adapting to changing consumer patterns, diversifying revenue streams and applying traditional VAT principles to these innovative business models.