A new judgment from the Court of Justice of the European Union (CJEU) could have significant VAT implications for providers of payment collection services and those that use their services such as charities, healthcare providers and businesses that accept payments by instalments.

In the case of DPAS Ltd – a dental plan administration services company that collected dental plan payments via direct debit –  the CJEU has again determined that except in the narrowest of circumstances, services relating to payment transfers fall outside the VAT exemption for financial services. The decision aligns with the Advocate General’s opinion in the matter and follows a raft of earlier judgments, the wider message being that the scope for exempting services of this type from VAT is extremely limited, perhaps only to regulated financial services providers themselves.

In short, it has become clear that even if a service is essential to completing the transfer of money between two parties, it will not qualify for exemption unless it actually involves effecting the transfer. This precluded the services which were in question in DPAS, which essentially involved DPAS conveying instructions to financial institutions to effect the transfer.

The widespread outsourcing of specific elements of payment services has resulted in a range of providers offering payment transfer and payment support services and so the implications of the decision are potentially extensive.

Justine McInnes, VAT Director at RSM said “Due to the fact that the business types which they serve often have limited VAT recovery, any requirement for a payment service provider to add VAT to its services is likely to fall as an unexpected and unwelcome additional cost to these businesses. As for the service providers themselves, there is no indication as yet as to whether HMRC will pursue payment service providers for underpaid VAT in relation to historical periods, but experience suggests that this will be the case.”

“The question which then arises is whether any additional VAT cost – both for historical periods and prospective periods, can be passed on to customers.  From a legal perspective, the answer to this question will depend mainly on the terms of the contractual documentation between the parties and whether these entitle the service provider to pass on the VAT cost. Ultimately, some service providers may decide that commercially it is preferable for them to absorb the VAT cost themselves. Alternatively, they may be forced to do so as a result of the terms of their contractual documentation. Either way, this will result in a corresponding reduction in the profitability of their service.”

“In summary, this decision is likely to have both an immediate and a longer-term VAT cost impact and may result in payment service outsourcing being less financially attractive going forward.”