On November 6 2017, the Irish Revenue Commissioners (Revenue) issued new guidance on the VAT treatment of payment services. The guidance was issued in the wake of a series of cases decided by the Court of Justice of the European Union (CJEU) on the VAT treatment of such services including Everything Everywhere (C-276/09), AXA UK (C-175/09), Bookit Ltd (C-607/14) and National Exhibition Centre Ltd (C-130/15).
Under Irish law, a VAT exemption is available for payment services. Recently with the emergence of new business models it can be difficult in some cases to distinguish between a financial service (which would be exempt) and a technology service (which, in Revenue's view should be taxable). This is evidenced by the series of cases heard by the CJEU. Revenue in their guidance have sought to clarify that distinction.
First, Revenue note that transactions are defined according to the purpose and nature of the service and not by reference to the person supplying or receiving the service. Accordingly, the supplier of a payment service does not necessarily need to be a regulated financial institution in order to avail of the exemption.
Similarly, the means by which the service is supplied (i.e. whether it is supplied electronically or manually) is not decisive when considering the application of the exemption.
In its guidance, Revenue has included the following principles that should be considered when determining whether a service qualifies for the exemption:
- The exemption is only available in respect of transactions that form a distinct whole, fulfilling in effect the specific, essential functions of such transfers;
- An exempted service must be distinguished from the supply of a mere physical or technical service;
- A transfer is a transaction consisting in the execution of an order for the transfer of a sum of money from one bank account to another;
- A transfer is characterised by the fact that it involves a change in the legal and financial relationship existing, on the one hand, between the person giving the order and the recipient and, on the other, between those parties and their respective banks; and in some cases, between those banks;
- The transaction that produced the changes is solely the transfer of funds between accounts, irrespective of its cause; and
- The mere fact that a service is essential for completing an exempt transaction does not warrant the conclusion that the service is exempt.
Helpfully, Revenue has also included four examples of services and an analysis of whether or not each service falls within the scope of the exemption:
- Example 1 – Standard banking services: the first and most straightforward example is where a customer instructs his bank to transfer funds to another party. This service is clearly exempt – the actions of the bank will directly result in a change to the financial and legal relationship between the customer and the transferee.
- Example 2 – Information messaging services: the second example relates to the provision of a secure messaging service to permit banks to transfer financial information to one another for international money transfers. Although this service is essential to complete the transfer of funds, this change to the financial and legal relationship between the parties is affected by transactions through the correspondent account between the banks. Accordingly, the supply does not qualify for the exemption.
- Example 3 – Merchant acquiring services: merchant acquirers process debit and credit card instructions on behalf of merchants. This involves the merchant acquirer sending sales information from the merchant to the various customer banks. The banks charge the customers and send funds to the merchant acquirers who pass the funds to the respective merchants. As the services of the merchant acquirer directly result in a change to the financial and legal relationship between the customer and the bank, the service provided is exempt.
- Example 4 – Financial infrastructure services: the fourth example builds on the third and relates to cases where a supplier acts as an intermediary between a merchant and a merchant acquirer. The intermediary provides infrastructure (or technology) to the merchant to enable it to access merchant acquirer services through the intermediary. In Revenue's view, the services of the intermediary do not qualify for the exemption on the basis that the change in the financial and legal relationships is being effected at the level of the merchant acquirer. The services provided by the intermediary only facilitate the transfer of relevant information to the merchant acquirer to enable them to process the transaction.
The application of the payment services exemption remains complicated and requires careful consideration on a case by case basis.
The guidance issued by Revenue is a welcome development given the proliferation of new business models. It provides greater clarity as regards Revenue's view of the application of the exemption. As more cases are heard by the CJEU, it is possible that the guidance issued by Revenue will be further refined as necessary.
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