European Court of Justice rules on VAT treatment Payment Services

With the rise of eCommerce, online platforms and FinTech the use of payment services or payment service providers, has substantially increased. As most (online) platforms, eCommerce  platforms or applications and FinTech companies offer payment solutions, activities relating to payments and money transfers are increasingly carried out by regular businesses instead of banks or traditional financial institutions. An everyday example would be the online marketplace or platform which also facilitates (the collection of) the payment of the goods and/ or services that are sold through their platform to consumers. In practice, it has not always been fully clear if, and to what extent such payment solutions are VAT exempt.

However, the recent judgement of the European Court of Justice (“ECJ”) on July 25^th in the DPAS case has provided some more clarification on the scope of the EU VAT exemption for payment services (i.e. art. 135,1.d EU VAT Directive). The ECJ ruled that payment services consisting of the mere instruction to banks to transfer money from one bank account to another bank account (e.g. on the basis of a debit mandate) as such do not qualify as a VAT exempt payment service.

As a result of the judgement of the ECJ in the DPAS case, that the mere instruction to a bank to transfer money from one bank account to another bank account (e.g. on the basis of a debit mandate) thus qualifies as a VAT taxable payment service, consumers and/ or businesses will face additional costs or lower margins.

DPAS

DPAS offered so called dental plans, allowing patients to spread the costs of dental periodically during the year. In light of these dental plans, DPAS obtained a so called “debit mandate” from patients which allowed DPAS to request the patient’s bank to transfer the agreed periodical payment to DPAS’s own bank account. DPAS would subsequently request its own bank to transfer the funds to the dentists minus its own commission for its services. As the UK Tax Authorities (HMRC) were unclear on whether this payment services rendered by DPAS qualified as VAT exempt payment services, a prejudicial question was referred to the ECJ whether an instruction to make a payment via a direct debit mandate is sufficient to constitute a VAT exempt payment transaction.

In short, the ECJ ruled that that DPAS’s services do not qualify for the VAT exemption for payments services, on the basis that the services provided by DPAS as such are administrative in nature and do not affect the payment transfer itself. As DPAS only instructs the banks at hand, and doesn’t carry out any transfers itself, the ECJ found that DPAS’s activities were merely a step prior to the transactions concerning payments and transfers. As a result, the fee’s charged by DPAS for its payment services are taxable with VAT.

Furthermore, the ECJ emphasized that DPAS did not have any legal responsibilities for the failure or cancelation of the payments by the patients. 

Additional Comments Atlas Indirect Tax Team

In our view the ECJ judgement in the DPAS case on the scope of the VAT exemption for payments and money transfers is consistent with its approach in the Bookit case (C-607/14) and the NEC case (C-130/15) earlier in 2016. In these cases it ruled that payment services that consist of the transmission of a demand to transfer money, cannot be regarded as (being part of) the actual execution of the transfer of money and therefore such transmission does not fulfil the essential functions of a transfer of money. Such services are thus taxable with VAT.

Although the ECJ appears to be clear in its approach on when the VAT exemption for payment services apply, the DPAS judgement in our view does not necessarily provide for an overall answer for all types of payment services that can be used. 

In this regard we note that the DPAS judgement follows from a specific and factual prejudicial question i.e. the VAT consequences of using a debit mandate. In addition, the ECJ appears to leave room to apply the VAT exemption for payment services, in the event of a liability for failed or cancelled payments. Furthermore, in practice payment services can also be based on the use of the VAT exemption for collecting debts. The latter exemption has not been addressed in the underlying case. 

Finally, we note that despite the aforementioned judgements of the ECJ, within the EU some local tax authorities, or even local VAT regulations, still have their own take on the VAT exemption for payment services and money transfers. For instance, in the UK there are rulings from lower courts that apparently still leave room to apply the VAT exemption for payment services and money transfers.

We therefore recommend for businesses that offer payment services, either incorporated in their business lines (e,g. online platform), or as a business line itself (e.g. FinTech or PSP) to review and consider the implications of the DPAS judgment.