Supplies Of Goods To Customers Fraudulently Using A Bank Card Are Subject To VAT Where The Card Provider Pays For Those Goods

Summary and implications

The European Court (CJEU) has ruled in the case of Dixons Retail plc v Commissioners (C-494/12) that a supplier must account for output VAT on payments received from third party card providers for supplies made to customers who bought goods using a fraudulent card.

It should be noted that this decision:

turned on the specific facts of the case - in particular the fact that Dixons had agreements with card issuers under which the issuers agreed to pay Dixons for all transactions made with their cards, provided Dixons followed set procedures; means retailers will not be able to recover any output VAT already accounted for in respect of payments received from card providers for goods bought using fraudulent cards; and does not come as a big surprise given the decisions in Loyalty Management UK and Redrow Group plc which held that payment by a third party to a supplier for goods or services supplied to a customer could amount to "third party consideration" for VAT purposes. Background

Dixons, the electrical retailer, accepts payment by credit or debit card for supplies of its goods under agreements with certain card providers. Under these contracts, Dixons agrees to accept payment by use of the issuer's cards and to comply with specific authorisation procedures. In return the issuer pays Dixons for the completed transactions (less a service charge).

This case relates to payments that Dixons received from the card providers for goods paid for with cards used in a fraudulent manner. Dixons originally accounted for the VAT received in relation to these supplies made to fraudulent customers, but later claimed repayment of that output VAT. HMRC rejected the claim. Dixons then appealed to the First-tier Tribunal.

Dixons argued it was entitled to a refund of the output VAT accounted for on the basis that there was no taxable supply of goods to the fraudulent customer because the customer did not offer genuine consideration. The transaction was equivalent to theft. Dixons also argued that the payments received from the card issuers did not constitute consideration for the supplies to the fraudulent customers, but were instead compensation under the contracts with the issuers and therefore outside the scope of VAT.

The First-tier Tribunal decided to stay the proceedings and refer various questions to the CJEU for a preliminary ruling.

Legal considerations

Under EU law, supplies of goods or services effected for consideration...