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The VAT treatment of money transfers still giving rise to case law!

Let’s talk about SDC

SDC is one of those rare European VAT cases that nearly all VAT practitioners will know of even if they have nothing to do with financial services. It was handed down in 1997 and it concerned the scope of the VAT exemption for “transactions concerning … transfers [or] payments.”   It set the basic test for securing exemption for payment services.

I am not going to go in to all of the cases that have followed SDC. That would be an unnervingly long and probably quite a dull article even for those of us who love our exemptions! However the recent AG’s opinion in Cardpoint GmbH reminds us that the issue rumbles on and is becoming more important as the payment industry grows.

Payment processing has moved more away from traditional financial institutions and into the realms of Fintech firms that in many ways are more tech than fin. As the inexorable march to electronic payments continues we need to consider where the jurisprudence is at and what this may mean for both the traditional providers and the disruptors.

The best starting point is SDC. SDC was basically an outsourcer to the German banks. The supply chain was a little convoluted but essentially an SDC recorded transactions in customer accounts. In other words it would debit or credit account holder’s accounts as instructed by the bank.

The Court set out the key feature of a money transfer for the purposes of the exemption as involving “a change in the legal and financial relationship existing between the person giving the order and the recipient and between those parties and their respective banks”.

Therefore in order to be exempt your service has to do two things

  • It must have the effect of transferring funds;
  • It must change the legal and financial relationship between the parties to the underlying transaction

If your services met these two functional tests it does not matter that you are not a financial institution or that you provide the service as a sub-contractor to the bank.

The UK detour!

In the 22 years since SDC the Courts have swung back and forward on the scope of the exemption. Much of this jurisprudence has been driven from the UK and, after several favourable decisions of the UK Courts, it was generally accepted that you could benefit from the exemption if you provided a binding instruction to another party to transfer funds. In the Bookit case the taxpayer provided the issuer banks with payment details including authorisation codes from the card schemes and as a result the courts accepted  Bookit’s services had the effect of changing the legal and financial relationship between the parties.

Following Bookit most on-line payment processors, who were effectively instructing financial institutions to transfer monies were comfortable that their services were exempt from VAT.

The ECJ bites back!

However when the UK cases ended up in the ECJ it became clear that the UK had taken too liberal a view of when the exemption applied. Bookit, NEC and Axa Denplan all went to the ECJ protesting that a card handling or payment processing fee was exempt under SDC principles. All left defeated. In Bookit and NEC the court found that the taxpayer was simply relaying the data necessary for the issuing bank or merchant acquirer to effect the transfer and did not in itself bring about any change in the legal and financial position of the parties.

The narrowness of the exemption was reinforced in DPAS. DPAS basically provides a dental plan whereby you pay monthly amounts to cover dental treatment that may be needed. It made a charge to the insured for “managing and administering dental plan payments.” DPAS was responsible for sending the direct debit instructions to the patients’ bank to transfer payment to DPAS’s client account. It then instructed its bank to transfer payment to the dentist after retaining it’s fee. In DPAS the was even more explicit that the exemption turned on actually effecting the changes in the accounts between the transferor and transferee and their respective banks. The Court confirmed that the exemption will apply to a service only where it has the effect of making the legal and financial changes which are characteristic of the transfer of a sum of money” and that on this test DPAS does not qualify for exemption as it “does not itself carry out the transfers or the materialisation in the relevant bank accounts of the sums of money.. but asks the relevant financial institutions to carry out those transfers.”

The Court was of the view that although DPAS instituted the direct debits and although the money passed through DPAS accounts the service it provided was only preparatory. It allowed the bank to make the transfer by passing the details of the transfer. However it did not functionally effect the transfer. It was only the bank by recording the transfer that moved the funds.

DPAS has re-iterated how difficult it will be for any entity that facilitates but doesn’t effect a transfer to secure exemption. This was confirmed once more in the AG’s opinion in Cardpoint GmbH released in May.


Cardpoint operated ATM’s. When a person used the ATM the software would send a request to the card issuer with the details of the proposed withdrawal. If the card issuer approved the withdrawal the machine would dispense the cash to the cardholder. At the end of each day Cardpoint would send a data file of all the transactions that happened that day both to the bank that owned the ATM and the German Federal Bank that was responsible for inter-bank settlement.

The AG held that Cardpoint’s services were taxable and reinforced how difficult it is to come within the exemption. Basically, like DPAS and Bookit and NEC, the AG thought that Cardpoint merely passed on information to the bank who effected the actual transfer. The instruction was given by the card holder, the banks transferred the money. Cardpoint relayed the essential information but relaying information is not exempt. Again the AG went back to those things that seem necessary for exemption

  • Directly debit or credit accounts concerned;
  • Act by means of accounting entries;
  • Instruct such debit or credit.

How strict is the exemption and where does it leave FinTech providers?

It appears it’s pretty strict. Generally only the financial institutions who hold the accounts (or their outsourcers) will actually debit or credit the account. Instructing the debit or credit seems to be restricted to the payee. Even relaying all the information to the bank and telling the bank to effect the payment seems to be classified as relaying the instruction and not instructing per se.  It feels like a contrived analysis of “instructing” but nonetheless appears to be where the Court has ended up.

Interestingly the Court seems to have left a chink of light where the exemption may be available if you have liability for the payment if it does not transfer correctly. Some transfer providers will take on liability for charge backs and failed payments and these providers could still have a claim for exemption should they wish to argue for it.

It is notable that the cases that have gone forward haven’t involved the type of app enabled payment processing that is becoming so prevalent in the payments industry. Where these processors act for retailers they will not need exemption. However for b2c providers, or where the main clients are financial institutions, seeking exemption will be a crucial issue. The doors to exemption aren’t closed but the gap is narrowing.

Exemption is about what you do – the question is do you do enough?  

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