Debenhams loses landmark VAT case

An earlier ruling in Debenhams' favour was overturned

UK retailers will have to pay hundreds of millions of pounds in value added tax (VAT) after the government won a landmark court case against Debenhams.

London's Court of Appeal ruled that the High Street chain will have to pay VAT on the handling fee paid by credit and debit card customers.

The court overturned an earlier ruling that said Debenhams had to pay VAT on only 97.5% of the cost of items sold.

The ruling is expected to boost UK tax coffers by an extra £300m a year.

Customs and Excise contended that the 2.5% handling fee charged by Debenhams and another 70 or so retailers should not be exempt from VAT.

Firms including Marks & Spencer, Boots, WH Smith, Tesco and J Sainsbury have run schemes similar to the one targeted at Debenhams.

Card charges

The court's decision was welcomed by a UK Treasury official, Reuters news agency reported.

The official was quoted as saying the system had given no benefit to consumers, who had been paying the same price for goods regardless of the scheme.

"It was giving the large chains and department stores operating these schemes an unfair advantage over small retail firms."

Debenhams had won a ruling in a lower court after it argued that the 2.5% card charge should escape VAT because under EU law banking fees were tax exempt.

The Treasury claimed that if the schemes were taken up by smaller retailers then billions of pounds could be lost in tax revenues.

Most ordinary goods in the UK are subject to VAT at 17.5%.