Customs and Excise fights EU ruling on outsourcing tax

HM Customs and Excise is appealing against a tribunal decision which found payment card management, processing and clearing services from Financial Data Resources (FDR) are not liable for value added tax (VAT).

In its March Budget, the UK government introduced the VAT Finance Order 1999. The reforms scrapped VAT relief for finance companies which outsource consumer product management systems.

But a UK tribunal found that under European Union (EU) laws, FDR should not have to pay a tax on such services - a ruling that finance house Ernst & Young believes can be applied to all companies affected by the Finance Order.

Ernst &Young is lobbying the UK government and Customs and Excise on behalf of users and companies such as FDR, warning that scrapping tax relief could cost industry £100m per annum.

Commenting on the appeal, a spokesman for Ernst & Young used the example of a bank that outsources its credit card payment and billing systems. "If it's going to cost a bank 17.5 per cent [the rate of VAT] on top of the cost of the contract, they are going to start thinking it would be better to do it in-house," he said. "That could end up putting companies like FDR out of business. It could also mean from the customer's point of view, that annual charges would go up or there will be a charge for every transaction to cover administrative costs."

Customs and Excise has previously said it thinks its interpretation of EU law is valid. The VAT Finance Order 1999 is part of the government's efforts to create a fairer tax system.

The appeal now looks likely to go to the European Court of Justice - a process that could take as long as two years. "In that time the VAT finance order will continue and the industry will suffer," the Ernst & Young spokesman said.