UK Tribunal looks at whether retailer entitled to refund of VAT for goods paid for by fraudulent use of credit cards – is there a supply?

In Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 the UK Tax Tribunal has referred to the ECJ the question of whether a retailer is required to account for VAT on the sales of goods paid for by the fraudulent use of credit cards where the retailer has not been required to repay the payments received from the issuing banks.

This case raises the interesting question of whether the retailers made a “supply” of goods to the customers, notwithstanding that the goods were obtained by fraudulent means.  The context of the dispute has a similarity with the recent decision of the High Court in Qantas as in both cases the taxpayer received a payment in circumstances where the “intended transaction” does not proceed but is entitled to retain the funds received. If a supply is nevertheless made, VAT/GST is payable.  If a supply is not made, the taxpayer receives a financial benefit with no VAT/GST consequences.

While the Tribunal referred the question to the ECJ, it is interesting to consider the arguments put by both parties.

The taxpayer made the following submissions:

  • the presence of a legal relationship requiring reciprocal performance is a fundamental criterion to the identification of a “supply of goods”
  • the existence of a supply will primarily be determined by the terms of the agreement between the retailer and the cardholder
  • it has already been held that obtaining goods by illegal means (theft) does not equate to a transfer of a right to dispose of tangible property as owner – there is no legitimate distinction to be drawn between goods obtained illegally by theft and those obtained by credit card fraud
  • any payment received by the retailer only forms part of the “taxable amount” to the extent that there is a direct link between the goods provided and the consideration received.  In the circumstances of a fraudulent card transaction there is no reciprocal assumption of any obligation by the fraudster in connection with the payment for the goods and thus no direct link between any sum received by the retailer and the release of the goods
  • it is crucial to identify what the payment is “for”

The Commissioner made the following submissions:

  • there is plainly a supply of goods by the retailer to a customer where the customer fraudulently uses a credit card which he knew he was not authorised to use – in the course of the transaction the relevant goods were handed over to the fraudulent customer by the retailer in the same way a they would have been to any other customer
  • the transactions are not identical to the theft of goods – the latter is a unilateral undertaking by the thief, with nothing agreed and no relationship between the thief and the owner
  • the state of mind, motive or dishonest intent of a customer is not relevant to whether there is a supply – an objective approach is required.  A transaction is not prevented from being a supply because it involved some fraud and is therefore unlawful
  • the retailer received payment of the price of the goods from the third party bank – the payment was directly linked to the making of the supply of the goods to the customer – this payment constituted third party consideration for the supply of the goods

While the UK VAT system is different to here, in particular the UK requires a “direct link” between supply and consideration whereas here the link is the broader “in connection with”.  Nevertheless, the views of the ECJ on this issue may well have relevance in the Australian context.

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