01 April 1999

BELYING CHANCELLOR Brown’s statement that last month’s Budget would not widen the scope of VAT, a significant change - omitted from his Parliamentary speech - could affect the profitability of many credit card issuers and lead to higher interest rates or additional charges for consumers.

The VAT changes, detailed in a Statutory Instrument entitled VAT (finance) 1999/595, were quietly lodged in the Commons Library during the Chancellor’s address to the House. However, this did not escape the eagle eye of Marc Welby, a tax partner at Ernst & Young. According to Mr Welby, the notice redefines outsourcing contracts for the administration of credit cards, debit cards and other credit management tasks. Hitherto these were VAT-exempt. He estimates that the covert move could generate additional VAT revenues of over £100m annually, and is likely to lead to legal challenges by banks and card management companies.

Contracts to the value of billions of pounds are affected. Worst hit would be major operators such as Bank of Scotland and First Data Resource, who handle outsourced card business from the clearing banks, retail chains, football clubs and specialist affinity groups, such as Saga. If, despite legal challenges, the extra VAT is levied, it will almost certainly be passed on to the end user in the form of higher interest or charges on card usage.