Paypal charges and VAT accounting

[JimJ]

Hi all,
There is not much info on the Paypal website about VAT apart from this:

Question : Am I charged VAT for my transactions in PayPal?


Answer : [FONT=Arial, Helvetica, sans-serif !important]Payments sent and received through your PayPal account are not subject to Value Added Tax (VAT). [/FONT]

So i was wandering if people apply "Reverse Charge VAT" rules to their Paypal transaction charges?

Or do you just treat them as exempt and not bother with reverse charging?

Thanks for any input

 

[johndon68]

PayPal charges are outside of the scope of VAT (just like bank charges) so they have no affect on VAT at all.

John

 

[JimJ]

Thanks John.
I was wandering why other gateways like Worldpay do charge VAT on transactions, and Paypal do not? Any obvious reason for that?

Thanks for you help

 

[talkinpeace]

Worldpay do not charge the person making the payment anything.
What you pay the supplier receives.
If they are VAT registered, there is VAT in the money you send to them.
Later on, Worldpay will bill the recipient of the money (like the ebay seller with paypal) a VAT irrelevant bank charge.

 

[David Griffiths]

PayPal charges are outside of the scope of VAT (just like bank charges) so they have no affect on VAT at all.

John

Later on, Worldpay will bill the recipient of the money (like the ebay seller with paypal) a VAT irrelevant bank charge.

I think that the position with services like PayPal and Worldpay might actually be chargeable to standard rated VAT following a recent ECJ judgement. The ruling in the case was that collection of money from customers fell under debt collection services which are chargeable at standard rate. The term debt collection can refer to collection of any money due from customers, not merely the chasing and collection of overdue debt.


See here

 

[johndon68]

Interesting link you've provided David. As I'm not an accountant, would this still hold true given that PayPal are not a UK registered business?

John

 

[David Griffiths]

If it applies, it would mean that the Paypal charges come under the reverse charge provisions

 

[UKSBD]

Interesting link you've provided David. As I'm not an accountant, would this still hold true given that PayPal are not a UK registered business?

John

Good question.
What is going to happen with PayPal now?
They don't even issue VAT invoices for the transactions but charge a fee per transaction.

Will they now have to start issuing VAT invoices for every single transaction, is it a service that is reverse charged, and as they don't send proper VAT invoices how can we reverse charge?

Will this be backdated?
If so, this is going to cost someone £millions of pounds (if not £billions)

Does anyone appreciate the implications of the ruling?

 

[UKSBD]

Just to add a bit more.

As an awful lot of small businesses use PayPal, Wordpay etc.
If this ruling applies to PayPal I assume it means PayPal should have been charging VAT to non VAT registered businesses?

If they didn't, can PayPal charge them all retrospectively?
(maybe a good time to withdrawl all funds so they don't take it automatically)

With Vat registered businesses, can they backdate and send new VAT invoices correctly filled out with their VAT number, ec directive for why reverse charge applies etc.?

It's only really a paperwork hassle for VAT registered people, but non VAT registered it could be a ticking timebomb.

 

[David Richards]

Interesting link you've provided David. As I'm not an accountant, would this still hold true given that PayPal are not a UK registered business?

As it's an ECJ ruling, it affects how VAT authorities will interpret and apply the rules across the EC.

If it means that PayPal services are now VATable at the standard rate, then the overall effect on their VAT-registered customers will be nil. Instead of being exempt, they'll account for (and reclaim) the VAT due via the Reverse Charge Mechanism. PayPal Europe is based in Luxembourg, but the effect would be the same even if they were based outside the EC - as Reverse CHarge VAT also applies on B2B swrvices from non-EC suppliers.

There will be an additional knock-on effect though; as Reverse Charge services count towards your turnover for VAT registration purposes - whereas I don't believe that exempt services do. So some businesses using PayPal who are very close to the VAT registration threshold may find that they now need to register for VAT.

The effect on PayPal's non-business customers will be different. PayPal will have to charge Luxembourg VAT on its services. I know the distance selling rules don't apply to services, but there may be a similar rule for services which obliges them to register for VAT in other EC countries too.

 

[Kevin Hall]

If it means that PayPal services are now VATable at the standard rate, ...

Agreed, the situation is still condition on Paypal deciding with their VAT Officer whether this ruling applies to them. It certainly looks like they might be caught. But if they can demonstrate (somehow) that they are acting in a more bank-like capacity, they might be able to retain the exemption.

I know the distance selling rules don't apply to services, but there may be a similar rule for services which obliges them to register for VAT in other EC countries too.

The new General rule states that the VAT Place of Supply for B2C supplies of services is that the service is supplied where the supplier is established. So if the Luxembourg office is the contracting office, I would usually expect Luxembourg VAT to be charged to the private customer.

Hope it helps?

 

[UKSBD]

The effect on PayPal's non-business customers will be different. PayPal will have to charge Luxembourg VAT on its services. I know the distance selling rules don't apply to services, but there may be a similar rule for services which obliges them to register for VAT in other EC countries too.

Would this be backdated, if so how long, and could PayPal charge non VAT registered customers the VAT retrospectively?
If so, could they just automatically take the ammount from peoples accounts?

I'm amazed this isn't a really big news story.

 

[David Richards]

The effect on PayPal's non-business customers will be different. PayPal will have to charge Luxembourg VAT on its services. I know the distance selling rules don't apply to services, but there may be a similar rule for services which obliges them to register for VAT in other EC countries too.

Agreed, the situation is still condition on Paypal deciding with their VAT Officer whether this ruling applies to them. It certainly looks like they might be caught. But if they can demonstrate (somehow) that they are acting in a more bank-like capacity, they might be able to retain the exemption.

It's clear from their T&Cs that PayPal consider themselves to be an issuer of eMoney. (Obviously a court may not agree, but it seems they feel they're not involved in "debt collection services".)

The new General rule states that the VAT Place of Supply for B2C supplies of services is that the service is supplied where the supplier is established. So if the Luxembourg office is the contracting office, I would usually expect Luxembourg VAT to be charged to the private customer.

Having had time to check, it's the special scheme for non-EC businesses I was thinking of, so wouldn't apply here. However Apple Europe (who are also based in Luxembourg) charge UK VAT in their UK iTunes store. Is that their choice because it's somehow advantageous to them?

There'a also mention on the HMRC website of "One Stop Scheme for [cross-border] B2C supplies of telecoms, broadcasting and electronically supplied services from 1 January 2015."; with a strong suggestion that in future, B2C supplies will attract VAT where the customer belongs."

 

[talkinpeace]

Apple will charge VAT because they are providing goods - even though in electronic form.

If paypal charges come under the scope of VAT then surely ALL credit card merchant charges will come under the scope of VAT. I cannot see Streamline taking that one lying down.
And once credit card charges are VAT then bank charges will. Again deeply unlikely.
Remember that paypal charge the recipient of the money, exactly like any other credit card provider.
There is no way they should be singled out.

 

[David Richards]

Having had time to check, it's the special scheme for non-EC businesses I was thinking of, so wouldn't apply here. However Apple Europe (who are also based in Luxembourg) charge UK VAT in their UK iTunes store. Is that their choice because it's somehow advantageous to them?

Apple will charge VAT because they are providing goods - even though in electronic form.

I think you may have misunderstood. I wasn't discussing whether or not PayPal charges should be subject to VAT, but pondering on the basis that they might be subject to VAT in the future, because of the ECJ ruling. I was wondering whether they would charge Luxembourg VAT or UK VAT.

I was using Apple iTunes Store was an example of Luxembourg-based business that charges UK VAT to its UK customers. When on the face of it, there's no obvious reason why they couldn't charge Luxembourg VAT instead. Luxembourg VAT is 15%, compared to the UK's 20% - so there's a potential saving for the consumer.

I'm just wondering what the benefit to Apple is...

If paypal charges come under the scope of VAT then surely ALL credit card merchant charges will come under the scope of VAT. I cannot see Streamline taking that one lying down. And once credit card charges are VAT then bank charges will. Again deeply unlikely. Remember that paypal charge the recipient of the money, exactly like any other credit card provider. There is no way they should be singled out.

I don't think anyone is suggesting that PayPal has been singled out for special treatment. I think the services provided by AXA in the ECJ case are quite different from those provided by PayPal and 'normal' payment gateways (such as Streamline or Sagepay). But then (as I mentioned earlier) PayPal define themselves as an issuer of eMoney - and I doubt that Streamline or Sagepay would ever fit that catgeory.

It's all going to some down to the legal minutiae and some specific detail of the type of services - just as in the Jaffa Cake case, what happened to a stale Jaffa Cake was crucial in determining if it was a biscuit or a cake.

 

[UKSBD]

It's all going to some down to the legal minutiae and some specific detail of the type of services - just as in the Jaffa Cake case, what happened to a stale Jaffa Cake was crucial in determining if it was a biscuit or a cake.

Do we know if a legal case has started yet or whether one is going to happen?

If there ever is one, and it goes against the payment processors will any VAT costs involved be backdated?

 

[talkinpeace]

Surely Apply are charging VAT at the UK rate because the goods and services are delivered in the UK to a value greater than the distance selling VAT limit

Paypal and Ebay's servers are not all in the UK so the service is not "delivered" within UK jurisdiction

 

[Kevin Hall]

UKSBD - As the HMRC Brief was only issued on 12 January 2011, I suspect it is a little early for a court case on the finer points of the new policy.

http://www.hmrc.gov.uk/briefs/vat/brief5410.htm

KPMG highlight what (they think) the ECJ were aiming at, namely that "the Court looked to the economic purpose of the service and concluded that the benefit that was provided to dentist was the recovery and management of debts owing from patients". The phrase examined by the ECJ is "designed to obtain payment of a pecuniary debt", which you could see a direct debit as being.

http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Documents/VAT/AXA_UK_PLC.pdf

To my mind, however, PayPal could argue that it is more than a mere debt collector. Though, as David says, it will come down to the legal mechanisms PayPal (et alii) use to recover the money from its client's customers. Essentially, it all comes down to what was the principal service, and what was the ancillary service (note HMRC's view in their Brief, which reflects the judgment).

To my mind, I'm not personally convinced that "E-money" really exists as a legal concept. Even PayPal's standard agreement defines this in other terms: "E-money means monetary value, as represented as a claim on PayPal, which is stored on an electronic device, issued on receipt of funds, and accepted as a means of payment by persons other than PayPal. The terms "E-money", "money" and "funds" are used interchangeably in this Agreement. Further, a reference to a payment made by via the Services refers to an E-money payment.".

More relevant, perhaps, is PayPal's definition of its services: "Services means all payment services and related products available through the PayPal website(s)."; and its description of its services: "PayPal enables you to make payments to and accept payments from third parties.".

So, whilst sounding very much like payment (debt) collection, PayPal perhaps crucially does not just collect debts on behalf of suppliers: it also allows payment of debts on behalf of customers.

To my mind, therefore, this seems more akin to bank-like "payments and transfers" activity (VAT exempt), than a mere means of "debt-collection" (standard-rated). But I am no lawyer; and I am sure PayPal and HMRC both have very astute VAT specialists arguing the case out, if they haven't already agreed the way forward. After all, the ECJ judgment was made on 28 October 2010, so there has been plenty of time to fight it out.

http://curia.europa.eu/jurisp/cgi-b...L&domaine=&mots=&resmax=100&Submit=Rechercher

I was using Apple iTunes Store was an example of Luxembourg-based business that charges UK VAT to its UK customers. When on the face of it, there's no obvious reason why they couldn't charge Luxembourg VAT instead. Luxembourg VAT is 15%, compared to the UK's 20% - so there's a potential saving for the consumer. I'm just wondering what the benefit to Apple is...

The test is which establishment the service is supplied from (the old UK test of "most closely connected with").

Just a guess here. Does Apple iTunes Stores have any establishments in the UK? If so, Apple might find it hard to argue that its UK stores/offices/establishments were "un-involved" in the supply, so that 20% UK VAT had to be charged to its UK customers from its UK establishment.

If PayPal has only a Luxembourg establishment, it could perhaps argue successfully that no UK office is involved in the supply to their UK customers.

Of course, this would become a live issue if PayPal really will have to charge UK VAT on its supplies; and perhaps we will then discover whether PayPal has an active UK establishment at that point!

 

[Kevin Hall]

will any VAT costs involved be backdated?

I note nobody has tried to answer this one yet. The HMRC Brief states:

What this means for businesses

All payment related services falling within the definition of 'debt collection' as outlined by the ECJ in the AXA judgment are now liable to VAT at the standard rate. If this applies to payment related services supplied by your business and your business has previously received a ruling from HMRC that those services fall within the VAT exemption (or it has previously been treating its services as exempt in line with HMRC's published policy in this area) then VAT must be applied to those services from the date of this brief.
Further information

Details of how to make any adjustments relating to previous VAT Return periods can be found in VAT Notice 700/45 How to correct VAT errors and make adjustments or claims and from the VAT Helpline on Tel 0845 010 9000.

To my mind, this means that you should be going back 4 years to correct VAT errors, as usual. Though if the supplier had previously received ruling from HMRC stating that their supplies were VAT exempt, they should only begin charging UK VAT to their customers from the date of the HMRC Brief.

In other words, you will not know until the supplier either tells you they had a ruling from HMRC confirming VAT exemption, or the supplier starts issuing VAT invoices.

Hope it helps?

 

[UKSBD]

To my mind, this means that you should be going back 4 years to correct VAT errors, as usual. Though if the supplier had previously received ruling from HMRC stating that their supplies were VAT exempt, they should only begin charging UK VAT to their customers from the date of the HMRC Brief.

In other words, you will not know until the supplier either tells you they had a ruling from HMRC confirming VAT exemption, or the supplier starts issuing VAT invoices.

Hope it helps?

Thanks (again),

Is 4 years the general rule and the most they can go back?

Can the supplier charge old customers the VAT which they didn't originally?

Is the old customer obliged to pay it even though it was the suppliers mistake?

If this ruling does apply to other payment processors (big if), could we be potentially looking at millions of pounds of VAT under-payment which they will either get from the suppliers or the customers (indirectly via the supplier, if non VAT registered)

As I said earlier, surprised this isn't a big news story, or is it very unlikely to effect the big payment processors?

 

[David Richards]

Surely Apply are charging VAT at the UK rate because the goods and services are delivered in the UK to a value greater than the distance selling VAT limit

The distance selling rules apply to goods, but not services..

Paypal and Ebay's servers are not all in the UK so the service is not "delivered" within UK jurisdiction

It's a bit more complicated than just "where the servers are based" - it's where the supplier and customer 'belong' that's relevant. There are additioanl rules for electronically-supplied services 'use and enjoyment' which may affect the deemed place of supply - but I don't think they do in the case of B2C supplies of electronic services.

See section 23 of VAT Notice 741A for details.

 

[talkinpeace]

But to get back to the original point,
at the moment Paypal is outside the scope of VAT
and until the ECJ ruling is tested is likely to stay that way
so the accounting treatment is pretty straightforward for now.

 

[UKSBD]

But to get back to the original point,
at the moment Paypal is outside the scope of VAT
and until the ECJ ruling is tested is likely to stay that way
so the accounting treatment is pretty straightforward for now.

Unless it gets backdated, then all the nightmares start, especially for non VAT registered people who use systems like Paypal.

Typical example, business taking £50,000 in payments a year,
Paypal (or other processor) fees approx 4% = £2,000
VAT on £2,000 = £350 - £400
Backdated x ?number of years. = Ouch!

 

[talkinpeace]

Not just paypal,
every business that takes card payments for a fee in the whole of the UK and the EU.
Sorry but I CANNOT see the banks letting that go through.

 

[David Richards]

But to get back to the original point, at the moment Paypal is outside the scope of VAT

I think it's 'exempt' rather than 'outside scope' - a subtle but important difference.

 

[UKSBD]

Not just paypal,
every business that takes card payments for a fee in the whole of the UK and the EU.
Sorry but I CANNOT see the banks letting that go through.

The banks not wanting it to go through is probably more of an incentive for the government to want to push it through the way things are at the moment

 

[David Richards]

Not just paypal, every business that takes card payments for a fee in the whole of the UK and the EU. Sorry but I CANNOT see the banks letting that go through.

Remember, just because two products or services fulfil the same need, it doesn't mean they work or are delivered in exactly the same way - so they may not be treated the same for tax purposes.

Take a sausage roll. If you run a bakery and sell a sausage roll that's hot simply because it's just come from the oven, then it's zero rated. If you sell it at room temperature, then it's zero rated. But if you re-heat it, it becomes "hot takeaway food" and is standard rated.​

It's the same sausage roll. It fulfils the same need. But it's treated differently for VAT purposes depending on how its supplied.

So as Kevin and I said earlier, the devil will be in the detail. Although on the face of it both PayPal and Streamline provide some services that appear similar; the way in which those services are provided may be crucial in determining their future VAT treatment.

 

[Kevin Hall]

Sorry but I CANNOT see the banks letting that go through.

I fear this case is in danger of being misunderstood. Yes, the definition of "debt collection services" was wider than everybody thought. But it remains true that the supply of a single, indivisible service follows the VAT rules according to its principal nature.

So a bank makes supplies of (VAT exempt) banking services, which might include transferring funds from one account to another account, which in turn might be for the purposes of settling a debt. Nevertheless the single, overall service purchased by the bank's customer is a (VAT exempt) banking service.

As I read it (I might be wrong, I'm still not a lawyer!), the difficulty with the dentist's service provider was that they simply collected payments from the dentist's customer by direct debit. Most of the other work they did seemed to support the fundamental debt-collection element of the service. The principal supply was therefore analysed as being (VAT standard-rated) debt collection.

On this view, banks would therefore be in the clear provided they continue to supply VAT exempt banking services (assuming they do not begin a distinct, separate debt-collection service which would be VAT standard-rated). The HMRC Brief 54/10 supports this view:

"Supplies which involve the collection of payments as a minor or ancillary function but which are principally concerned with other payment related transactions that fall within the Article 135(1) exemptions, for example the movement and settlement of payments between bank accounts, will not be affected by the AXA judgment and will continue to fall within the VAT exemption."

To be clear, here is Article 135(1) from the Principal EC VAT Directive:

CHAPTER 3
Exemptions for other activities
Article 135
1. Member States shall exempt the following transactions:
...
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;

So where do PayPal's services fit in?

Whilst PayPal looks like debt-collection from the point of view of the vendors (e.g. the businesses looking at this website), it must be remembered that PayPal also markets itself to buyers as a "payment service". Yet, the buyers do not pay PayPal for these services, presumably only the vendors pay PayPal for their services. So is PayPal's single, indivisible principal service that of debt-collection for the vendors? Or is it a broader "payment and transfers service"?

As I say, I am not a lawyer. So whilst it appears to my mind that PayPal (and the like) should remain VAT exempt, it will ultimately come down to the details (to which I am not privileged) of how the operations occur in practice and what the legal relationships are between PayPal and those whom they charge. If HMRC do decide to "have a go", assuming the banks are already in the clear, then PayPal will not have the banks' support in a battle with HMRC.

Hope that helps?

 

[myk3]

Hi there, i have had a read of this post and a good understanding that i would like to clarify.

We accept paypal from some of our clients which is rare so we dont have to worry to much about the overheads. we do however want to get it right for the accounting side of things.

am i correct to say that if a customer pays for something that is £100 which including VAT is £120. Which means we have to return £20 back to HMRC on our VAT return.

They pay via paypal and we as the business are subject to around 4% fee from paypal which is £4.80.

As there is no VAT on paypal we cannot claim the 20% from the £4.80.

so the
a) £4.80 goes down as an expense on the company.
b) We still pay HMRC £20 for this transaction at our VAT return.

i hope i have caught this correctly.

Thanks,

mike

 

[talkinpeace]

myk
if you refund money back through paypal, they refund the fees SO LONG as you show it as a refund not a transfer to them -otherwise the customer will get whacked for paypal fees too

if its an ebay sale, use the ebay reference
if its a website sale use the original transaction reference

 

[Kevin Hall]

Myk3, yes I believe you have it correct:

1. A supply of £120 (£100 net turnover, plus £20 VAT payable to HMRC) to a customer who pays via PayPal.

2. A purchase of services from PayPal (£4.80 expense, no VAT).

Hope it helps?

 

[myk3]

great thanks! good to know

 

[UKSBD]

Yes that is right, but if it turns out that PayPal fees are subject to VAT there will be 20% VAT on the £4.80

Imagine the hassle this will cause, PayPal will have to provide a VAT invoice for every single transaction.
Or if it's reverse charged, we will have to account for every transaction.

 

[talkinpeace]

I do not understand why you are so obsessed with accounting for VAT on paypal fees.
It is not there at the moment.
It is not likely to be there any time soon.
WHEN a deal is reached we will all abide by the terms of it - I take paypal on my website after all
but until that point, it would not be prudent to panic about a contingency with such a low probability.

 

[Kevin Hall]

if it turns out that PayPal fees are subject to VAT ...

I do not use PayPal, so I have never seen their invoices (if there are any). But a PayPal invoice would have to state that it was VAT exempt (though this might be a reference to a domestic Lexembourg law); or would not be issued at all if it was VAT exempt. So the next PayPal charge should determine what view has been taken on this subject.

Of course, you could contact PayPal now and ask them whether they believe the ECJ's Axa ruling affects their services. With luck, they will reply (in writing) and say "not".

Nevertheless, PayPal is in Luxembourg and UK businesses would have to decide for itself whether the purchase is VAT exempt or taxable (and therefore Reverse Charged) under UK VAT law. Although PayPal's view could carry some weight with a future inspecting VAT Officer, you would have to contact HMRC for a written clearance to achieve complete peace of mind.

 

[talkinpeace]

Kevin
I DO use paypal
both as an ebay seller and on my website
their website makes no mention of the ECJ ruling
nor does Streamline's who are the alternate card handler
nor does my Santander business bank account website who also provide card merchant services
Paypal bill statements are perfectly clear.
I am surprised that the rest of the posters on this thread have not looked at theirs before scaring the wits out of the OP.

 

[talkinpeace]

And just to clarify
http://www.hmrc.gov.uk/briefs/vat/brief5410.htm
the movement and settlement of payments between bank accounts, will not be affected by the AXA judgment and will continue to fall within the VAT exemption
which is what paypal and other card handlers do.

The Axa / Denplan case was about chasing up direct debits, not taking a cut of credit card payments.

 

[Kevin Hall]

Yes, I believe I have already quoted that and made that point.

But you don't mention whether PayPal issues invoices to you.

And if PayPal does, does it state "VAT exempt" on the invoices issued to you since 12 January 2011.

This would be useful information to have in the discussion.

 

[talkinpeace]

Why would it?
The ECJ ruling does not relate to the services Paypal provides.
Do bank merchant charge bills suddenly have to start saying exempt on them?
Paypal bills come out at the end of the month.
This whole ECJ thing is a TOTAL red herring as far as Paypal are concerned.

 

[Kevin Hall]

Why would it?

What you have been expressing is your opinion, admittedly argued rationally on principles, derived from the ECJ judgement and HMRC's Brief. Indeed, I share the same opinion, as you know from reading my posts. Nevertheless, it is just an opinion at this stage and documentation would provide a more factual base.

For if I were HMRC, I would have looked at the Axa judgment and tried to see whether there was any way to apply the ruling to PayPal and its ilk. As you will be aware, HMRC are regularly pegged back in the courts for over-playing their interpretations, so I am not prepared to say that HMRC will not impose this on PayPal etc. I repeat: I do not expect HMRC to do that, but I am not prepared to state that HMRC will not do that, as I have nothing in my dealings with HMRC on the subject and neither do any of my VAT peers. So it would help to see our opinion confirmed in fact.