High street stores accused of huge tax avoidance scheme

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Customs officials are to seek the recovery of "hundreds of millions of pounds" from some of Britain's biggest stores after uncovering a lucrative "tax avoidance scheme".

Tesco, Sainsbury's, Dixons, Currys and PC World are among the companies that, investigators say, have deprived the exchequer of money.

Many retailers introduced a scheme last year in which a "card-handling fee" is levied on customers paying by credit or debit card and the customers are then compensated for the fee by a discount, which means that, in effect, they only pay the amount on the price tag. However, the card fee can still be seen on receipts. The retailers claim that it is exempt from VAT and have withheld the tax, but Customs dispute this. A VAT tribunal later this year will adjudicate on the issue.

A customs source said last night: "We are about to have a punch-up with the big stores. The artificiality of the scheme is demonstrated by the fact that customers who pay cash are not given a discount."

One of the companies involved has already been presented by Customs with a tax assessment for the amount of VAT estimated to have been unpaid. The company is challenging the assessment. If Customs wins the case, it will request payment of hundreds of millions of pounds from all retailers operating the scheme.

Marks & Spencer operates a similar scheme, although it pays VAT on the card fees. The company said last night it would be seeking a rebate if the test case went in favour of the retailer.

Card-handling fees were the brainchild of the accountants of some of the biggest retailers. They believed that their clients were paying too much in tax and that costs for handling credit and debit cards should be exempt from VAT.

Retailers do pay commission to card-issuers, but these are only about 0.2 per cent on debit cards and 1 per cent on credit cards. The new fees are typically for 2.5 per cent.

Customs officers claim that the scheme also puts small traders, who are unable to reclaim VAT fully on goods that they have bought for their businesses, at a disadvantage.

John Lawson-Reay, a self-employed businessman, told Which? magazine that he had been surprised to find that his bill for computer equipment from PC World included a substantial charge for using his debit card.

The bill of £1,899 was broken down into a basic charge of £1,575.76 and £275.76 in VAT, plus a card-handling fee of £47.48 that incurred no VAT.

The transaction allowed the company to withhold payment of £7.24 in VAT, meaning that Mr Lawson-Reay was unable to recover the money himself.

A spokeswoman for the Dixons Group, which owns PC World and Currys, said last night that the card-handling fee scheme was a "legitimate procedure" that "helps keep our prices low".