Target believed that its services fell under the exempt payment processing services category, but HMRC disagreed and considered them taxable. Target lost the case at every stage of litigation, including the Supreme Court.

The Supreme Court agreed with the lower courts and HMRC, stating that Target's services did not qualify for the payment exemption. The court emphasised that the exemption should be interpreted narrowly and that the services must involve the transfer of funds and the change of legal and financial situations. Target's role was limited to passing information to BACS, which did not meet the requirements for an exempt payment transaction. The court also rejected Target's argument that its services fell under the Current Account Exemption.

This decision has wider implications for businesses relying on the Payment Exemption. It clarifies that only suppliers directly involved in the legal and financial functions of a transfer or payment can qualify for the exemption.

This may make it more difficult for businesses outside the operation of clearing systems to support the exemption. The Supreme Court acknowledged that only banks and similar financial institutions are likely to benefit from the exemption, although there may be exceptions.

HMRC may now scrutinise other businesses relying on the Payment Exemption and challenge those that do not meet the strict conditions set by the Supreme Court.

Businesses in sectors such as merchant acquiring, payment services, in-house payments, ATM operation, and outsourced providers may be affected. It is advised that businesses review their position in light of this decision.

Overall, this Supreme Court decision provides final and binding precedent, confirming that services falling short of directly performing the legal and financial functions of a transfer or payment are not eligible for the Payment Exemption. This brings clarity to the scope of the exemption but may make it more challenging for businesses to qualify for it.

If this affects your business, please contact our VAT Director Ian Marrow .