BUSINESS LIFE: Prospect of massive VAT bills.

Byline: COLIN LEWIS, Business Editor

RETAILERS could face a massive VAT bill following a costly ruling against High Street giant Debenhams, says a Coventry corporate tax specialist.

The VAT tribunal ruled that Debenhams' so-called "merchant charge" - a charge made to customers by Debenhams' in-house card handling company - was created solely to avoid VAT and had no other real commercial purpose.

As a consequence, the tribunal dismissed Debenhams' appeal against the VAT man's assessment of pounds 644,000.

James Hurst, indirect tax manager at business advisers Grant Thornton, said: "Many High Street retailers have adopted similar merchant charges schemes. In most cases, 2.5percent of the purchase price is allocated to a card handling service provided by a captive card service company within the same retail group.

"Card handling services are exempt from VAT and, as a consequence, retailers have only paid VAT on 97.5percent of the ticket price. However, following this decision, they will now be required to pay the VAT due on the full ticket price.

"In Debenhams' case, this amounts to about pounds 4million per year. Customs and Excise has estimated that, nationally, the scheme was costing them about pounds 300million per year in lost receipts."

Mr Hurst added: "It is not yet known whether Debenhams intends to lodge an appeal against the tribunal's decision.

"If it does, the matter will probably take some years to resolve. If not, it is likely that Customs & Excise will be seeking payment of underpaid VAT from all retailers operating similar schemes."

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ALERT: James Hurst says the Debenhams ruling could equally hit other retailers