Buy Now, Pay Later providers could be losing out to competitors, or storing up issues, if they fail to fully consider their VAT position.

With competition high and the industry set to grow by half as much again in 2022 to nearly $30bn-worth of transactions in the UK alone, BNPL providers must ensure they are optimally priced for growth – and VAT could be a significant but overlooked factor.

BNPL providers that are not charging VAT to their customers cannot reclaim VAT that they incur on goods and services supplied to them.

Debates about whether BNPL products are subject to, or exempt from, VAT are ongoing, without a clear position established in law or HMRC guidance. This has led to inconsistent treatments being applied across the sector. HMRC have been inclined to challenge providers in the market that do charge VAT and as a default, have generally interpreted such products as exempt supplies of financial services.

However, this position is not clear-cut, and providers that fail to assess their VAT position and consider a taxable analysis could be relinquishing market share to competitors who are charging VAT and able to offer their products at a lower price. Equally, those that have opted for a taxable model, but without consulting HMRC, may be at risk of subsequent challenge and assessments.

What difference would charging VAT make to a BNPL provider?

Put simply, providers that can charge VAT to their customers can also reclaim it back on their costs, enabling them to recover this rather than bearing it as a cost – something that could be a significant advantage in the start-up or growth phase of these often rapidly growing businesses that spend a significant amount on marketing and technology.

Where their customer (e.g. a merchant) can also recover the VAT charged, this can allow the BNPL provider to price their services more competitively for their customers versus peers that are paying VAT on goods and services supplied, but that aren’t able to reclaim this.

BNPL providers that have not considered their VAT strategy could be impeding their own growth prospects and losing a competitive advantage.

Providers within the industry might be keen to wait and see whether legislation and HMRC guidance, supported by case law, concludes on the VAT treatment of BNPL products but waiting to find out could create an ongoing cost disadvantage or result in a growing VAT liability risk.

Why should BNPL providers assess their VAT strategy now?

BNPL is a rapidly growing, innovative product in the UK that is fast gaining traction with consumers and continues to advance into new consumer markets.

More than 17 million UK consumers have now used a BNPL service, but despite its increasing prevalence, the VAT treatment of these products is not conclusive.

The VAT treatment of services supplied in the UK is principally determined through UK legislation and supporting case law, and this is interpreted by related HMRC guidance. However, this does not currently explicitly cater for BNPL products. In addition, ongoing regulatory scrutiny which resulted in the recent ‘Regulation of Buy-Now Pay-Later Consultation’, which closed in January, may have a knock-on impact on how such products are both offered by providers, and viewed by HMRC.

Furthermore, the unique way new style BNPL offerings have been developed – notably those aimed at small-ticket retail purchases – has begun to call into question the possibility of a VAT exemption, particularly where BNPL arrangements exist without the presence of any credit agreement (interest-bearing or otherwise) and where they involve significant other services being provided to the merchant.

What should BNPL providers do?

Every provider in the BNPL space should assess its VAT strategy to ensure it is appropriate and that its VAT treatment is supportable and genuinely reflects the nature of the services supplied to customers.

Whilst VAT is in principle a self-assessed tax, providers of similarly new and innovative services often seek confirmation from HMRC about their VAT liability. This is particularly important in the BNPL space, where the position is complex and HMRC have actively challenged providers that have charged (and recovered) VAT without confirmation from HMRC.

Communication with HMRC and advice from experts is a vital component in helping providers obtain certainty in this area. There may be an opportunity to challenge HMRC’s default position that BNPL products represent exempt supplies of financial services. However, successfully doing so requires the right fact pattern, careful consideration and, given the complexity and novel nature of BNPL products, is very likely to need advance clearance from HMRC.

With new rivals appearing on an almost weekly basis, providers cannot wait until a clear legal precedent has been set – being proactive and carefully considering your VAT position up front will benefit the business in the longer term.