What is BNPL?
Recently, the so-called BNPL service, which stands for "Buy Now, Pay Later", has become increasingly popular.
BNPL is a financial arrangement that allows customers of an online store to pay for the products they buy at a later date, rather than immediately at the time of purchase.
This new payment solution is becoming increasinly widespread, with Revolut and Apple Pay among others having already introduced it abroad, but it also raises a number of tax issues, especially regarding VAT.
How does BNPL work?
Most BNPL providers offer interest-free credit to their customers, but if the customer is unable to pay the amount by the specified deadline, the provider may charge a late payment interest. The BNPL therefore works in a similar way to credit cards, where the debt can be repaid for a short period of time without incurring charges and interest, but later the loan has to be repaid at high interest rates. However, with BNPL services, the user does not need to have a credit card, the service is a payment option in the online store.
The operating model of the BNPL provider can be of two types:
- it acts as a credit intermediary for financial institutions and offers instalment services to merchants,
- it assumes the risk itself (in this respect it is similar to a bank) by factoring the merchant's receivables from the customer and collecting the purchase price at a later stage.
What are the advantages of BNPL?
The BNPL service is offered by an increasing number of online stores, with the positive effect that customers add more products to their shopping basket when shopping online (thus increasing the value of the basket) and the rate of cart abandonment (customers who add products to their basket but do not complete the order/payment process) is decreasing.
For customers, there is a clear advantage in not having to pay the full price for the goods purchased immediately.
What are the risks of BNPL?
According to some surveys, 40% of customers who use BNPL services fall behind, generating significant revenue for the companies. In many cases, the service is used by customers who can no longer charge their credit cards or obtain bank loans, and BNPL providers do not carry out any credit rating or verification, meaning that anyone can use the service.
BNPL and VAT – several questions
The Hungarian Tax Authority has not yet developed a uniform practice on the correct VAT treatment of BNPL services. Digitisation and the impact of COVID-19 on shopping habits in recent years have accelerated the spread of this interest-free, deferred or instalment payment facility; therefore there is a growing need for appropriate legislation, including the necessary market authorisations.
PLEASE CONTACT OUR VAT EXPERTS
If we look at BNPL services under the VAT Act, the atypicality of the transaction is clear, as the customer does not pay directly for BNPL services (not even interest in the default case). There are three agreements (between the merchant and the customer, the merchant and the BNPL provider, and the customer and the BNPL provider),but only two payments are made (between the merchant and the BNPL provider, and the customer and the merchant).
The possible VAT treatment of the service under Hungarian legislation can therefore be as follows:
- this may be regarded as a tax-free financial service,
- but also as other taxable service (e.g. factoring or other non-exempt payment transfer service, etc.),
- or even instalment purchase.
If we wish to classify this as a platform service, we should ask whether the service agreed between the merchant and the BNPL provider goes beyond the simple handling of the collection of the customer's payment.
Incorrect VAT classification of a transaction can have a number of adverse implications: for taxable transactions, the tax authority may assess unpaid VAT liabilities, while for tax-exempt classification, the tax authority may contest unauthorised VAT deductions.
In the light of the above, it is by no means easy to find the correct VAT treatment for BNPL services, so it is worth seeking the help of an experienced tax advisor to help you decide.
