More than 50 high street retailers, including Debenhams, have lost their battle with HM Customs and Excise to avoid paying VAT on a portion of all credit card transactions.

Under the scheme retailers would charge customers a 2.5% handling fee on each card transaction although the price was the same as it would be for a cash sale.

Retailers have claimed that the 2.5% handling fee should be exempt from VAT.

However, the Independent VAT tribunal said that the actions of the retailers amounted to VAT avoidance and ruled that the practice should cease.

The decision means the retailers must now pay VAT on the full retail price of goods sold in their stores and so is likely to hit their profits,