A number of High Street retailers are set to clash with Customs & Excise over the use of credit and debit card handling fees.

The fees have been introduced by retailers when people pay for goods using plastic rather than cash.

The retailers say the fees are exempt from VAT, but Customs & Excise disagrees.

And Customs officials say the scheme could be costing the Treasury hundreds of millions of pounds in lost revenue.

A test case is expected to be heard later this year.

Handling fee

Customs & Excise are not naming the retailers involved, but say the system has been taken up by most major High Street names.

Under the scheme, when someone buys an item from a shop with a credit or debit card, the store charges a handling fee which can be between 2 and 2.5% of the total cost of the goods.

So if an item costs �100, this may include a handling fee of �2.50.

As the retailers say this fee is exempt from VAT, it means they end up passing on less VAT to Customs & Excise.

But if the shopper asks to pay by cash, they are still charged the full �100.

In a statement Customs & Excise said it considered the scheme "to be a highly artificial VAT avoidance scheme and we are vigorously tacking it wherever we find it."

"We don't agree with the retailers that this scheme should lead to less VAT being paid."

"The potential damage to the Exchequer runs into hundreds of millions of pounds."

Small businesses 'worse off'

Customs officials also said the move could be damaging for many VAT-registered small businesses or self-employed workers.

"VAT registered customers may be worse off, because if the retailers are correct, the so called 'fee' reduces the amount of VAT they can claim back from Customs & Excise."

"This undermines small business and distorts competition between big business and smaller traders."