Commissioners of Customs and Excise v Electronic Data Systems Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Lord Justice Potter,Lord Justice Peter Gibson |
| Judgment Date | 11 April 2003 |
| Neutral Citation | [2003] EWCA Civ 492 |
| Docket Number | Case No: C3 2002 1090 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 April 2003 |
[2003] EWCA Civ 492
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LONDON VALUE
ADDED TAX AND DUTIES TRIBUNAL
(Dr Nuala Brice,Mr K.S. Goddard MBE and Mrs S. Sadeque MRCS)
Lord Justice Peter Gibson
Lord Justice Potter and
Lord Justice Jonathan Parker
Case No: C3 2002 1090
Mrs Melanie Hall QC and Mr Andrew O'Connor (instructed by The Solicitor for Customs and Excise) for the Appellants
Mr Roderick Cordara QC and Mr David Scorey (instructed by The Legal Department of EDS Ltd) for the Respondent
INTRODUCTION
This is an appeal by the Commissioners of Customs and Excise ("the Commissioners") against a decision of the London Value Added Tax and Duties Tribunal (Dr Nuala Brice, Chairman, Mr K. S. Goddard MBE and Mrs S. Sadeque MBCS) ("the Tribunal") which was released on 19 March 2002. By its decision ("the Decision"), the Tribunal allowed an appeal by Electronic Data Systems Ltd ("EDS") against two decisions of the Commissioners rejecting EDS' claim that a supply of services by EDS to Lloyds TSB Bank plc ("the Bank") is exempt from value added tax ("VAT") by virtue of Article 13B of the Sixth European Council Directive on the Harmonisation of the Laws of the Member States relating to Turnover Taxes – Common System of Value Added Tax: Uniform Basis of Assessment ("the Sixth Directive").
The services in question were supplied by EDS to the Bank pursuant to a Master Services Agreement dated 30 September 1999 ("the 1999 agreement"). The 1999 agreement superseded an earlier agreement between the parties made in 1998 (referred to in the Decision as "the 1998 agreement"). By the 1999 agreement, the Bank 'outsourced' to EDS certain of its customer services relating to lending and insurance. It is common ground that, had such services been supplied direct by the Bank to its customers, the supply would have been exempt from VAT; however, it is also common ground that that is not material to the question whether the supply of services by EDS to the Bank under the 1999 agreement is similarly exempt.
Article 2 of the Value Added Tax Tribunal Appeals Order SI 1986 No. 2288 (made pursuant to section 86 of the Value Added Tax Act 1994 ("the 1994 Act")) provides for an appeal from a VAT tribunal direct to the Court of Appeal if (a) the parties consent, (b) the tribunal certifies that the decision involves a point of law relating wholly or mainly to the construction of (among other things) a Community instrument, being a point of law which has been fully argued before it; and (c) the leave of a single judge of the Court of Appeal has been obtained. In the instant case those three conditions have been fulfilled: the parties consent; the Tribunal has given the requisite certificate; and Carnwath LJ has given leave.
ARTICLE 13 OF THE SIXTH DIRECTIVE
Article 13 is in Part X of the Sixth Directive. Part X is entitled "Exemptions". Article 13 itself, which is headed "Exemptions within the territory of the country", is divided into three parts: 13A, 13B and 13C. Article 13A, which is headed "Exemptions for certain activities in the public interest", is not material for present purposes; nor is Article 13C, which is headed "Options". Article 13B, which is headed "Other exemptions", provides as follows (so far as material):
"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:
(a) insurance and reinsurance transactions, including related services performed by insurance brokers and agents;
(b) …….
(c) …….
(d) the following transactions:
(1) the granting and the negotiation of credit and the management of credit by the person granting it;
(2) …..
(3) transaction[s], including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;
(4) …..
(5) transactions, including negotiation, excluding management and safe-keeping, in shares, interests in companies or associations, debentures or other securities, excluding …."
The provisions of Article 13B were implemented by Schedule 9 to the 1994 Act, as amended by the Finance Order 1999 SI 1999 No. 594. No issue arises in this case as to the interrelation of domestic legislation with the Sixth Directive; the arguments on both sides are accordingly confined to the direct effect of the Sixth Directive, and in particular of Article 13B.
THE RELEVANT FACTS
The Tribunal set out the relevant facts in considerable detail in paragraphs 10 to 62 of the Decision. For convenience, the entire passage is reproduced in an Appendix to this judgment.
As an overview of the services supplied by EDS pursuant to the 1999 agreement, and of the mechanics of the supply, the following will, I hope, suffice.
Pursuant to the 1999 agreement, EDS supplies to the Bank administrative services in the nature of loan arrangement and execution services. In practical terms EDS represents the contact point between the Bank and actual or potential customers. As such, its principal functions under the 1999 agreement are to receive initial applications for loans and to record details of the applicants ('the capture of applications'); to 'validate' the applications, using the Bank's credit-rating system ('the validation of applications'); where a loan has been validated, to produce and forward to the borrower a loan agreement signed on behalf of the Bank together with a direct debit mandate and other documents; to verify the documentation received from the borrower; to release funds to the borrower; and to collect payments using the direct debit system.
As consideration for the supply, the Bank pays variable charges related to specific functions. The charges are related to the volume of commercial activity, rather than to the amounts of the loans.
Under the 1999 agreement the Bank retains the functions of advertising the loans and of dealing with borrowers who are in arrears, but effectively EDS performs all other administrative functions in relation to the loans.
By a separate agreement ("the insurance agreement") dated 31 August 2000 and made between EDS and Lloyds TSB Insurance Services Ltd ("Lloyds Insurance"), an associate company of the Bank, EDS was appointed agent of the Bank in respect of the effecting of loan protection insurance. Pursuant to this agreement, EDS undertakes the marketing and sales of loan protection policies. Such policies provide cover in the event of the policy-holder losing his or her job (in which event the insurer credits the policy-holder's bank account with the loan repayments as they fall due) and in the event of the death of the policy-holder (in which event the insurer pays off the loan in full).
To perform its functions under the 1999 agreement and the insurance agreement, EDS operates a loan centre at Peterlee in County Durham, which is dedicated primarily to the supply of services under those agreements; the primary commercial aims being to generate as many loans, and sell as many policies, as possible. Employees of EDS working at the loan centre wear badges bearing the name of the Bank. EDS is authorised by the Bank to offer four types of loan, with or without loan protection insurance. However, the Bank fixes the interest rates and the maximum and minimum sum which may be lent to any one borrower (although it does not set any limit on the total amount outstanding on loan at any one time).
The mechanics of a loan transaction are in summary as follows. Once the relevant initial information has been 'captured', and the borrower has selected the type of loan which he wishes to take, the loan application is 'validated' by the operator pressing a key on his computer. This links him to the Bank's software 'credit-scoring' system known as ASM (application scoring manager). The ASM assesses the credit risk of the borrower and 'decides' how much he can afford by way of monthly repayments. If the ASM 'accepts' the application, the operator quotes to the borrower the figures which the ASM has produced. If the borrower accepts the quotation, the operator presses another key on his computer to generate the loan documentation, which is in standard form. The documentation includes two copies of the loan agreement, one of which is 'signed' electronically on behalf of the Bank. The documentation is sent to the borrower under cover of a standard letter, written on the Bank's headed notepaper but giving the address of the loan centre. Once the relevant documents have been returned by the borrower, and the operator has satisfied himself that they have been completed correctly, the operator submits the transaction to an automated sanction process. If it survives that process, the next stage is authorisation. Authorisation is an automatic procedure involving the checking of the clerical details of the transaction. Once this has been completed, the operator presses another key on his computer to effect the release of the funds direct to the borrower's bank account. At that point, the loan is made.
While a loan remains outstanding, EDS calculates and applies interest on a basis determined by the Bank, and debits interest charges to the borrower's loan account. Statements are provided periodically, or on request. EDS also deals with clerical matters such as changes of...
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