Commissioners of Customs and Excise v FDR Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 July 2000 |
| Date | 13 July 2000 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Barclays Bank plc (No. 3) VAT(1991) VATTR 466; [1991] BVC 893
Blasi v Finanzamt München I VAT(Case C-346/95) [1998] BVC 247
British Airways plc v C & E Commrs VAT(1990) 5 BVC 97
British Eagle International Airlines Ltd v Compagnie Nationale Air France WLR[1975] 1 WLR 758
C & E Commrs v Civil Service Motoring AssociationVAT[1998] BVC 21
C & E Commrs v Diners Club Ltd VAT(1989) 4 BVC 74
C & E Commrs v Lloyds TSB Group Ltd VAT[1998] BVC 173
C & E Commrs v Madgett (t/a Howden Court Hotel) VAT(Joined Cases C-308/96 and C-94/97) [1998] BVC 458
C & E Commrs v Scott VAT(1977) 1 BVC 139
Card Protection Plan Ltd v C & E Commrs VATVAT(Case C-349/96) [1999] BVC 155 (ECJ); [1994] BVC 20 (CA)
CILFIT Srl v Italian Ministry of Health (Case 283/81) [1982] ECR 3415
Continuum (Europe) Ltd VAT[1998] V&DR 70; [1998] BVC 2131
Countrywide Insurance Marketing Ltd VAT[1993] VATTR 277; [1995] BVC 580
Devoti t/a Belmont Associates VAT(MAN/92/374) No. 11,868; [1995] BVC 1421
EC Commission v UK VAT(Case 353/85) (1988) 3 BVC 265
Faaborg-Gelting Linien A/S v Finanzamt Flensburg VAT(Case C-231/94) [1996] BVC 436
Libyan Arab Foreign Bank v Bankers Trust Co ELR[1989] 1 QB 728
Lindum Resources Ltd VAT(MAN/93/784) No. 12,445; [1995] BVC 1118
Lubbock Fine & Co v C & E Commrs VAT(Case C-63/92) [1993] BVC 287
Mander Laundries VAT(1973) VATTR 136; (1973) 1 BVC 1008
Marleasing SA v La Comercial Internacional de Alimentación SA(Case C-106/89) [1990] ECR I-4135
Momm (t/a Delbrueck & Co) v Barclays Bank ELR[1977] 1 QB 790
Network Insurance Brokers Ltd v C & E CommrsVAT[1998] BVC 259
R v International Stock Exchange of the United Kingdom and the Republic of Ireland Ltd, ex parte Else (1982) Ltd ELR[1993] QB 534
Re Bank of Credit and Commerce International SA (No. 8)ELR[1998] AC 214
Re Charge Card Services Ltd ELR[1987] Ch 150
Skatteministeriet v Henriksen VAT(Case 173/88) (1990) 5 BVC 140
Sparekassernes Datacenter (SDC) v Skatteministeriet VAT(Case C-2/95) [1997] BVC 509
Stein v Blake ELR[1996] 1 AC 243
Exempt supplies - Finance - Outsourced credit card transactions - Settlement of liabilities between card issuers and merchant acquirers - Whether netting-off involved payment - Whether certain ancillary activities part of the composite core supply - Whether appellant "making arrangements" for transfer or receipt of money - Directive 77/388, the sixth VAT directive,eu-directive 77/388 article 13(B)art. 13(B)(d)(1) and 13(B)(d)(3) ; Value Added Tax Act 1994 schedule 9 group 5Value Added Tax Act 1994, Sch. 9, Grp. 5, items 1, 2, 5 and 8 and Note (4).
The issue was whether the appellant's activities relating to credit cards amounted to a single composite supply of an exempt financial service or whether it was supplying a service which could be characterised as credit card management, processing and administration services, which were standard-rated.
The appellant, a wholly-owned subsidiary of First Data Corp, provided credit card services to banks and had a turnover of its own money of over £23 billion in 1998. Its business consisted of providing services which fulfilled the obligations of banks which issued payment cards to cardholders and of banks contracting with merchants, normally retailers, to acquire vouchers accepted by those merchants in payment for goods or services. In effect, it acted as a clearing house for card transactions involving its clients, whether issuers or acquirers or both, and effecting settlement of the net positions of those clients and supplying connective services to them. The core activity included opening and maintaining accounts for each cardholder, responding to authorisation requests, recording all card transactions, calculating the total due from the issuer each day, settling the amount due either by CHAPS transfers or by netting it off, providing the issuer with details of all transactions, mailing statements to cardholders, raising direct debits for cardholders where relevant, recording payments by cardholders and sending cardholders' cheques to Issuers. In March 1998, the appellant's market share was 45 per cent of the issuer market and 27 per cent of the acquirer market. It acted for four acquirers, all of which were issuer customers, and 24 other issuer customers. On 27 September 1995, the commissioners assessed the appellant for approximately £3.5m for the three months to 31 July 1995 on the basis that the financial services which it had treated as exempt were in fact standard-rated.
The appellant contended that its essential activity provided the means whereby transfers and payments for goods and services occurred by cards designed to put the retailer and the customer on the same footing as if cash had been used, such transactions being concerned with accounts, payments, transfers and debts within Directive 77/388, the sixth VAT directive, eu-directive 77/388 article 13(B)art. 13(B)(d)(3) and the transfer or receipt of money within Value Added Tax Act 1994, Value Added Tax Act 1994 schedule 9 group 5Sch. 9, Grp. 5, item 1. As a matter of substance and reality the dominant component from which the service supplied took its fiscal identity was the settlement of debts arising from the use of cards. The term "negotiating" in eu-directive 77/388 article 13(B)art. 13(B)(d)(3) of the sixth VAT directive covered similar concepts to "making of arrangements" in item 5 of Grp. 5 and was also apt to describe the appellant's activity. To the extent that a banking relationship was central to the exemption, the appellant was in just such a relationship because its customers were banks and it made advances to banks and received money on their behalf. As an outsourcer, it provided not simply back up for the banks but an entire function moved out of the banks and subcontracted to the appellant to perform on the bank's behalf.
The commissioners contended that the service provided by the appellant was predominantly accounting and bookkeeping with reporting. The appellant's emphasis on settlement masked the distinction between banking operations involving movements between bank accounts and the accountancy operation of bookkeeping and netting-off. The latter, which was the activity conducted by the appellant, did not alter the legal and financial position but merely worked out what the position was. Netting-off did not involve payment, which required money being paid in a real sense.
Held, allowing the company's appeal in principle:
1. The netting-off by the appellant did affect the legal and financial position of the issuer banks, the acquirers affected and the payments system. Netting-off involved a credit in the daily account struck of the debits and credits of each client bank and, in economic terms, this clearly involved both a payment and a transfer.
2. The debits and credits to the cardholders' accounts were just as much transactions concerning current accounts as if the accounts were normal cheque accounts.
3. These findings led to the conclusion that the basic services supplied by the appellant to issuers fell within eu-directive 77/388 article 13(B)art. 13(B)(d)(3).
4. If it had been necessary to do so, the tribunal would have found that the activities would have been included in "the making of arrangements" for the principal activity of the transfer or receipt of money within item 1 of Value Added Tax Act 1994 schedule 9 group 5Grp. 5.
[The tribunal set out the facts summarised above and continued as follows.]
98. Mr Cordara [for the appellant] said that payment for goods and services by cards is designed to put the retailer and the customer on the same footing as if cash is used. The focus of the transactions with which the FDR is concerned is payment. Its clients are in the cycle in order to pay or be paid. FDR provides the means whereby the payments and transfers occur; in order to make payments it is necessary to ascertain who owes what to whom. He said that the fact that the processes performed by FDR require elaborate and sophisticated systems should not obscure the commercial and financial reality that FDR's services are transactions concerning accounts, payments, transfers and debts within eu-directive 77/388 article 13(B)art. 13(B)(d)3 and constitute the transfer or receipt of money within Value Added Tax Act 1994 schedule 9 group 5Grp. 5, item 1 [of Sch. 9 to the Value Added Tax Act 1994 (the 1994 Act)].
99. In C & E Commrs v Diners Club Ltd VAT(1989) 4 BVC 74, it was held that the payment by the acquirer to the retailer was a supply. The nature of the supply by FDR is similarly the mailing of payments. It is immaterial that FDR is a sub-contractor following outsourcing by its clients, see Sparekassernes Datacenter (SDC) v Skatteministeriet VAT(Case C-2/95) [1997] BVC 509 at para. 53 to 57.
100. The overall service provided by FDR viewed as "a distinct whole" is a specific service essential to the effecting of transfers, making of payments and settlement of debts, see SDC at para. 66. The analysis by the tribunal in Continuum (Europe) LtdVAT[1998] V&DR 70; [1998] BVC 2131 at para. 21 and 22 is helpful.
101. FDR's service also involves "the making of arrangements" within item 5, see C & E Commrs v Civil Service Motoring Association VAT[1998] BVC 21, Countrywide Insurance Marketing Ltd VAT[1993] VATTR 277; [1995] BVC 580 at p. 585G and Barclays Bank plc (No. 3) VAT(1991) 5 VATTR 466; [1991] BVC 893 at p. 895G.
102. The 1994 Act must be interpreted wherever possible in conformity with the sixth directive, see Marleasing SA v La Comercial Internacional (Case C-106/89) [1990] ECR I-4135 at para. 8. The directive must be interpreted having regard to the evolution of Community law at the date when applied, see CILFIT v Ministry of Health (Case 283/81) [1982] ECR 3415 at para. 20.
103. Upon a natural interpretation, eu-directive 77/388 article 13(B)art....
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