HBOS Plc v HM Revenue and Customs
| Jurisdiction | Scotland |
| Judgment Date | 30 December 2008 |
| Neutral Citation | [2008] CSIH 69 |
| Docket Number | No 19 |
| Date | 30 December 2008 |
| Court | Court of Session (Inner House) |
[2008] CSIH 69.
Court of Session (Inner House, Extra Division).
Lord Nimmo Smith, Lord Reed and Lord Drummond Young.
Heriot Currie QC (instructed by Tods Murray LLP) for the taxpayer.
Julian Ghosh (instructed by Shepherd and Wedderburn LLP) for the Crown.
The following cases were referred to in the judgment:
Barclays Bank plcVAT No. 20,528; [2008] BVC 2,189
Bookit Ltd v R & C CommrsTAXTAX [2006] BTC 5,535 (CA); [2005] BTC 5,581
Card Protection Plan Ltd v C & E CommrsECASTAX (Case C-349/96) [1999] BTC 5,121; [1999] ECR I-973
Card Protection Plan Ltd v C & E CommrsTAXELR [2001] BTC 5,083; [2001] 1 AC 202
College of Estate Management v C & E CommrsUNKTAX [2005] UKHL 62; [2005] BTC 5,673
C & E Commrs v Civil Service Motoring Association LtdTAX [1998] BTC 5,003
C & E Commrs v CSC Financial Services LtdECASTAX (Case C-235/00) [2002] BTC 5,141; [2001] ECR I-10237
Debt Management Associates LtdVAT No. 17,880; [2003] BVC 4,055
Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factory GmbHECASTAX (Case C-305/01) [2003] BTC 5,561; [2003] ECR I-6729
Muys' en De Winter's Bouw- en Aannemingsbedrijf BV v Staatssecretaris van FinanciënECAS (Case C-281/91) [1993] ECR I-5405
Sparekassernes Datacenter (SDC) v SkatteministerietECASTAX (Case C-2/95) [1997] BTC 5,395; [1997] ECR I-3017
Value added tax - Exemption - Granting, negotiation and management of credit - Debt collection - Intermediary services - Exclusion from exemption - Negotiation concerning debts but excluding debt collection - Financial institution subcontracting recovery of debts to agents - Whether contract giving creditor's agent power to negotiate terms for payment removed activity from classification as debt collection - Taxpayer's appeal dismissed - Council Directive 77/388, eu-directive 77/388 subsec-or-para B article 13art. 13(B)(d)(3) - Value Added Tax Act 1994, Sch. 9, Grp. 5, Value Added Tax Act 1994 schedule 9 group 5item 2, 5.
This was an appeal by the taxpayer against a decision of the VAT and Duties Tribunal (Decision No. 20,118; [2007] BVC 2,394) that the service supplied to it by agents used to obtain payment of sums due from customers was a single supply of debt collection within art. 13(B)(d)(3) of Council Directive 77/388, to which any debt negotiation services were ancillary.
The taxpayer provided credit facilities to customers by way of loans, credit cards and overdrafts. In a proportion of arrears recovery cases, the taxpayer referred the matter to an agent. The agent had the power to negotiate and compromise in respect of the outstanding amount. Commission was paid to the agent on the basis of sums successfully recovered.
The taxpayer contended that the services provided by the agents constituted the negotiation of credit and/or the granting of credit, both of which were exempt under art. 13(B)(d)(1) of the sixth directive. Although the agents were not financial institutions, in varying the contract and departing from the absolute legal position of the parties they granted credit on behalf of the taxpayer within art. 13(B)(d)(1) and VATA 1994, Sch. 9, Grp. 5, item 2. In applying the exclusion from exemption for debt collection, the terms debt and credit were merely opposite sides of the same coin, so that negotiation of debts and negotiation of credit both fell within the exemption. Further, the agents supplied intermediary services which were exempt within item 5 of Grp. 5.
Customs and the VAT tribunal took the view that the dominant purpose of the arrangements was the recovery of money due to the taxpayer. Negotiation involved in the recovery of money was not an aim in itself, but was ancillary to the dominant purpose of debt recovery. The agents' services did not fall to be regarded as intermediary services within item 5 since the agents did not act in an intermediary capacity in relation to both debtor and creditor. The service supplied by the agents was a single supply of debt recovery and was not to be regarded as the granting of credit (see Decision No. 20,118; [2007] BVC 2,394).
The taxpayer appealed contending that the tribunal erred in law in concluding that the service provided by the agents did not fall to be regarded as the granting of any credit, and in concluding that the agents did not act in an intermediary capacity in relation to both the debtor and creditor.
Held, dismissing the taxpayer's appeal:
1. Given that the parties in the present case agreed that there was a single, and not a mixed, supply by the agent to the taxpayer in performing services pursuant to the standard contract, the task was to decide what was the objective character of the supply, having regard to its essential aim or essential features. In the standard contract, the taxpayer had chosen to describe the services provided by the agents as "debt negotiation services". But it was necessary to consider what the agents actually did in pursuance of the contract. (Card Protection Plan v C & E Commrs (Case C-349/96) [1999] BTC 5,121; [1999] ECR I-973 and Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factory GmbH (Case C-305/01) [2003] BTC 5,561; [2003] ECR I-6729 applied.)
2. The starting point in the case of every customer was that there was a debt owed by the customer and that circumstances had arisen which had caused the debt to crystallise. On the evidence, the taxpayer's principal objective, using their agents' skills, was to recover as much of the crystallised debt as possible. Various techniques might be used by an agent to induce a debtor to pay, varying from the threat of litigation to cajolery coupled with the offer of inducements. Offering the debtor the opportunity to pay less than the amount due, or to pay it over a longer period of time, or both, might be the most effective means of securing payment of something, rather than little or nothing. But the objective remained the same. Moreover, the sole measure of the agent's remuneration was an agreed percentage of the amount recovered: the agent was paid by the results achieved in pursuance of the objective of "maximising recoveries". Those were the essential features of the arrangement between the taxpayer and the agent. They pointed towards the essential aim or dominant purpose of the service supplied being debt recovery. The tribunal correctly concluded that the service supplied by the agent was debt collection, within the meaning of art. 13(B)(d)(3). The exercise of skills by the agent, including those that might be described as negotiation directed to that end, were elements in the debt collection service provided by the agent. Negotiation was not an end in itself, let alone an essential aim. The taxpayer might prefer to retain the customer for the future, even though the customer had been in default. But that was no more than incidental and did not feature in the standard contract.
3. The terms used to specify the exemptions provided for by art. 13 were to be interpreted strictly but that did not support the argument that, if a supply included an element of negotiation, it could not be characterised as debt collection; on the contrary, it led to the conclusion that it was only where the objective character of the supply was the granting and the negotiation of credit, within art. 13(B)(d)(1), or the granting of any credit within item 2, or negotiation concerning debts, within art. 13(B)(d)(3), that it was not caught by the exclusion. While the agent and the customer might agree upon a reduced amount or an extended period for payment, or both, and thus innovate upon the original contract, that was always in a situation where there was a debt which had crystallised.
4. The agent was not acting in an intermediary capacity within the meaning of item 5, as that term was properly understood. The agent acted on behalf of and was answerable to the taxpayer as its principal, and from the customer's point of view stood in for the taxpayer rather than acted as a go-between.
[1] This is an appeal by HBOS plc against a decision of the Edinburgh VAT and Duties Tribunal ("the Tribunal") dated 19 April 2007 ([2007] BVC 2,394) dismissing the appellant's appeal against a decision of the Commissioners dated 18 April 2006.
[2] HBOS, as is well known, is a major financial institution. It and its subsidiaries and associated businesses, such as Sainsbury's Bank plc, Automobile Association Personal Finance Ltd and Intelligent Finance, a division of Bank of Scotland plc, amongst others (all hereinafter collectively referred to as "HBOS") provide inter alia financial services. These include the provision of credit facilities to customers by way of loans of various types, credit card facilities or overdrafts. Customers with loans and credit card facilities are required to make a payment every month of part at least of the balance outstanding on a particular date. In relation to an overdraft special terms and conditions apply and must be complied with. For example, the agreed limit must not be exceeded.
[3] For some time HBOS used agents to obtain payment of some of the sums then due which they were unable or not equipped to recover themselves from their customers. HBOS sought a ruling from the Commissioners on the VAT status of these arrangements. By letter dated 18 April 2006 the Commissioners gave their decision, concluding that the supply made by the agents was "a single debt collection … with any other activities being ancillary to it". Being dissatisfied with this, HBOS appealed to the Tribunal.
[4] The starting point is EC Council Directive 77/388 of 17 May 1977 on the harmonisation of legislation in Member States concerning turnover taxes ("the Sixth Directive"). It recites that:
a common list of exemptions should be drawn up so that the Communities' own resources may be collected in a uniform manner in all the...
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