ING Intermediate Holdings Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 July 2016 |
| Neutral Citation | [2016] UKUT 298 (TCC) |
| Date | 05 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Morgan, Judge Sarah Falk
Kevin Prosser QC and James Rivett, instructed by PricewaterhouseCoopers LLP, appeared for the appellant
Kieron Beal QC and Peter Mantle, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Deductibility of input tax incurred by bank in providing deposit accounts – Deposit accounts provided “free of charge” to bank's customers – Whether provision of deposit accounts involved a supply by bank – Whether supply was for consideration capable of quantification – Whether investment by bank of funds received was an economic activity – Company's appeal dismissed.
The Upper Tribunal (UT) dismissed ING's appeal against the decision of the First-tier Tribunal (FTT) ([2014] TC 04051), because ING made an exempt supply of “banking services” when it accepted deposits and paid interest on them, so the VAT on its costs was irrecoverable.
The appellant (“ING”) was a UK-registered company and the representative member of a VAT group, which included the two Dutch companies that made the disputed supplies (ING Direct (UK) NV and ING Direct NV), and which were referred to by the UT as “IDUK”. ING belatedly claimed input tax of £6,032,280 for the periods 10/02 to 10 03/11.
IDUK took cash deposits from private individuals in the UK. It used the deposits to make investments. Its profit was the margin between what it paid to receive deposits and what it gained in interest on its investments. Thus, the business model comprised:
1) the generation and retention of deposits by private individuals with the bank; and
2) investing virtually all of the deposited money on long-term investments.
A small percentage of the funds was invested in short-term deposits, so IDUK could meet its liquidity needs. The costs of attracting and retaining deposits was high. Many of these costs were subject to VAT. In relative terms, little expenditure subject to VAT was incurred in making the investments (apart from the cost of the investments themselves). The appeal was concerned with the VAT that ING incurred on attracting and retaining deposits. There was some VAT incurred on the investment side of the business model, but ING did not claim that this was recoverable.
IDUK's retail banking business model was a normal retail banking service, except that:
1) it offered only interest-bearing accounts, not current accounts, cheque books, credit cards, debit cards or overdraft facilities; and
2) it had no physical premises where customers could attend.
It attracted customers by the following means:
1) generally, it charged customers no fees or penalties;
2) it offered customers an interest rate higher than most or all competitors; and
3) it provided a 24-hour telephone and internet-based banking service.
Customers could pay in money only (1) by a cheque (drawn on any bank) or (2) by a transfer of money from another bank account (with any bank). Money could be withdrawn only by a transfer into a linked account, which might be with a different bank, but must be in the name of the depositor.
ING operated a special method for input tax recovery (the “PESM”). ING argued that IDUK made “specified supplies” within the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121), art. 3(a) when it made investments in non-EU issued financial instruments. HMRC accepted that (after 1 January 2004) IDUK made some investments in non-EU-issued financial instruments, but argued that these investments were not economic activities.
ING argued that the VAT on services purchased by IDUK to support its deposit taking activity in the UK (e.g. the marketing, administration, IT services and property costs) were business overheads and under VATA 1994, s. 26(2)(c) recoverable in part, because IDUK made some “specified supplies”.
ING argued that from 1 April 2004 its PESM was inappropriate, as IDUK ceased to make only exempt supplies and commenced making exempt and “specified supplies”, to which its input tax was attributable. Its voluntary disclosures notified a proposed change to the PESM to permit recovery of some input tax by IDUK.
There was a subsidiary issue in that, before 1 January 2004, ING did not make specified supplies, because it invested its money by loaning it to the Spanish branch of its parent company. Nevertheless, it tried to reclaim at least some of the pre-1 January 2004 input tax on the basis that there was a change of intention under Value Added Tax Regulations 1995 (SI 1995/2518), reg. 109.
The dispute concerned to what supplies the input tax on the costs was attributable.
Fundamentally, the dispute was whether IDUK made exempt supplies for consideration to the depositors.
The FTT said that the customer gave consideration for the bank's services by depositing money in the account. Thus, the consideration for the provision of the bank account by the bank, was the loan of the deposited monies to the bank by the depositor. The loan is not monetary consideration, it is non-monetary consideration.
The FTT agreed with ING that the fact that retail banking transactions are exempt under VATA 1994, Sch. 9, Grp. 5, item 8 does not imply that all retail banking activities are exempt.
The FTT held that the facilities were a service provided by ING to its depositors. The facilities went beyond what a mere borrower of money would provide to a mere lender. The bank provided more than a promise to repay the lender. It provided easy-access deposit accounts.
The FTT held that deposits were made in return for both the interest and the banking services. The banking services were supplied for consideration.
The FTT rejected ING's claim that subjectively the parties valued the bank's services at nil. The value given was non-monetary, i.e. the loan.
The FTT rejected ING's claim that it is not possible to value the services it provided to its customers. The subjective value of consideration given for the provision of banking services is the amount which the bank was prepared to spend in order to provide the banking services. The FTT did not have the full evidence of the bank's costs to make that valuation, but did not need to have it. The question was whether the service could be valued: not what the value was.
Thus, ING's appeal was dismissed. It supplied banking services in return for the supply to it of the loans made by the depositors. The consideration for that supply by the bank was capable of valuation. The supply was exempt. The input tax at issue, which was incurred in making the supplies of banking services, had a direct and immediate link to those banking services. It was attributable to those exempt banking services and so was irrecoverable.
Also, the FTT held that ING's investment activities (buying and holding bonds to maturity) did not amount to an “economic activity”. ING appealed to the UT. The FTT's findings of fact were not challenged.
The UT held that the test is objective. The contractual terms must be considered. It is also necessary to consider the “economic and commercial reality”. If the terms reflect the economic and commercial reality, then it is not necessary to go any further (para. 37 of the decision).
The UT concluded that the FTT did not make an error of law in deciding that IDUK was supplying services to depositors for VAT purposes. The FTT did not make an error of law either in directing itself as to the approach it should adopt or as to the application of that approach to its findings of fact. Further, the FTT's detailed reasoning on this issue was essentially correct, so the UT reached the same result on this issue as that reached by the FTT (para. 42 of the decision).
There must be a legal relationship between the supplier and the recipient entailing reciprocal performance, the remuneration received by the supplier constituting the value given in return for the supply. Applying this test, the UT concluded that the FTT was correct to decide that there was consideration for the supply of banking services (para. 58 of the decision).
The UT held that the “no fees” catchphrase did not make the position analogous to “free” vouchers. The UT agreed with the FTT that this meant no separate monetary fees or charges. The bargain between the parties was that, if a deposit was made, the depositor would (in addition to the obligation to repay) receive in exchange interest together with the services (para. 60 of the decision).
In order to comprise consideration for VAT purposes, consideration must be capable of being ascertained in monetary terms. It was not necessary to determine the amount of the consideration, because the supplies were exempt. It was sufficient that the UT determined that the FTT had correctly concluded that the consideration was capable of valuation. The valuation methods could be:
1) the cost of supplying the services;
2) the bank's gross margin;
3) the economic cost of funds; or
4) alternative sources of funds.
There was no need for the UT to determine the appropriate method (para. 65 of the decision).
The UT concluded only that there was consideration, which was capable of being expressed in monetary form (para. 66 of the decision).
The conclusions on issues (1) and (2) were sufficient to dismiss ING's appeal, but the UT also considered other matters.
The UT held that deposit taking was an economic activity. Against that background, the investment activities were a direct extension of that activity even if they would not comprise economic activity in isolation (para. 81 of the decision).
Both parties accepted that the UT's finding, that services were supplied to depositors for consideration, meant that all the...
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