Lloyds Banking Group
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 November 2017 |
| Date | 22 November 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Marilyn McKeever, Ms Jo Neill
Mr Andrew Hitchmough QC, instructed by Allen & Overy appeared for the appellant
Ms Jennifer Thelen, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Meaning of consideration for a supply – Two payments under a single contract – First payment of charges for services – Second payment of redundancy payments to employees of supplier – Whether redundancy payments part of the consideration for the services provided by the supplier – Held – No – No direct link – Appeal allowed.
The First-tier Tribunal (FTT) allowed an appeal by Lloyds Banking Group against assessments issued by HMRC for failing to account for Value added tax (VAT) under VATA 1994, s. 8 (the reverse charge) in respect of redundancy payments to a service company in Ireland.
The Bank of Scotland (BOS) was a member of the Lloyds Banking Group (LBG) VAT group of companies. LBG decided to close its business in Ireland operated by a subsidiary of BOS, the Bank of Scotland (Ireland) (BOSI). Certus, a new company incorporated in Ireland was appointed to oversee the winding-down operation. The majority of employees would be transferred to Certus under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE).
BOS and Certus formed an agreement covering various customer-related services. Parallel negotiations also took place with the trade union Unite culminating in a Legal Framework Agreement (LFA) under which BOS agreed to meet redundancy costs for both transferring and future employees. Certus later expanded its operation leading to a second agreement. The first and second agreements were made under a cost plus model but later this was changed to an outsourced model resulting in a third agreement.
The taxable amount stems from the Principal VAT Directive (PVD) 2006/112, art. 73 enshrined in UK law by VATA 1994, s. 19, in addition art. 78 includes all taxes, levies, duties and charges. There is no definition of the meaning of consideration. HMRC contended that its meaning should include everything received by a supplier and be given the broadest possible meaning, Naturally Yours Cosmetics Ltd v C & E Commrs (Case No 230/87) (1988) 3 BVC 428. The appellant LBG argued that a single payment might include part – consideration but also payment for something else. Both parties agreed that there must be a direct link between payment and services made for it to be consideration, Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] BVC 117.
To establish the question of a direct link the FTT analysed the contractual position as per R & C Commrs v Newey (t/a Ocean Finance) (Case C-653/11) [2013] BVC 259, further developed by Lord Neuberger in R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) [2014] BVC 9. It identified services provided, charges, how they were calculated and redundancy terms. It identified at clause 4 of the LFA that BOS was obligated to fund redundancy payments even if the Certus contract was terminated.
LBG argued that the redundancy payments fell within the LFA a stand-alone agreement having no direct link with the services provided by Certus, they were part of an obligation by BOS to a third-party, Unite not consideration for a supply by Certus, see Airtours Holidays Transport Ltd v R & C Commrs [2016] BVC 17. HMRC argued that BOS had agreed to fund the redundancy payments that they formed part of the wider agreement and there was sufficient interweaving and interlinking of the contracts to show this.
Although Naturally Yours Cosmetics gave consideration the broadest meaning and given that the term is not defined in law, Tolsma required that remuneration received must give value to the service provided, this was the direct link. Following both Airtours and Tolsma the redundancy payments did not form part of the consideration for the services received. The mechanism for calculating charges had no impact on the redundancy payments and the FTT concluded that the charges under the service agreement were the only consideration for services and that the redundancy payments were part of a separate stand-alone obligation to Unite, see para. 136 of the decision.
The FTT then considered the economic reality test, finding that BOS had contracted with Certus to manage the close down of its business in Ireland with an orderly transition for a fee. The key issue was the LFA and the relationship between BOS and Unite. There was nothing artificial and the various agreements reflected the economic reality accordingly the appeal was allowed, see para. 148–151.
Under the reverse charge as a partly exempt bank LBG would have suffered loss on input tax recovery had the case gone in favour of HMRC. The FTT followed the guidance in Tolsma showing the need for a direct link between a payment and supply and the importance of the contracts and agreements, confirming that not every payment is consideration as in Airtours where accountants were paid, for a report that was supplied to lenders.
[1] This case concerns the VAT treatment of certain payments in respect of redundancy costs (“Redundancy Payments”) made by Bank of Scotland (“BOS”) (a member of the Lloyds Banking Group (“LBG”) VAT group), following the closure of its business in Ireland and the transfer of the winding-down operation and its employees to an Irish company, Certus.
[2] HMRC's case is that the Redundancy Payments made by BOS to Certus were additional consideration for the services provided by Certus and that BOS ought to have accounted for VAT on those payments under the reverse charge provisions contained in s8 Value Added Tax Act 1994 (VATA). HMRC raised two assessments for underdeclared VAT: the first on 31 March 2016 in respect of the VAT period 03/12 in the sum of £17,025 and the second on 9 September 2016 in respect of the periods 09/14 to 09/15 in the sum of £5,623,000.
[3] LBG's case is that although the Redundancy Payments, were made under the Service Agreements with Certus, the obligation to make them derived from negotiations with the employees' union, Unite, which were ultimately embodied in a document called the Legal Framework Agreement. The contractual and commercial reality was that the Redundancy Payments formed no part of the consideration paid for the services provided by Certus and are, accordingly, not subject to VAT. LBG appeals against the two assessments totalling £5,640,425.
[4] We had before us numerous bundles of documents. We also heard witness evidence from Mr Duane Davidson, who is Director, Change and Supplier Management at LBG and who has been head of the Irish Supplier Management team since December 2010 and Ms Samantha Ward, who was, at the relevant time, Assistant Supply and Relationship Manager at LBG, reporting to Mr Davidson. Ms Ward has since left LBG.
[5] BOS had a subsidiary, Bank of Scotland (Ireland) Limited (“BOSI”), which carried on a banking business in Ireland. Both companies were within the VAT group of Lloyds Banking Group.
[6] In early 2010, LBG decided to close the retail and intermediary business in Ireland. On 19 August 2010, LBG issued a press release announcing that it had carried out a strategic review of BOSI and had decided to close the business in Ireland and transfer it to BOS. BOS would be able to use its extensive resources in the UK to run down the existing Irish lending portfolio in an efficient manner.
[7] In order to retain local administrative capability, historic knowledge and continuity of customer relationships, it was proposed that BOS would enter into an agreement with an independent service company which would carry out administrative functions relating to the BOSI banking business, using its former employees. As part of the proposal, it was intended that the majority of BOSI's employees would be transferred to the service company under the Transfer of Undertakings (Protection of Employment) Regulations 2006 in relation to employees in Northern Ireland and the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 in relation to employees in the Republic of Ireland (“TUPE”).
[8] BOS considered a number of potential suppliers but decided to engage Certus, a new Irish company formed by six of the existing BOSI directors, including the BOSI CEO.
[9] A Services Agreement was entered into between, BOS, BOSI and Certus on 9 November 2010 (the “First Agreement”). Certus agreed to administer and collect on the remaining loan book in Ireland. This involved call centre services for customers, checking information such as changes of address and requesting payment from customers in arrears. The commercial aspects of the agreement were negotiated by a discrete team headed by the Senior Sourcing Manager from Group Sourcing.
[10] The proposal involved the transfer of about 722 employees from BOSI to Certus.
[11] In parallel with the commercial negotiations, an HR team, led by the Wealth and International HR Director, was carrying out a separate negotiation involving BOS, Certus and Unite, the Union which represented the affected workers.
[12] Although Mr Davidson only took up his current role in December 2010, he had discussions with BOS's HR lawyer and the directors of Certus who were present during these negotiations. Unite's standpoint was that all the employees to be transferred were effectively on notice of “deferred compulsory redundancy”. LBG had taken the decision to close the retail, intermediary and wholesale business of BOSI in Ireland and Unite therefore anticipated that the business of Certus, which was providing services exclusively to BOS in order to wind down the Irish business, would have a limited duration. As the “run-off” period progressed, fewer employees would be needed and, over time,...
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In Tandem Resources Ltd
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