MBNA Europe Bank Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE BRIGGS,Mr Justice Briggs |
| Judgment Date | 22 September 2006 |
| Neutral Citation | [2006] EWHC 2326 (Ch) |
| Docket Number | Case No: CH/2006/APP/165, 325, 245, 324 |
| Court | Chancery Division |
| Date | 22 September 2006 |
[2006] EWHC 2326 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Honourable Mr Justice Briggs
Case No: CH/2006/APP/165, 325, 245, 324
Mr Roderick Cordara QC and Mr Mark Smith (instructed by KPMG LLP) for the Appellant.
Mr Nicholas Paines QC and Mr Peter Mantle (instructed by Solicitors for HM Revenue & Customs) for the Respondents.
Hearing dates: 17,18,19,20,21,24,25&26 July 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Briggs:
This is an appeal by MBNA Europe Bank Ltd ("MBNA") from a decision of the Manchester VAT and Duties Tribunal, originally issued on 5 th January 2006 and later reissued on 3 rd March 2006. Subject to one relatively minor point, the Tribunal dismissed MBNA's appeals from four decisions of the Commissioners on VAT issues arising from MBNA's involvement in a series of securitisation programmes by which MBNA deployed debts owing to it by its credit card holding customers on a rolling basis, for the purposes of raising working capital.
For VAT purposes, the main business of MBNA may be described as the making of exempt supplies of credit. But since MBNA also makes other supplies, some of which are taxable rather than exempt, it is treated as a partially exempt trader.
Central to the EU–wide operation of VAT is the concept that, by contrast with a consumer, a trader is entitled to recover and set off against tax which he is liable to collect and pay on his outputs, tax incurred by him in the acquisition of goods and services in connection with his business ("input tax"): see sections 24 and 25 of the Value Added Tax Act 1994 (" VATA").
Where a trader's supplies are partly taxable and partly exempt he can in principle recover only that part of his input tax which is attributable to taxable supplies (or to certain supplies made outside the EU ("specified supplies")). Where the input tax can be shown to be directly attributable to taxable or specified supplies, it can be recovered in full. Where it is directly attributable to exempt supplies, it cannot be recovered at all. But traders, including in particular MBNA, may incur input tax in the acquisition of goods and services which are not directly attributable either to taxable (including specified) or exempt supplies. VATA section 26(3) and regulations made thereunder (now to be found in part XIV of the VAT Regulations 1995 ("the Regulations") contain provisions designed to secure a fair and reasonable attribution of input tax as between taxable and exempt supplies. The dispute which led to the Tribunal's decision arose in relation to the correct application of those regulations (specifically regulations 101 – 103) to MBNA's input tax burden. They may therefore be, and have during this appeal been, categorised as input tax issues.
All the methods prescribed or provided for under regulations 101–103 for the attribution of input tax to taxable (including specified) and exempt supplies may critically depend upon a correct appreciation of what supplies a trader makes in the course of his business. During the exchanges in which the present dispute arose, it became apparent that there was a fundamental divergence of view as between MBNA and the Commissioners upon the question whether the method by which MBNA deployed the debts accruing due to it from its credit card customers for the purposes of raising working capital involved MBNA in the making of supplies. MBNA claimed that they did, whereas the Commissioners determined that they did not. Much the greatest part of the argument (both written and oral) in this court has been directed to that issue, which has been fairly characterised as an output issue.
Further, in the event that it were to be determined that those methods did constitute the making of supplies, further issues arise, also to be categorised as output issues, namely the quantum of the consideration for those supplies and the place where those supplies were made. I shall refer to the question whether those methods constituted supplies as output issue 1, to the consideration quantum question as output issue 2 and to the place question as output issue 3.
The Tribunal determined output issue 1 against MBNA, so that it was not necessary for it to decide either of output issues 2 or 3, and it could not do so otherwise than on the hypothetical basis it was wrong about issue 1. It does not appear that the Tribunal identified output issue 2 as a distinct issue which it was called upon to resolve. None the less the Tribunal hypothetically decided output issue 3 in favour of MBNA. It concluded that if the methods whereby MBNA made debts payable by its credit card holding customers available for the raising of working capital did constitute supplies, then those supplies were made in Jersey so as to be specified supplies within the meaning of paragraph 3 of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999, and VATA section 26 (2) (c). The relevance of that conclusion to the input tax issues will become apparent in due course.
In resolving output tax issues 1 and 3 respectively against and in favour of MBNA, the Tribunal followed an earlier decision of a differently constituted Manchester VAT & Duties Tribunal in the case of Capital One Bank (Europe) Plc v HM Revenue & Customs (VAT Decision 19238) ("the COBE Decision"), adopting and supplementing the reasoning to be found therein. The COBE Decision also concerned a securitisation scheme involving substantially the same relevant elements, and prepared by the same firms of lawyers and accountants. MBNA's appeal necessarily and expressly involved the proposition that the reasoning of both those experienced Tribunals was wrong in law in relation to output issue 1. It had been anticipated by the parties to this appeal that it might be possible for it to be consolidated with a pending appeal by the taxpayer against the COBE decision at least for the purpose of the determination of the output tax issues which were common to both appeals. Perhaps unfortunately, the COBE appeal was withdrawn shortly before it had been due to be heard in May of this year. Nonetheless it will be necessary for me to examine the reasoning in the COBE Decision on output issue 1, incorporated as it was by reference by the Tribunal in its reasoning in this case.
I have so far described in deliberately neutral terms the securitisation scheme as a process which involved the deployment by MBNA of receivables payable by its credit card holder customers for the purpose of raising working capital. A central question for the purposes of output issue 1 is the proper characterisation of the method by which that deployment was achieved, for the purpose of deciding whether it constituted a series of supplies for VAT purposes. In the barest outline, the Commissioners and both Tribunals concluded that the method did not constitute a supply, but amounted to no more than the granting of security for a loan. By contrast, the taxpayers in both cases contended, and MBNA contends on this appeal, that the method constituted a true sale of those debts to a third party, and necessarily, a sale for consideration, so as to fall fairly and squarely within the definition of a supply, both for UK and EU VAT purposes.
I should add however that it is not common ground that the question whether the method constituted a supply is determined by its classification as either the grant of security or a sale. Mr Roderick Cordara QC who appeared for MBNA submitted that even if the method amounted to the grant of security for a loan it would still be properly classified as a supply for the VAT purposes, provided that it was for consideration which included something (however small) more than the making of a loan. Nor did the Commissioners concede (or the Tribunals conclude) that a finding that the method had the characteristics of an outright sale rather than the grant of a security necessarily concluded the matter in favour of the taxpayer. For example, Mr Nicholas Paines QC who appeared for the Commissioners submitted that the Tribunals were right to find that even if the method were to be categorised as involving a sale, it was a sale to a bare trustee for MBNA, and therefore a sale by MBNA to itself, so that it could not be a supply.
As the final arbiter of issues of fact, the Tribunal made detailed findings of the relevant facts which, unless challengeable pursuant to the principles set out in Edwards v Bairstow [1956] AC 14, cannot be and are not the subject of challenge. No useful purpose would be served by my repeating or attempting an unsatisfactory paraphrase of those facts in this judgment. I pay tribute to the detail and clarity with which they have been set out by the Tribunal. I shall set out on an issue by issue basis only those facts material to the determination of the particular issue under review.
Output issue 1 – did the method whereby MBNA deployed debts due from its credit card holding customers for the purpose of raising working capital involve the making of supplies by MBNA?
As argued before me (and before the Tribunals) this issue involves an appreciation both of the legal definition of "supply" in the applicable VAT legislation and an understanding of the appropriate method, as developed largely by the European Court of Justice and amplified by the UK courts, for resolving questions of categorisation for VAT purposes. Commonly, categorisation questions arise in relation to transactions acknowledged to constitute...
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