Target Group Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 April 2018 |
| Neutral Citation | [2018] UKFTT 226 (TC) |
| Date | 20 April 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0226 (TC)
Judge Sarah Falk
Roderick Cordara QC, instructed by Pricewaterhouse Coopers LLP, and Mr Christian Bell of that firm, appeared for the appellant
Hui Ling McCarthy QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Whether supplies of loan administration services to a bank are exempt under art. 135(1)(d) of Directive 2006/112 and VATA 1994, Sch. 9, Grp. 5, item 1, and 8, or are standard rated either as debt collection or on another basis – Whether loan accounts are current accounts – Held – No – Standard rated as debt collection – Appeal dismissed.
The First-tier tribunal (FTT) dismissed an appeal by Target Group Limited (the Appellant) finding that loan administration services to a bank were deemed debt collection and fell outside the exemption under VATA 1994, Sch. 9, Grp. 5, item 1, and 8 and art. 135(1)(d) of Directive 2006/112.
The Appellant contracted with a bank to provide loan administration services. HMRC informed the Appellant that such services were taxable rather than exempt financial services and the matter now came before the FTT.
The FTT set out the leading case involving outsourced services which laid down a number of principles, Sparekassernes Datacenter (SDC) v Skatteministeriet (Case C-2/95) [1997] BVC 509.
The parties agreed that there was a single or composite supply, the dispute was exactly what that supply was and whether it qualified for exemption. The legal background stems from art. 135(1)(d) which exempts among other things, transactions including payments, transfers and debts. This was transposed into UK law by way of item 1 and 8 of Grp. 5 without reference to debt.
The Appellant's contract involved the operation of individual loan accounts on behalf of its client bank involving the processing of payments from borrowers of the bank and administration of loans. A loan account was described as an account with borrowers details of transactions including charges, payments, interest, arrears and sundry fees. There were four portfolios of loans from the bank comprising, secured personal loans, secured commercial loans, unsecured home improvement and home ownership and unsecured personal loans.
The Appellant's case was that its supplies fell within art. 135(1)(d) and item 1 and alternatively fell within item 8 as operating current accounts. relying on C & E Commrs v Electronic Data Systems Ltd (EDS) [2003] BVC 451. HMRC was wrong in that the EU Value added tax (VAT) definition of debt collection concerned pecuniary debt rather than transactions concerning debts which fall in the exemption, see MKG-Kraftfahrzeuge-Factory GmbH (Case C-305/01) [2003] BVC 616.
HMRC's case was that if the Appellant's supplies fell within item 1 then it was excluded by way of being debt collection, see R & C Commrs v AXA UK plc (Case C-175/09) [2011] BVC 35, where the ECJ ruled that Axa's Denplan payment handling scheme for dentists was debt collection rather than the facilitating of bank transfers. Alternatively, HMRC argued it would fall as exempt credit management services.
The FTT referred both parties to a recent case, R & C Commrs v Metropolitan International Schools [2017] BVC 535 which outlined the primary test for a single composite supply as being to determine the predominant element, see Město Žamberk v Finanční ředitelství v Hradci Králové, now Odvolací finanční ředitelství (Case C-18/12) [2013] ECR 00000. It then agreed with the Appellant that its supplies involved transactions concerning, payments, transfers etc as falling within item 1, as it debited and credited accounts through the BACS and CHAPS banking systems which the FTT saw as a key test, see R & C Commrs v National Exhibition Centre Ltd (Case C-130/15) [2016] BVC 19 and Bookit Ltd v R & C Commrs (Case C-607/14) [2016] BVC 21.
However, the FTT concluded that it did not operate current accounts within item 8. The loan accounts did not function like a current account where there is a running account that can vary from debit to credit and a customer also has free choice to vary a current account which they did not have with the loan accounts.
The FTT then looked at the key issue of debt collection and whether it applied as this would remove the supplies from the exemption in art. 135(1)(d) and item 1, Grp. 5. HMRC argued that this involved establishing the predominant core element alongside the contractual arrangements in the light of commercial purpose. The FTT found that the main objective was debt collection involving processing payments and keeping records. Although EDS was binding the FTT laid greater stress on Axa finding that in this instance there were material differences with EDS and the economic reality was that the Appellant collected pecuniary debts. Target's supplies therefore fell within the debt collection carve out under art. 135(1)(d), see para. 110.
The appeal was therefore dismissed.
Over the years HMRC has lost several key cases where activities in the financial sector have been outsourced. Here the FTT decided that the core element was debt collection which is excluded from the exemption. Whether the FTT's decision is swimming against the tide remains to be seen as its interpretation of the Court of Appeal's decision in EDS might be open to challenge.
[1] This is an appeal against a decision by HMRC that loan administration services supplied by the appellant (“Target”) to a UK bank, Shawbrook Bank Limited (“Shawbrook”) are standard rated supplies for VAT purposes, rather than exempt supplies as claimed by Target.
[2] HMRC's decision was made in response to a request for a non-statutory clearance made by Target in May 2015. The original decision was issued on 31 July 2015. This concluded that taxable services were supplied, comprising the management of loan accounts. Following further correspondence HMRC upheld their original decision on review by a letter dated 8 January 2016, and Target appealed to the Tribunal.
[3] In brief summary, Target's contractual arrangements with Shawbrook relate to four categories of loans provided by Shawbrook to customers in the course of its lending business (each referred to as a portfolio). Target's description of its supplies in its Notice of Appeal was “loan account administration services”. In essence, the services that Target provides cover the entire lifecycle of the loans covered by the arrangements, apart from the making of the initial loan or any further advance. Target establishes loan accounts using its own systems, communicates with borrowers as an undisclosed agent of Shawbrook, and deals with payments by borrowers and all administrative issues that arise during the life of the loan. Target has limited discretion. The terms of the loans, including interest rates, are set by Shawbrook. Although Target is involved in dealing with arrears, any enforcement action would be a decision for Shawbrook.
[4] There is no dispute between the parties that the services provided by Target to Shawbrook comprise a single (composite or complex) supply for VAT purposes, rather than multiple supplies. What is in dispute is the precise nature of the supply, and more particularly whether it qualifies for exemption from VAT. The areas of dispute include, in particular, whether Target's supplies are excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.
[5] There was one preliminary point. HMRC had made an application on 22 February 2018 to file an amended Statement of Case. A draft of the amended document had been provided to Target in October 2017, and Target did not object. The application was accepted at the hearing.
[6] Article 135(1)(d) of the Council Directive 2006/112/EC (the Principal VAT Directive, or “PVD”) requires Member States to exempt the following transactions:
transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
This exemption was formerly contained in article 13(B)(d)(3) of the Sixth VAT Directive (77/388/EEC), which was in the same terms but also included the words “and factoring” at the end.
[7] This exemption is transposed into UK law, albeit using different language, in Group 5 of Schedule 9 to the Value Added Tax Act 1994 (“VATA”). Items 1 and 8 of Group 5 exempt the following:
1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.
…
8. The operation of any current, deposit, or savings account.
I will refer to these as “item 1” and “item 8” respectively.
[8] Target's case is that the services it provides to Shawbrook comprise “transactions … concerning … payments, transfers, debts” and/or “transfer(s) or … dealing(s) with money” within article 135(1)(d) and item 1, or alternatively that they comprise the operation of a current account falling within article 135(1)(d) and item 8, and are not carved out from exemption as debt collection.
[9] It is also relevant to refer to article 135(1)(b) of the PVD, which exempts:
the granting and the negotiation of credit and the management of credit by the person granting it;
The relevant corresponding domestic law provisions are items 2 and 2A of Group 5 of Schedule 9 to VATA:
2. The making of any advance or the granting of any credit.
2A. The management of credit by the person granting it.
[10] It is convenient to refer at this stage to the most significant case law relating to the approach to VAT exemptions and the interpretation of what is now article 135(1)(d) and item 1.
[11] The general approach to the interpretation of VAT exemptions is well-established. As explained by the Court of Justice (CJEU) in Stichting Uitvoering...
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