Target Group Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 November 2019 |
| Neutral Citation | [2019] UKUT 340 (TCC) |
| Date | 15 November 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 340 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Zacaroli, Judge Greg Sinfield
Roderick Cordara QC, instructed by PricewaterhouseCoopers LLP, with 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 made by appellant to a bank are exempt – Principal VAT Directive, art. 135(1)(d) – VATA 1994, Sch. 9, Grp. 5, Items 1 and 8 – Whether loan accounts are current accounts – Whether services are transactions concerning payments or transfers – Whether services are debt collection – Appeal dismissed.
The UT dismissed an appeal by Target against a decision of the FTT that the loan administration service it supplied to a bank was taxable. The two courts reached the same conclusion but by different routes. The FTT concluded that debt collection (which is specifically excluded from the exemption for making payments and transfers) was the predominant element of Target's supply. However, the UT concluded that Target was not making supplies of “payments and transfers” so the question of whether the debt collection “carve out” was applicable did not arise.
Target provides outsourced “loan administration” services to banks and buildings societies. It considered that the service supplied to one bank, Shawbrook, was covered by the exemption from VAT for certain financial services. HMRC disagreed, arguing that the services were taxable. The FTT agreed with HMRC and Target appealed to the UT.
Target enters into a complex contract with its customers, the contract considered by the FTT and UT summarised Target's service for Shawbrook as the “operation of individual loan accounts, processing payments received from Borrowers and the administration of Loans” (see para. 9). In summary, Shawbrook made loans to its customers and Target administered the repayment of these loans, collecting payments, dealing with defaults etc.
The VAT exemption under consideration is set out in art. 135(1) of the Principle VAT Directive. The relevant extracts are:
- (b) the granting and the negotiation of credit and the management of credit by the person granting it;
- (d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection; and
This exemption is enacted into UK law in items 1, 2, 2A and 8 of Grp. 5, Sch. 9, VATA 1994 which between them exempt:
- 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. …
- 2. The making of any advance or the granting of any credit.
- 2A. The management of credit by the person granting it
- 8. The operation of any current, deposit, or savings account.
The parties agreed at the FTT and UT that Target was making a single, composite supply. However, they disagreed over how best to characterise this.
The FTT concluded that, although the service did include elements of transactions concerning “payments, transfers [and] debts” (art. 135(1)(d)), the predominate element was debt collection, because in operating the loan accounts Target collected debts (i.e the loan repayments owed to Shawbrook) when they became due (see para. 34). Because debt collection is excluded from the VAT exemption, Target's services were standard rated.
The FTT rejected Target's argument that the Borrower's loan accounts were current accounts for the purposes of the VAT exemption.
The UT agreed with the FTT that the loan accounts were not current accounts, they lacked certain essential features such as the ability to make payments to third parties etc.
The UT did not consider whether or not Target's services constituted debt collection because it concluded that Target's services were standard rated by a different route to the FTT.
The UT reviewed case law concerning the exemption for payments and transfers (paras. 53–74). It noted that the ECJ in Sparekassernes Datacenter [1997] BVC 509 determined that for the exemption to apply the supplier needed to “have the effect of transferring funds and entail changes in the legal and financial situation” (para. 53, emphasis added).
The UT concluded that Target was not making transactions concerning payments and transfers, its services were therefore standard rated and the appeal was dismissed. The UT stated that “It could not be suggested that the act of inputting a credit entry in a loan account made any change in the legal and financial relationship between Shawbrook and the relevant borrower unless (or until) there had been an actual transfer of funds from the borrower's bank account to Shawbrook's bank account” (para. 88).
This case demonstrates the fine line separating the exempt and taxable supplies made by companies to which banks and other financial institutions outsource activities. The decision indicates that Target had been making exempt supplies to Shawbrook for some time, this case came about because there was a change to the contract between the parties and Target wanted to ensure that VAT exemption continued to apply (see para. 2).
The decision is silent on the differences between the “old” and “new” contract but, as most of the VAT which Target will have to charge (assuming there is no successful appeal to a higher court) will not be recoverable by Shawbrook as input tax, the change is likely to prove more expensive than first anticipated.
[1] This appeal concerns whether loan administration services supplied by the appellant (“Target”) to a UK bank, Shawbrook Bank Limited (“Shawbrook”) are standard rated supplies for VAT purposes or exempt under article 135(1)(d) of Council Directive 2006/112/EC (“Principal VAT Directive” or “PVD”) as claimed by Target.
[2] Target provides outsourced loan administration services to banks and building societies including Shawbrook. Shawbrook is a provider of a range of mortgages and loans. On 21 May 2015, Target wrote to the Respondents (“HMRC”) to request a non-statutory clearance of the proposed VAT treatment of supplies it made to Shawbrook, following changes to their supply agreement. Target asserted that its supplies to Shawbrook constituted composite supplies of payment processing and were thus exempt.
[3] On 31 July 2015, HMRC notified Target of their decision that the supplies to Shawbrook were composite supplies of the management of loan accounts and were therefore taxable. On 27 August, Target asked for the decision to be reviewed by an HMRC officer not previously involved in the case. On 25 September, HMRC responded to the questions raised in Target's letter of 27 August and maintained their view that Target's supplies to Shawbrook were composite taxable supplies of the management of loan accounts. Following a review, HMRC confirmed their decision in a letter dated 8 January 2016 and Target appealed to the First-tier Tribunal (“FTT”).
[4] In a decision released on 20 April 2018 with neutral citation [2018] TC 06459, the FTT (Judge Sarah Falk) dismissed Target's appeal. The FTT held that the loan administration services supplied by Target to Shawbrook are standard rated for VAT purposes as debt collection.
[5] Target now appeals against the FTT's decision with permission of the FTT on all but one of four grounds and with permission of this Tribunal in relation to the remaining ground. Save as otherwise indicated, paragraph references in square brackets in this decision are to paragraphs in the FTT's decision.
[6] There was no challenge to the findings of fact by the FTT. The FTT set out the facts at [29] to [57]. For the purposes of this decision, the facts can be summarised as follows.
[7] The relevant contract pursuant to which Target provided its services to Shawbrook was the Amended and Restated Master Servicing Agreement (“ARMSA”) entered into in 2014. Supporting schedules to the ARMSA set out the Definition of Services (“DoS”).
[8] The recitals to the ARMSA describe Target as being “a provider of loan origination and account operation services” which “performs activities including the functions of: payment processing and servicing and portfolio management services”.
[9] Clause 3 of the ARMSA deals with the appointment of Target by Shawbrook to provide the “Services” in accordance with the terms of the agreement. It grants Target authority to do everything that, acting reasonably, it deems necessary or desirable in respect of the provision of the Services (provided that, without prior written consent, it does not exceed the scope of its authority). The “Services” provided by Target are described as the “operation of individual loan accounts, processing payments received from Borrowers and the administration of Loans”. A loan account is separately defined as “an account operated by Target containing details relating to transactions occurring in respect of a Borrower's Loan including, inter alia, charges, payments, interest, arrears, and sundry fees”.
[10] Clause 4.5 of the ARMSA provides that Target will act as agent of Shawbrook for the purpose of providing the Services. Further, clause 23.2 of the ARMSA provides that, in carrying out the Services, Target has full authority to bind Shawbrook in accordance with the criteria and standards agreed with it, and that it shall conduct all correspondence on Shawbrook's letterhead and otherwise carry out all dealings and activities in Shawbrook's name and not in its own name. The FTT held, at [31], that Target acted as an undisclosed agent of Shawbrook.
[11] Charges are dealt with principally in clause 8 of the ARMSA. The fee paid by Shawbrook is on a “per loan” basis. The amount payable per loan varies according to which of four portfolios of loans provided by Shawbrook it relates to and...
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