Target Group Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 12 July 2021 |
| Neutral Citation | [2021] EWCA Civ 1043 |
| Year | 2021 |
| Court | Court of Appeal (Civil Division) |
[2021] EWCA Civ 1043
Lord Justice Underhill, Vice President of the Court of Appeal, Lord Justice Henderson and Lady Justice Simler
Court of Appeal (Criminal Division)
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 services are transactions concerning payments or transfers – Appeal dismissed.
The Court of Appeal unanimously dismissed an appeal against the UT's decision that loan administration services supplied by Target were taxable (and not exempt).
Target supplied “loan administration services” to a bank (Shawbrook Ltd). It was common ground that Target was making a single complex supply (para. 24) and the question was whether this single supply was taxable or exempt.
Target argued that its service was covered by art. 135(1)(d) of the PVD, which exempts “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection”.
The FTT [2018] TC 06459 and the UT [2019] BVC 520 both agreed that the service was taxable, but for different reasons. The FTT concluded that Target's service would have fallen within art. 135(1)(d) but for the “carve out” for debt collection. However, the UT concluded that Target was not making “transactions concerning payments or transfers” and the services did not therefore fall within art. 135(1)(d) in the first place.
Target's first ground of appeal was that the UT had unduly narrowed the scope of the exemption for “transactions concerning payments or transfers”. Target argued that it was responsible for making legal and financial changes in the position of the parties and its services were therefore within the scope of the exemption (para. 8).
The Court of Appeal reviewed the ECJ's case law on art. 135 at para. 30-71. The case law considered included R & C Commrs v AXA UK plc (Case C-175/09) [2011] BVC 35 and R & C Commrs v DPAS Ltd (Case C-5/17) [2018] BVC 41, two cases in which companies which managed payment plans run by dentists were found to be making taxable, not exempt supplies.
Target attempted to distinguish itself from suppliers like AXA and DPAS on the grounds that they were a “mere communications interface” whereas it “in the context of operating a continuing financial relationship through the provision of loan accounts, constructs and delivers binding instructions for money to be moved between accounts”. The Court described this argument as “unsustainable” (para. 89).
In summary, the court found that Target was not engaged in transactions concerning payments or transfers because:
- The services supplied do not form a distinct whole that fulfils the essential functions of a financial transaction within the meaning of art. 135(1)(d) (para 98);
- The functions delegated to Target by Shawbrook were limited to passing the necessary information to BACS to enable it to give the relevant instructions to the borrower's bank and Shawbrook's bank so that the transfer of funds can take place; and do not include the necessary steps ordinarily undertaken in effecting the transfer of funds or payments themselves (para. 99);
- Target's role is limited to giving instructions or orders that are executed by a different party (para. 100); and
- The service performed by Target does not go beyond an exchange of information or request for payment to somebody else to make the transfer or payment (para. 101).
Target also argued that its services fell within art. 135(1)(d) because they were transactions concerning debts. The Court dismissed this argument for the same reasons (para. 112).
Having found that Target's services were not transactions concerning payments, transfers or debts within art. 135(1)(d) the Court of Appeal did not consider its other ground of appeal which related to whether the loan accounts it managed for Shawbrook were a form of current account (para. 125) and it was unnecessary to consider the FTT's decision that the services were taxable on the grounds that they constituted debt collection (para. 126).
Financial institutions making exempt supplies often outsource certain functions and the ECJ has repeatedly had to consider how the exemption applies to outsourced activities (if the exemption does not apply the financial institution will usually incur significant irrecoverable input tax). In its decision the Court of Appeal provided a helpful overview of the case law on this issue and how it has evolved over time.
Mr Roderick Cordara QC (instructed by Pricewaterhouse Coopers LLP) appeared for the appellant
Ms Hui Ling McCarthy QC and Mr Michael Ripley (instructed by General Counsel and Solicitors to HM Revenue and Customs) appeared for the respondent
[1] The question on this appeal is whether loan administration services (including the operation of individual loan accounts and processing payments received from borrowers) supplied by the appellant (“Target”) to Shawbrook Bank Limited (“Shawbrook”) (which originates and provides mortgages and loans to borrowers) are exempt from VAT pursuant to the exemption for financial services contained in article 135(1)(d) of Council Directive 2006/112/EC (the “Principal VAT Directive” or “PVD”) implemented in UK law in Group 5, Schedule 9 of the Value Added Tax Act 1994 (“the VAT Act”).
[2] The exemption in article 135(1)(d) is for “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts … but excluding debt collection …”. In this case the following provisions within the exemption arise for particular consideration:
- the exemption for transactions concerning payments and transfers;
- the exemption for transactions concerning debts;
- the exemption for transactions concerning current accounts; and
- the exclusion of debt collection from the exemption.
[3] The services supplied by Target are described in further detail below by reference to the findings of fact made, but in essence they comprised the following. Target created a “loan account” on receipt of loan origination data from Shawbrook. Target recorded the account information on file (including the initial loan advance) and identified the balance of the loan, the next repayment date and the amounts (including interest) to be applied to the next payment. Then it interacted with borrowers (in the name of Shawbrook) including taking steps to facilitate timely repayment. Target created a standing direct debit instruction to be applied to the borrower's bank account (with other payment methods also available). In terms of processing payments, the loan payments were processed by direct debit where possible. This involved transfers of money from the borrower's bank account to Shawbrook's bank account which Target reconciled with the loan accounts. Target submitted the initial payment request/agreed the form of payment with the borrower, reviewed the money paid through different mechanisms, processed collection of money paid through different methods (for example by cheque), reconciled payments to the loan accounts, credited loan accounts once payments were made, recalculated the amount of the next payment to be made and confirmed total repayments made to Shawbrook each month. Target also accepted and processed overpayments from account holders and guarantors, monitored and applied corresponding repayment charges, amended the account's secured loan balance and, issued standardised correspondence to account holders and guarantors to confirm the overpayment. Once a loan reached its full contractual term or the borrower repaid the loan in advance, Target was responsible for closing the account.
[4] Significantly Target was not involved in the making of any loans at the outset or in making any further advances.
[5] The appeal arises in consequence of a ruling dated 31 July 2015 made by the respondent (Her Majesty's Commissioners for Revenue and Customs, “HMRC”) in response to a request by Target for non-statutory clearance of the proposed VAT treatment of the supplies it made to Shawbrook following changes to their supply agreement. Target contended that the supplies were composite supplies of payment processing and therefore exempt. HMRC rejected that claim, deciding that the supplies made by Target to Shawbrook were composite supplies of the management of loan accounts and were therefore taxable. Target sought a review and by a decision dated 25 September 2015 (confirmed by letter dated 8 January 2016) HMRC maintained the view that Target's supplies to Shawbrook were composite supplies of the management of loan accounts and subject to VAT at the standard rate accordingly.
[6] Target appealed to the First-tier Tribunal and by a decision released on 20 April 2018, Judge Sarah Falk (“the FTT”) dismissed Target's appeal, holding that the loan administration services supplied by Target to Shawbrook were a single composite supply that would have qualified for exemption as transactions concerning payment and transfers but since she held that the supplies constituted debt collection, they were excluded from the scope of the exemption and standard rated for VAT purposes accordingly.
[7] Target appealed to the Upper Tribunal and by a decision released on 15 November 2019, Zacaroli J and UTJ Sinfield (“the UT”) dismissed the appeal but for different reasons. The UT held that the loan administration services did not attract the exemption at all because Target's role in transactions concerning payment and transfers was limited to passing the necessary information to “BACS”1 (an automated electronic clearing house system established and operated by a company all the members of which are major UK banks) to enable BACS to give the relevant instructions to the borrower's bank and Shawbrook's bank...
To continue reading
Request your trial
- Target Group Ltd v Commissioners for HM Revenue and Customs
- Target Group Ltd v Revenue and Customs Commissioners
-
SilverDoor Ltd
...exempt. [37] We consider that this approach is also supported by the decision of the Court of Appeal in Target Group Ltd v R & C Commrs [2021] BVC 15, when it noted that “[it is not] relevant that once data messages are sent, BACS operates automatically, as the ECJ confirmed in Bookit II at......