Target Group Ltd v Commissioners for HM Revenue and Customs

Heard on 12 and 13 July 2023

Lord Hamblen ( with whom Lord Reed, Lord Lloyd-Jones, Lord Sales and Lady Rose agree):

Value Added Tax (‘VAT’) is paid on all services supplied for consideration by a taxable person and its application is governed by Council Directive 2006/112/EC (the ‘Principal VAT Directive’ or ‘PVD’). The PVD exempts specified supplies from VAT and under article 135(1)(d) this includes various financial transactions. The issue on this appeal is whether loan administration services provided by the appellant (‘Target’) fall within that exemption.

Shawbrook Bank Limited (‘Shawbrook’) is a provider of mortgages and loans. Target administers loans made by Shawbrook, including by operating individual loan accounts and instigating and processing payments due from borrowers.

The article 135(1)(d) exemption applies to “transactions, … concerning …payments, transfers, debts, … but excluding debt collection”. Target contends that the services it provides fall within this provision and so are exempt from VAT. In particular, it relies on the fact that it procures payments from borrowers' bank accounts to Shawbrook's bank accounts by giving instructions for payment which are then automatically and inevitably carried out through the BACS system (BACS is the acronym for Bankers' Automated Clearing System).

The respondent (‘HMRC’) contends that the exemption does not apply because the case law of the Court of Justice of the European Union (‘CJEU’) makes it clear that the exemption only applies to the execution of an order for transfer or payment and giving instructions for payment is a prior step to execution rather than part of the process of execution. The Court of Appeal (and the Upper Tribunal) upheld HMRC's case and Target now appeals against that decision.

Article 135(1) of the PVD lists a series of transactions which are exempt from VAT. These include:

“…

(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; …”

Prior to the PVD coming into force, the two exemptions above were in article 13B(d)(1) and (3) respectively of the Sixth Directive (77/388/EEC). Since 1 January 1991, the exemption for “management of credit” has been restricted to management undertaken by the grantor only.

These exemptions are reflected in national law by Items 1, 2, 2A and 8 of Group 5 of Schedule 9 to Value Added Tax Act 1994. Nothing in this appeal turns on the precise wording of the UK statute.

The interpretation of the PVD is a matter of EU law, as retained pursuant to sections 2, 5(2) and 6 of European Union (Withdrawal) Act 2018.

In their decisions the First Tier Tribunal (‘FTT’) made findings about the services provided by Target to Shawbrook at paras 29 to 57 which were summarised by the Upper Tribunal (‘UT’) at paras 18 to 23 as follows:

“18. The loan accounts maintained by Target are the sole record of the financial relationship between Shawbrook and its borrowers. They are effectively ledgers which evidence the level of indebtedness, capture repayments and record other financial information including fees and interest charged. Target credits and debits the loan accounts with all relevant amounts (payments, fees and interest etc).

19. Target operates bank accounts on behalf of Shawbrook. Target is responsible for matching payments to individual loan accounts and identifying missing payments. The vast majority of payments are made by direct debit. Target is responsible for generating the instructions for direct debit payments, in the form of a BACS file produced by Target's systems which contains electronic payment instructions to banks operating the borrowers' bank accounts, which BACS processes automatically. Target also accepts payments otherwise than by direct debit, eg by debit card payments and cheques.

20. As well as regular payments, Target processes irregular payments, for example where a borrower is in arrears and is seeking to pay amounts towards clearing the arrears, makes an overpayment or is paying off a loan early. Target reconciles and credits the payments to the loan accounts. Target has authority to transfer funds paid by borrowers into an incorrect account to the correct account. It uses both the BACS and CHAPS payment systems, which process instructions issued by Target (on behalf of Shawbrook), to move funds between Shawbrook's bank accounts where required, or to repay sums to the borrower where an overpayment has been made.

21. Target is also responsible for calculating the amounts of interest and principal repayments due, and for calculating and applying any fees. Where Shawbrook makes an additional advance to a borrower, Target follows the same processes as for a new loan with the new outstanding loan amount replacing the previous balance. Where a borrower wishes to repay a loan early, Target is responsible for providing an early settlement quote. It also handles the entire process for any loan repayment, including discharge of security (using Shawbrook's approved panel of solicitors) and closure of the account.

22. Target also deals with missed payments and arrears. For any default, a letter is produced in Shawbrook's name providing formal notification to the borrower and advising them of the fee that will be applied. Target is provided with a certain level of authority by Shawbrook to negotiate how missed payments will be made up, with any longer-term forbearance being referred to Shawbrook. Any changes to the terms of a loan, eg an extension to the loan period, are also a matter for Shawbrook. If an account remains in arrears, the decision whether to take legal action or write off a loan is solely a matter for Shawbrook. If Shawbrook decides to take legal action, Target will work with a firm of solicitors on a Shawbrook approved panel, providing information, keeping records and continuing to handle contacts with the borrower.

23. Target also deals with any overpayments. Generally, borrowers can overpay a certain percentage of the balance, eg 10%, in any year without incurring an early repayment charge. Target amends the loan balance and term as appropriate and issues a letter confirming the overpayment. Alternatively, borrowers may be eligible for a refund if they overpay which Target will process. As mentioned above at [13], Target has authority to process refunds of less than £300 without reference to Shawbrook.”

The principal issue on this appeal is whether Target carried out “transactions…concerning” “payments” and/or “transfers” and/or “debts” within the meaning of article 135(1)(d).

Target contends that it did so on two bases:

(1) By giving instructions which automatically and inevitably resulted in payment from the borrowers' bank accounts to Shawbrook's bank accounts via BACS (‘the payments/transfers issue’); and/or

(2) By the inputting of entries into the borrowers' loan accounts with Shawbrook (‘the loan accounts issue’).

If Target succeeds in its appeal on this principal issue a further issue arises, namely whether its services are nevertheless excluded from exemption because they comprise a single composite supply which amounts to “debt collection” (the exclusion from the exemption under article 135(1)(d)) and/or “the management of credit” by a person other than the person granting it (ie Shawbrook), a supply which is specifically not exempted under article 135(1)(b).

The FTT (Judge Sarah Falk) promulgated its decision on 20 April 2018 [2018] UKFTT 226 (TC). Before the FTT HMRC put Target to proof that its supply fell to be treated as transactions concerning payments or transfers, but did not positively dispute this. Their primary case was that the supply was excluded as being debt collection. The FTT found that Target's supply included transactions concerning payments or transfers within article 135(1)(d) but that the predominant nature of the supply was debt collection and therefore taxable because it was excluded from the exemption.

HMRC appealed to the UT. Between the FTT decision and the hearing before the UT the CJEU gave its decision in HMRC v DPAS Ltd (Case C-5/17) [2018] STC 1615 (25 July 2018) (‘ DPAS’). In the light of that decision HMRC disputed whether Target's supply did include transactions concerning payment or transfer. The UT (Zacaroli J and Judge Greg Sinfield) promulgated its decision on 15 November 2019 [2019] UKUT 340 (TCC), [2020] STC 1. It held that:

“74. The decision of the CJEU in DPAS is, in our judgement, clear and unambiguous. Where the relevant service at issue involves the giving of an instruction to a financial institution to effect a payment, it does not constitute an exempt supply even though it may be a necessary step in order for the payment to be made.”

The UT further held that the role carried out by Target in processing payments was indistinguishable from that of the taxpayer in DPAS and that it did not therefore fall within the article 135(1)(d) exemption. It also held that Target's inputting of accounting entries in the loan accounts did not fall within the exemption as it did not change any party's legal and financial position. It therefore...