The ECU Group Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 July 2010 |
| Date | 01 July 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00585.
[2010] UKFTT 297 (TC).
John Walters QC (Judge), Ms. Sonia Gable.
Greg Sinfield, Lovells LLP, for the Appellant
Anna Markham, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
The following cases were referred to in the judgment:
Bookit Ltd v R & C CommrsVAT [2006] BVC 605
C & E Commrs v AXA UK plcVAT [2008] BVC 605
C & E Commrs v CSC Financial Services LtdECASVAT (Case C-235/00) [2002] BVC 253
C & E Commrs v Electronic Data Systems LtdVAT [2003] BVC 451
First National Bank of Chicago v C & E CommrsECASVAT (Case C-172/96) [1998] BVC 389
Ludwig v Finanzamt LuckenwaldeECASVAT (Case C-453/05) [2009] BVC 967
Sparekassernes Datacenter (SDC) v SkatteministerietECASVAT (Case C-2/95) [1997] BVC 509
Swiss Re Germany Holding GmbH v Finanzamt München für KörperschaftenECASVAT (Case C-242/08) [2010] BVC 259
Velvet & Steel Immobilien und Handels GmbH v Finanzamt Hamburg-EimsbüttelECASVAT (Case C-455/05) [2009] BVC 961
Exemption - Financial services - Service of managing foreign currency exposure of a multi-currency loan provided to client by third-party lender - Whether essential aims and features of the service were the execution of foreign exchange transactions - Whether the service was properly characterised as transactions concerning payments, transfers or currency within the 2006 VAT directive (Directive 2006/112), eu-directive 2006/112 subsec-or-para 1 article 135art. 135(1)(d), (e) and Value Added Tax Act 1994, Value Added Tax Act 1994 schedule 9 group 5Sch. 9, Grp. 5, item 1 - Where transactions effected using a prime broker, whether the service also fell within the exemption on the basis that it was the provision of intermediary services within Grp. 5, item 5.
The issue was whether services provided by the appellant in respect of multi-currency mortgages were exempt for VAT purposes. The appellant contended that the services were, indeed, exempt because they were supplies of currency exchange and/or of currency management services or they were financial intermediary services in relation to currency exchange.
The appellant's services were described as a multi-currency debt management programme with the objectives of reducing the size of a client's debt by borrowing in currencies which fell in value against sterling, and of reducing the cost of servicing the debt by borrowing in currencies which had a lower interest rate than sterling. On being engaged by a client, the parties entered into a private client agreement for discretionary multi-currency debt management services. Under this agreement, the appellant was appointed by the client under a power of attorney to manage the foreign currency exposure of a loan provided to the client by a stated lender. This involved instructing the lender or any prime broker or counterparty to change the currency exposure and denomination of the loan as and when the appellant considered it appropriate to do so. For its services, the appellant was paid a monthly management fee and, if the scheme was profitable, an annual performance fee.
The commissioners contended that the appellant's services were not exempt because, objectively, they were discretionary multi-currency debt management services. The commissioners maintained that such services were taxable unless supplied by the person who had granted the credit being managed, in which case they fell within the exemption in the Value Added Tax Act 1994, Value Added Tax Act 1994 schedule 9 group 5Sch. 9, Grp. 5, item 2A. On the evidence, according to the commissioners, the appellant did not deal with any money, payments or currency. Nor did the appellant provide relevant intermediary services in bringing together persons providing financial services and persons seeking them, since the contract for financial services to which the client was a party, namely the loan, already existed before any currency management took place. The appellant argued that its services were exempt because they satisfied the requirements of the 2006 VAT directive (Directive 2006/112), eu-directive 2006/112 subsec-or-para 1 article 135art. 135(1)(d), which corresponded to the domestic exemptions in Sch. 9, Grp. 5, items 1 and 5.
In considering the precise nature of the services supplied, the tribunal concluded that the essential aim and essential features of the appellant's services were the use of its best endeavours in the procurement for the client of a reduction in the capital value of its loan by means of foreign exchange (forex) transactions. The exchange of one currency for another was the essence of the services provided by the appellant even though it did not actually make any such exchanges. Adopting the Sparekassernes Datacenter test as analysed by the High Court in R & C Commrs v AXA UK plc, the tribunal acknowledged that whether a service provided had the effect of transferring funds and bringing about changes in the legal and financial situation depended on whether it had truly effected, in the sense of brought about, a transfer. The tribunal was satisfied that the only realistic answer to the question posed by that test was that the appellant's services did, indeed, bring about currency transactions and, more generally, payments or transfers. It followed that the appellant's services, when trading was conducted by a lender's treasury team, formed a distinct whole which fulfilled the specific essential functions of transactions concerning currency and/or payments or transfers. The same conclusion was reached in respect of the appellant's services when a prime broker was used to conduct foreign exchange trading.
So far as the appellant's contention that it had acted as an intermediary was concerned, the tribunal rejected the commissioners' argument that art. 135(1) and item 5 of Grp. 5 could not be in point because the loan was already in place when the appellant agreed to supply its services to the client. The financial transactions relative to which negotiations were relevant were the foreign exchange transactions which, as the tribunal had held, were the essence of the services supplied by the appellant. In a minority of cases, where trading was conducted by a lender's treasury team, and the appellant's role was merely to instruct them to trade the relevant currencies, there was no identifiable service of negotiation provided, since the appellant was not involved in bringing together the parties undertaking the foreign exchange transaction. However, where the prime broker's services were used, the appellant did bring together the prime broker and the relevant execution banks and the prime broker and the various lenders. These were intermediary services within the specific exemption in item 5 of Grp. 5.
Held, allowing the company's appeal:
1. The appellant's services were exempt within both art. 135(1)(d) and (e) of the 2006 VAT Directive and item 1 of Grp. 5 of Sch. 9, as it fell to be interpreted in conformity with art. 135(1).
2. The appellant's services to a client where the relevant foreign exchange trading was conducted by a lender's treasury team did not fall within the specific exemption in item 5 of Grp. 5 for the provision of intermediary services, but they did where the prime broker's services were used.
1. This appeal, brought by The ECU Group plc ("the Appellant") on 31 March 2009, is against a decision of the Respondents ("HMRC") given by one of their officers, Mr. David Potter, that certain services provided by the Appellant in respect of multi-currency mortgages are not exempt for VAT purposes. Mr. Potter's decision was upheld on review by another officer of HMRC, Mr. Steve Doherty, in a letter dated 11 March 2009. The Appellant contended in its grounds of appeal that the services were indeed exempt from VAT for one or both of the following reasons: (a) the services are supplies of currency exchange and/or of currency management services and are exempt from VAT; (b) the services are financial intermediary services in relation to currency exchange and are exempt from VAT.
2. We were referred to extensive documentary evidence. We also received a Witness Statement, and oral evidence, from Mr. Paul Wheldon, the Appellant's Head of Finance.
3. A document, being a type of brochure, produced by the Appellant for clients and potential clients, gives a description of the services the Appellant offers. They are described in the document's introduction section as a multi-currency debt management programme, with the objectives of reducing the size of a client's debt by borrowing in currencies which fall in value against sterling, and reducing the cost of servicing the debt, by borrowing in currencies which have a lower interest rate than sterling.
4. Under the heading "The need for professional management", the document has the following narrative:
Bridging the gap between borrowers' needs and their capabilities.
It must be pointed out that achieving interest rate savings and debt reductions and, more importantly, maintaining them over the term of a loan is a much more complex [sic] than any simplified example may suggest.
For most private individuals, the reality of trading the many available currencies coupled with the need for extensive analysis and monitoring, has meant that controlling foreign exchange risk extends beyond the scope of their resources.
To ensure that interest rate differentials and exchange rates can be used to the borrower's best advantage, a professional currency management company is strongly recommended. Indeed many lending banks will not extend a multi-currency loan facility unless an approved currency management company has been engaged.
A currency debt manager's role is to seek to maintain debt in currencies that are expected to weaken against (or, at least, remain stable against) sterling, whilst achieving an interest rate advantage. Given sterling's...
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