In Target Group Ltd v HMRC [2023] UKSC 35 (11 October 2023), the Supreme Court (SC) decided that the loan administration services supplied by the appellant did not qualify as exempt financial services. The services did not themselves have the effect of transferring funds or change the legal and financial situation.
The case concerned the VAT treatment of services Target Group Ltd (TGL) supplied to a lender. The services included providing instructions to the banker’s automated clearing system (BACS) and making ledger entries in loan accounts, calculating fees, interest, and principal repayments due, and issuing letters in the name of the lender.
The principal issue was whether the services qualified for exemption under VATA 1994 Sch 9 Group 5 items 1, 2, 2A and 8. It was not in dispute that this legislation reflects the exemption provided for in the Principal VAT Directive article 135(1)(d) for transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.
The SC considered whether the instructions TGL provided to (BACS), which automatically and inevitably resulted in the transfer of funds from the bank account of a borrower to the bank account of the lender, meant that the services supplied by TGL were within the scope of the exemption.
The SC rejected an argument that a wide interpretation should be given to the judgment in Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) (SDC). SDC ruled that to fall within the scope of the exemption relating to the transfer of funds, the services must have the effect of transferring funds and change the legal and financial situation. A narrow interpretation of SDC is that the services must in themselves have that effect and make that change. A wide interpretation of SDC is that it is sufficient for the services to have that causal effect.
The SC decided that, in providing instructions to BACS, the services supplied by TGL were functionally indistinguishable from those that were held not to qualify for exemption in HMRC v DPAS Ltd (Case C–5/17) (DPAS). A significant point about DPAS is that it confirms that SDC must be interpreted narrowly.
The SC also rejected an argument that the judgment in ATP Pension Services A/S v Skatteministeriet (Case C-464/12) (ATP) supported the position that the services TGL supplied in making ledger entries in the loan accounts in relation to expected payments were within the scope of the exemption. The Court noted that the entries made in ATP changed the legal and financial situation, whereas the ledger entries made by TGL could not and did not legally change anything.
Why it matters: The decision confirms that a narrow interpretation must be given to the judgment in Sparekassernes Datacenter v Skatteministeriet (Case C–2/95). To fall within the scope of the exemption relating to the transfer of funds, the services must themselves have the effect of transferring funds and change the legal and financial situation, and not merely be a cause of a transfer of funds. It confirms that providing instructions to BACS is not in itself an exempt activity.
Writing in last week’s edition (Tax Journal, 13 October 2023), Hui Ling McCarty KC and Michael Ripley (11 New Square), said: ‘In line with EU law, it is now clear that the exemption for services concerning transfers and payments is narrower than the UK’s higher courts had previously suggested. However, the fact that Target Group is taxable cannot be read across to all non-banking payment service providers.’
They added: ‘Ultimately, however, the courts have yet to be faced with a case which tests the boundaries of the exemption by requiring a deeper exposition of which payment service providers and, crucially, which types of accounting entry, can be said to make the requisite legal and financial changes.’
In Target Group Ltd v HMRC [2023] UKSC 35 (11 October 2023), the Supreme Court (SC) decided that the loan administration services supplied by the appellant did not qualify as exempt financial services. The services did not themselves have the effect of transferring funds or change the legal and financial situation.
The case concerned the VAT treatment of services Target Group Ltd (TGL) supplied to a lender. The services included providing instructions to the banker’s automated clearing system (BACS) and making ledger entries in loan accounts, calculating fees, interest, and principal repayments due, and issuing letters in the name of the lender.
The principal issue was whether the services qualified for exemption under VATA 1994 Sch 9 Group 5 items 1, 2, 2A and 8. It was not in dispute that this legislation reflects the exemption provided for in the Principal VAT Directive article 135(1)(d) for transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.
The SC considered whether the instructions TGL provided to (BACS), which automatically and inevitably resulted in the transfer of funds from the bank account of a borrower to the bank account of the lender, meant that the services supplied by TGL were within the scope of the exemption.
The SC rejected an argument that a wide interpretation should be given to the judgment in Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) (SDC). SDC ruled that to fall within the scope of the exemption relating to the transfer of funds, the services must have the effect of transferring funds and change the legal and financial situation. A narrow interpretation of SDC is that the services must in themselves have that effect and make that change. A wide interpretation of SDC is that it is sufficient for the services to have that causal effect.
The SC decided that, in providing instructions to BACS, the services supplied by TGL were functionally indistinguishable from those that were held not to qualify for exemption in HMRC v DPAS Ltd (Case C–5/17) (DPAS). A significant point about DPAS is that it confirms that SDC must be interpreted narrowly.
The SC also rejected an argument that the judgment in ATP Pension Services A/S v Skatteministeriet (Case C-464/12) (ATP) supported the position that the services TGL supplied in making ledger entries in the loan accounts in relation to expected payments were within the scope of the exemption. The Court noted that the entries made in ATP changed the legal and financial situation, whereas the ledger entries made by TGL could not and did not legally change anything.
Why it matters: The decision confirms that a narrow interpretation must be given to the judgment in Sparekassernes Datacenter v Skatteministeriet (Case C–2/95). To fall within the scope of the exemption relating to the transfer of funds, the services must themselves have the effect of transferring funds and change the legal and financial situation, and not merely be a cause of a transfer of funds. It confirms that providing instructions to BACS is not in itself an exempt activity.
Writing in last week’s edition (Tax Journal, 13 October 2023), Hui Ling McCarty KC and Michael Ripley (11 New Square), said: ‘In line with EU law, it is now clear that the exemption for services concerning transfers and payments is narrower than the UK’s higher courts had previously suggested. However, the fact that Target Group is taxable cannot be read across to all non-banking payment service providers.’
They added: ‘Ultimately, however, the courts have yet to be faced with a case which tests the boundaries of the exemption by requiring a deeper exposition of which payment service providers and, crucially, which types of accounting entry, can be said to make the requisite legal and financial changes.’
