V@ update - October 2023
Welcome to the October 2023 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world relevant to your business.
News
- HMRC has updated VAT Notice 700 to include revised language relating to the penalty regime.
- HMRC is writing to businesses registered at 'high volume' addresses to seek evidence that they are, in fact, established in the UK for VAT purposes. If they do not respond, HMRC may consider these businesses not to be established in the UK.
- Recorded webinars about the Flat Rate Scheme, VAT Accounting Scheme and VAT basics, have been added to HMRC's website.
Case reports
Target Group Ltd v Commissioners for HMRC [2023] UKSC 35
Financial services exemption – Supreme Court confirms that outsourced loan administration services are standard rated supplies for VAT purposes.
Target Group Ltd (Target) provided loan administration services to Shawbrook Bank Ltd (Shawbrook). The detail of the services provided can be stated shortly.
Shawbrook issued loans to borrowers and passed the loan origination data onto Target. Target then created a 'loan account' and recorded the balance of the loan, the next repayment date and the amounts to be applied to the next payment. Once the account was created, Target also interacted with the borrower to facilitate repayment by creating standing direct debit instructions. The loans were repaid by transfers from the borrower's bank account to Shawbrook each month and Target recorded these payments and updated the loan account. Target also accepted and processed overpayments and monitored and applied corresponding repayment charges. Once a loan reached its full contractual term, Target was responsible for closing the account.
Critically, the services were limited to 'management'. Target did not transfer funds to the borrower.
In May 2015, Target sought a non-statutory clearance from HMRC contending that the services outlined above were exempt from VAT.
HMRC responded with a letter stating that Target's services were vatable. This decision was upheld on an internal review and subsequently by the First-tier Tribunal (FTT), Upper Tribunal (UT) and Court of Appeal (CA).
Target appealed the CA's decision to the Supreme Court (SC).
Target contended that its loan administration services were exempt for VAT purposes on the basis of Article 135(1)(d), Council Directive 2006/112/EC (the Principal VAT Directive), which provides that the following transactions are exempt (emphasis added):
"transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection"
This exemption was implemented in UK legislation by Item 1, Group 5, Schedule 9, Value Added Tax Act 1994 (VATA), which exempts the following:
"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".
The SC noted that the effect of sections 2 and 5(2), European Union (Withdrawal) Act 2018, was that EU-derived domestic legislation (such as VATA) must be interpreted, as far as possible, in accordance with EU law (due to the principle of supremacy of EU law). For that reason, their interpretation focussed on the effect of the wording in the Principal VAT Directive.
Target's case was that its services were, for the purposes of Article 135(d) of the Principal VAT Directive, either:
- transactions concerning payments and transfers,
- transactions concerning debts, and/or
- transactions concerning current accounts.
The argument that the loan accounts were effectively current accounts, was dealt with shortly by the SC. It was held that the loan accounts should not be considered current accounts for the purposes of the exemption because they lacked the essential characteristics of current accounts, being the ability to deposit and withdraw funds in varying amounts and to pay third parties.
In dealing with grounds 1 and 2, the SC started by clarifying the general principle that the financial services exemption should be strictly construed in a way that does not have the effect of extending its scope beyond the fair meaning of the words contained in the Principal VAT Directive.
The SC then undertook a review of EU case law in relation to the interpretation of 'transactions concerning payments and transfers'. It was confirmed in Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) [1997] ECR I-3017 that the decisive feature of a transaction concerning payment or transfer is the existence of a transaction consisting of the execution of an order for transfer of a sum of money, involving a change in the legal and financial situation as between the relevant parties.
Essentially, the service must execute an order for the transfer of a sum of money in order to fall within the exception.
Applying these principles to the services Target provided, the SC concluded that it did not fulfil the essential functions of a financial transaction within the meaning of Article 135(1)(d), Principal VAT Directive. Target did not provide the original loans or advance money to the borrowers, it did not debit or credit an account directly, it did not execute payments (it only provided instructions to third parties to execute payments - including by BACS) and it did not assume responsibility or liability for achieving a transfer or payment in its services.
In relation to transactions concerning debt, the SC considered that the same reasoning applies because the wording of the exemption makes clear that each transaction referred to concerns services or instruments that operate as a way of transferring money. In other words, a 'transaction concerning debt' would still require the effect of the transaction to be change the legal and financial situation of the respective parties, which was not the case in this instance.
Why it matters: This decision could have significant implications for payment processors, outsourcers, and the wider financial services market. Consideration should be given to the transactions which occur throughout commercial arrangements to determine whether a payment or transfer is actually effected and the potential VAT consequences.
The judgment can be viewed here.
R (oao Royal Surrey NHS Foundation Trust) v HMRC [2023] EWHC 2354 (Admin)
Recovery of input tax – High Court confirms taxpayer was entitled to VAT concession
The claimant, the Royal Surrey NHS Foundation Trust (the Trust) applied to the High Court (HC) for judicial review in relation to a decision of HMRC to deny it the benefit of a concession to recover input tax in respect of its onward supply purchase of machines used for radiation therapy for cancer patients, known as Linacs.
The Linacs were purchased via NHS Supply Chain and were later supplied to Healthcare Partners Ltd (HPL), an entity wholly owned by the Trust. After the Trust ordered the Linacs from NHS Supply Chain, but before the Linacs were supplied to the Trust, the board of the Trust approved a revised final business plan. This provided for, amongst other things, the transfer of the Linacs and other medical equipment to HPL. The Trust considered that this transfer was a business activity.
The Trust wished to benefit from a concession which allows members of the NHS VAT division, such as the Trust, to recover input tax (the Concession). The Concession, originally published by HMRC in Newsletter 1/98, was repeated in subsequent materials from 2004. Importantly, the Concession only applies in respect of business activities.
HMRC argued that the Trust was not entitled to benefit from the Concession because, at the time the Trust purchased the Linacs, it was not intended for the machines to be used for a business activity. Therefore, according to HMRC, the purchase of the Linacs did not fall within the ambit of the Concession and therefore the Trust was not entitled to recover the input tax. The Trust sought judicial review of HMRC's decision to deny it the benefit of the Concession.
The HC held that the Concession did apply. In coming to this conclusion, the HC noted that HMRC had failed "to grip the issue of time of supply for the purposes of judging the relevant intention of the Trust". HMRC had failed to recognise that there is a distinction between the time at which the Trust "purchased" the Linacs and the time at which the Linacs were "supplied" to it. The HC concluded that at the relevant time, which was when the Linacs were supplied to it, the Trust's intention for the Linacs was a business activity. Therefore, the purchase of the Linacs fell within the Concession and the Trust was entitled to recover the input tax.
Why it matters: This case highlights the difference between "purchase" and "supply" and that these two terms are not synonymous. Further, a party's intention may validly change between the time of purchase and the supply stage.
The judgment can be viewed here.
Intelligent Money Ltd v HMRC [2023] UKUT 00236 (TCC)
Exemptions - UT confirms self-invested pension plans are not exempt "insurance transactions" for VAT purposes
Intelligent Money Ltd (IML) supplied services establishing and administering self-invested pension plans (SIPPs). IML operated a SIPP, charging members annual and other event-related fees. It did not charge VAT on these fees, contending that they fell within the scope of the exemption from VAT available in respect of insurance transactions under Item 1, Group 2, Schedule 9, VATA (the Insurance Exemption). HMRC determined that the services in respect of which IML charged these fees did not qualify for the Insurance Exemption. In HMRC's view, the fees were payments for non-exempt services, not risk premiums (which would have been exempt). IML appealed to the FTT, which dismissed its appeal. It then appealed to the UT.
IML argued that an insurance transaction does not require the insurer to bear financial risk, which it considered the FTT had wrongly imposed as a criterion. IML also argued that the FTT failed to appreciate that a consequence of its decision was that life insurance policies with an investment element, such as those in Fuji Finance Inc v Aetna Life Insurance Co Ltd [1997] Ch 173, cannot benefit from the VAT exemption.
The UT dismissed IML's appeal. The UT relied on CJEU principles that define insurance transactions as involving an insurer providing a service to protect the insured from specified risks upon the materialisation of those risks. The UT concluded that an essential feature of an insurance contract is that the insured person obtains protection from the relevant risk or uncertainty and that the cost of payments or services related to that risk must not be borne by the insured party.
In this case, none of the SIPP members' payments could be seen as risk premiums, and the fees collected were primarily for administrative services, not contingency-related costs. Members of the SIPP carried the risk of investment performance and risks associated with the nature and timing of benefits taken. Additionally, when life and death benefits were paid under the SIPP, only administrative services were provided, funded by the member, and those services did not constitute a contractual obligation of IML.
In relation to the Fuji case, the UT noted that the decision in that case was not made in the context of an exemption from VAT. The UT also noted that the effect of its conclusions was that if an insurance exemption could extend to some life insurance contracts with an investment element, there was a distinction between cases where the premiums became owned by the insurance company and the cost of the payment benefits was made out of the insurance company's own resources and cases where the premiums remained substantially owned by the insured person and the benefits were paid out of funds held substantially for the benefit of the insured person and/or the beneficiaries.
Why it matters: This case confirms the application of CJEU case law principles in relation to insurance transactions. Therefore, for the purposes of VAT, an 'insurance transaction' must involve the assumption of risk by someone other than the insured.
The decision can be viewed here.