The Advocate General (AG) of the CJEU has given his views on the extent of the exemption from VAT for "transactions concerning payments or transfers", reiterating that to fall within the exemption, the supply of services in question must result in the legal and financial changes which are characteristic of the transfer of a sum of money.
In practice, this means that only those actually executing the transfer will be providing exempt services and not those simply requesting that others do so or undertaking other administrative functions, however essential to the payment or transfer.
The AG also made some remarks indicating that a restructuring of arrangements to obtain a more favourable VAT result could be ignored if the "commercial reality" of the arrangements remained the same. This is somewhat controversial as there is often more than one way of achieving the same economic result and, in the absence of sham or Halifax abuse, the taxpayer would not normally expect its transactions to be recharacterised for VAT purposes.
Provision of payment plan administration services
DPAS provided dental plans under which patients could spread the cost of their dental treatment and healthcare throughout the year. Initially, the associated management, administration, finance and insurance services were provided by DPAS directly to the dentists. In the main, this consisted of receiving the monthly fee from patients, deducting its fee and the amount to be paid to the insurer before paying the remainder to the dentists.
After the CJEU decision in Axa, that a service to dentists of taking payments from patients and passing them to dentists was debt collection and therefore excluded from the VAT exemption, DPAS restructured its contractual arrangements so that it provided in part taxable dental payment plan services to the dentist and in part exempt dental payment plan facilities directly to patients. It was the tax treatment of the latter contracts that was in issue.
Transactions concerning payments or transfers
It is by now clear that a transaction concerning payments or transfers must result in the legal and financial changes which are characteristic of the transfer of a sum of money.
DPAS's direction that money be taken by direct debit from a patient's bank account and passed by DPAS, after deduction of DPAS's remuneration, to the patient's dentist and insurance provider did not involve DPAS itself debiting or crediting any accounts over which it had control. Even though the services provided were essential to the resulting transfer of funds, DPAS was simply asking the relevant financial institutions to transfer the funds and the services supplied were therefore merely "physical, technical or administrative". This is not sufficient to fall within the exemption.
Although the CJEU in Axa said that the supply of these kinds of payment administration services were "in principle" transactions concerning payments which were exempt (albeit then excluded from the exemption by being taxable debt collection), the AG did not seek to distinguish the cases but instead said that the CJEU was wrong on this point.
We expect the CJEU to follow this approach as it did implicitly in the Bookit/NEC cases but it will be interesting to see whether it does hold that its decision in Axa was wrong on this point.
Debt collection and economic reality
The CJEU in Axa held that debt collection for VAT purposes includes collecting payment that have fallen due for payment but are not in arrears. Since Denplan in that case was providing a service to the creditor (dentist), this meant that the services were taken outside the VAT exemption and were taxable debt collection.
It has generally been thought that a debt collection service can only be one that is provided to the creditor, hence DPAS restructuring to contract directly with the debtor patients to the extent possible.
However, the AG here commented controversially that the contractual form of the arrangements as being between DPAS and the debtor was irrelevant as the economic reality of the supply remained unchanged from the former contractual arrangements between DPAS and the creditor. Therefore, even had the AG considered the services to be exempt in principle, they would nonetheless have been taxable debt collection in the same way as in Axa.
In the context of alleged VAT abuse in the case of Newey, the Court of Appeal considered that an evaluation of the economic and commercial reality of a structure should not be done by reference to an earlier, less tax efficient arrangements entered into by the taxpayer but by considering only the current arrangements. If this were not the case, different taxpayers with identical arrangements could face different tax treatments depending on whether they had carried out a restructuring of previous arrangements or not and that would be contrary to the principles of fiscal neutrality and legal certainty.
If the CJEU also considers the services not to qualify for the "payments and transfers" exemption from VAT, its view on this point will be interesting. One would hope though that, absent sham or wholly artificial arrangements, the contractual form of arrangements would be respected whether or not a different, less favourable, structure had been used in the past.
Payment administration services
This decision can be contrasted with a recent decision of the First-tier Tribunal, Target, in which it was held that loan administration services provided by Target to a bank were exempt transactions concerning payment or transfers, albeit that they nevertheless fell outside the exemption as taxable debt collection services. As Target kept the relevant records of interest and payments, it was held that this constituted effecting the relevant accounting entries – it was not merely sending instructions for processing by a bank.
While services which involve only issuing of instructions regarding payments are unlikely to fall within the scope of the exemption, in circumstances where an entity is keeping accounting records on behalf of a financial institution as part of an outsourcing arrangement, there remains the possibility that such services could fall within the exemption.
