VAT exemption for negotiation of credit applies to lead generation services

In a broadly taxpayer-friendly decision, the First-tier Tribunal held that the online services provided by "lead generators" to a payday loan provider qualified for the VAT exemption for the negotiation of credit. The decision also supports similar conclusions in the context of online introduction services for insurance products.

Suppliers of financial services and insurance products which have incurred VAT on payments made to lead generators should therefore consider the arrangements carefully to assess whether this decision provides a basis for recovering the VAT and, if appropriate, should make any applicable reclaims of the VAT.

More generally, this decision gives useful guidance in respect of the factors that may help determine whether a service is within the "negotiation of credit" exemption in other situations. Clarification of the scope of the VAT financial services intermediaries exemption is welcome, given the constant evolution of services in this sector and the resulting uncertainty as to what is exempt. 

VAT intermediaries exemptions for negotiation of credit or insurance

UK legislation provides that the financial services intermediary exemption applies to "the provision of intermediary services in relation to the granting of any credit (among other things), whether or not any such transaction is finally concluded, by a person acting in an intermediary capacity". 

Intermediary services are defined as "the bringing together of persons who are or may be seeking financial services with persons who provide such services, with a view to the provision of financial services including preparatory work but excluding market research, advertising, promotional or similar activity, or the collection, collation and provision of information in connection with such activities."

A very similar exemption applies to the provision by an insurance broker or agent of the services of an intermediary relating to an insurance transaction. Again, such services include the bringing together, with a view to the insurance of risks, of persons seeking and persons providing insurance, and the carrying out of work preparatory to the conclusion of contracts of insurance.

Lead generation services

The lead generators ("leadgens") provide the service of generating leads for its customers which offer various products to consumers. 

In this case, the customer was a payday lender, Dollar Financial. Potential borrowers finding the leadgen's website would fill in an application form and then, depending on which of the criteria they fulfilled, would be directed to a suitable payday lender. If the potential borrower met the criteria of more than one payday lender, the leadgen passed the lead on to whichever lender would pay the most for it.

On receiving an offer of a lead from the leadgen, the payday lender then decided electronically – and almost instantaneously –- whether to purchase the lead. Broadly, the decision was taken by double-checking that the relevant criteria were fulfilled and then carrying out a credit check. The payday lender would reject leads where it had a pre-existing relationship with the potential borrower. Commission was then paid to the leadgen for any lead that was purchased.

Intermediary, not "mere conduit"

The Tribunal concluded that the leadgens in this case were acting as intermediaries and not mere conduits, and the services were therefore eligible for the exemption from VAT. 

In particular, the leadgen was obliged to filter the borrowers so that the introduction was only offered to those lenders whose criteria the borrowers met. It was not then relevant that the leadgen offered the potential borrower to the lender paying the highest commission rather than the one with the best deal for the borrower; in other words, the intermediary need only undertake an assessment on behalf of one of the parties.

The Tribunal noted that the level of assessment made by, or extent of involvement of, the intermediary will necessarily depend in part on the complexity of the product. Payday loans are very simple products, normally for relatively small amounts, and therefore the intermediary's assessment of the borrower could also be straightforward. More sophisticated financial or insurance products would require an intermediary to undertake a more in-depth assessment.

The Tribunal did not agree that there was no real assessment of the borrower by the leadgen, either because the filtering took place automatically and in seconds, or because only about one per cent of leads were actually paid for as a result of most potential borrowers being already known to the lender in question. Even a simple, broad filter automatically applied by the leadgen is of use to a lender, provided only that it is not too basic to eliminate unsuitable candidates for loans. There is no need for the intermediary to be exercising judgement or discretion on behalf of its clients.

This guidance, together with the factors set out in the box, should assist those both making and receiving lead generation (or similar) services determine whether VAT is chargeable or not.

Determining eligibility for the exemptions – key factors distilled from legislation and case-law:

• What matters is the nature of the supply and not the identity of the supplier
• An intermediary can act entirely electronically
• An intermediary will be remunerated for intermediation but will not be a party to the contract between borrower and institution
• Negotiation can be exempt even if no contract results
• An intermediary can be one in a chain of intermediaries, and does not have to undertake the entire mediation
• Intermediation does not include the carrying out of back office functions, which functions include customer services such as explaining the terms of a loan and advising on the procedure for entering into the loan. 
• An intermediary is someone who:
  introduces two parties, one looking for a financial product and one providing it;
  negotiates the terms of such products as between the borrower and lender; or
  concludes a contract on behalf of one or other parties
• An intermediary carrying out introductory services must do more than merely advertising or acting as a mere conduit; that extra could be assessing the suitability of the service provider.

Please click below for further articles in this newsletter: 

State Aid decision on profit allocation methods

Capital allowances on leases of plant and machinery – consultation

Tackling disguised remuneration

Longridge: what is an economic activity for VAT purposes?