Target Group Limited (Target) provide loan servicing to clients, typically banks and investment houses.  This service entails managing the loan accounts of borrowers, collecting sums due, calculating interest and fees due under the loans, and corresponding with borrowers.  Since many of its customers, being banks and financial institutions, cannot reclaim VAT where its services are considered exempt this would help encourage loan providers to outsource their loan servicing needs to Target.

Using a contract that it had arranged with Shawbrook Bank it requested from HMRC non-statutory clearance that the services contemplated in the contract were exempt of VAT being composite supplies of payment processing services.  HMRC disagreed and held that the services were not exempt but were composite loan administration services.  Target requested an internal HMRC review which also held the services were taxable and Target appealed to the lower tax tribunals, both of which dismissed Target’s appeals.  Target then appealed to the Court of Appeal (CoA).

In a similar manner to HMRC and the lower tribunals, the CoA reviewed the relevant legislation, the case law surrounding that legislation, the prior decisions and the services provided by Target.

Target contended that as they submitted information to the BACS system that they were generating payments, since the BACS systems was fully automated.  An earlier VAT case had held that since BACS was an automated system, in effect those submitting payments were making exempt services of payment processing. This was an older case decided at the CoA.  Since then, more cases on payment services had been held at the CJEU and subsequently held that services of submitting payment information (credit card details) were not providing payment processing services but administration services to facilitate the account holders’ (the card providers and the purchasers) necessary communications.  As UK courts are required to follow the CJEU in respect of VAT matters the CoA sided with the more recent case law from the CJEU holding that just submitting information to the BACS systems to generate direct debits was not payment processing.

The CoA dismissed Target’s appeal.

The decision can be found at: Target Group Ltd v Her Majesty’s Revenue And Customs [2021] EWCA Civ 1043 (12 July 2021) (bailii.org)

This case helps highlights the usefulness of non-statutory clearance procedures where permission is sought from HMRC before entering transactions.  While the case took a long time to settle (6 years) Target at least would have charged VAT from the commencement of the contract with Shawbrook Bank so no nasty VAT surprises happened via an assessment where HMRC disagreed with the VAT treatment.

Please contact us if you have any questions around VAT or need assistance with obtaining clearances from HMRC for contentious tax matters.