Loan administration services fell within the definition of debt collection services
Target Group Limited v Commissioners for Revenue and Customs  UKFTT 226 (TC) was an appeal against a decision by HMRC that loan administration services supplied by the appellant to a UK bank, Shawbrook Bank Limited, were standard-rated supplies for VAT purposes, rather than exempt ones as claimed by the appellant.
HMRC’s decision was made in response to a request for a non-statutory clearance made by the Appellant in May 2015. HMRC concluded that taxable services were supplied, comprising the management of loan accounts and debt collection.
In brief summary, the appellant’s contractual arrangements with Shawbrook related to four categories of loans provided by Shawbrook to customers in the course of its lending business. The appellant’s description of its supplies in its notice of appeal was ‘loan account administration services’. In essence, the services that the appellant provided covered the entire lifecycle of the loans covered by the arrangements, apart from the making of the initial loan or any further advance.
The appellant established loan accounts using its own systems, communicated with borrowers as an undisclosed agent of Shawbrook, and dealt with payments by borrowers and all administrative issues that arose during the life of the loan. The terms of the loans, including interest rates, were set by Shawbrook. Although the appellant was involved in dealing with arrears, any enforcement action would be a decision for Shawbrook.
There was no dispute between the parties that the services provided by the appellant to Shawbrook comprised a single composite supply for VAT purposes, rather than multiple supplies. What was in dispute was the precise nature of the supply, and more particularly whether it qualified for exemption from VAT. The areas of dispute included, in particular, whether the appellant’s supplies were excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.
The appellant’s work started immediately after a loan was made, with the creation of loan accounts and, from then on, their day-to-day operation and dealings with Shawbrook’s customers up to the point of final repayment. The appellant had day-to-day control over and responsibility for operating the relevant loan accounts, which was the mechanism through which it maintained and continuously updated the financial relationship and position between Shawbrook and its borrowers.
The appellant made the point that, in contrast to a ‘classic’ debt collection function which would simply involve pursuing repayment until a portfolio of debts was repaid, the appellant was remunerated by Shawbrook for doing the opposite, because the basis on which it was remunerated was linked to the number of loans outstanding.
Where a payment was missed the appellant was required, under regulatory obligations, to notify the borrower of the failure and seek an understanding of the reason, and then work with the borrower to agree an arrangement to repay the outstanding amount over an agreed period.
The appellant’s primary case was that the principal or core supply it made to Shawbrook related to payments and transfers. In the alternative, the principal or core supply related to the operation of accounts (specifically, current accounts), or amounts to transactions concerning debts. To treat what the appellant did as debt collection would denature the exemption, because almost every payment involves the discharge of a debt. It would call into question a significant part of banks’ activities, for example the collection of direct debits. Any facilitation for the payee’s side would be caught.
HMRC’s case was that, if the appellant’s supply fell to be treated as ‘transactions…concerning… payments, transfers, debts’, then it was excluded from the exemption as debt collection. In the alternative, if the appellant’s contention was that the service was not debt collection because of additional elements, then what was supplied amounted to credit management services which would be taxable in any event. Management of credit is exempt only when carried out by the person granting it, under Art 135(1)(b) PVD(Principal VAT Directive) and Item 2A, Group 5, Sched 9 VATA 1994.
HMRC argued that once it is accepted, as it has to be in the light of HMRC v Axa UK plc (Case C-175/09), that debt collection covers amounts as they fall due rather than simply amounts that are overdue, then it must follow that the payments or transfers processed by the Appellant can be described as the collection of debts. This was the case whatever the length of the relationship and irrespective of the fact that Shawbrook was a financial institution. The principal amounts paid by borrowers are just as much debt as interest and charges, and indeed perhaps more obviously so given the nature of a lending transaction.
The First-tier Tribunal concluded that the loan administration services supplied by the appellant to Shawbrook fell within the definition of debt collection services and accordingly were not exempt. The appeal was therefore dismissed.
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