Following a strategic review, Lloyds determined that it would close the retail and intermediary business of Bank of Scotland (Ireland) Ltd (BOSI), a subsidiary of Bank of Scotland (BOS).
To retain local administrative capability, historic knowledge and continuity of customer relationships, BOS entered into an agreement with an independent service company (Certus) which would carry out administrative functions relating to the BOSI banking business, using the former BOSI employees.
As part of the proposal, it was intended that some 722 BOSI’s employees would be transferred to Certus under TUPE rules, thereby protecting the employees accrued employment rights, including compulsory redundancy payments.
While there is no dispute that charges levied by Certus for carrying out its services were consideration for supplying these services, and therefore subject to VAT, HMRC determined that redundancy payments, paid by BOS to Certus for onward payment to former employees, was further consideration for that taxable supply of services.
In the VAT world, any payment, whether in specie or by barter arrangement, is a ‘consideration’ if it is paid ‘for’ a supply of goods or services. If a payment does not relate to a supply of goods or services, it cannot be consideration for a supply, and cannot therefore be subject to VAT.
Upon review of service level agreements and the legal framework agreement underlying the arrangements, the VAT tribunal concluded that the obligation imposed on BOS to underwrite the redundancy payments was a stand-alone agreement, quite separate from the terms dealing with the provision of, and payment for, the services performed by Certus.
In Weekly Tax Brief, we often highlight strange and unusual tax tribunal decisions, and frequently highlight cases that should probably never have gone to the tax tribunal in the first place. The incorrect VAT assessment raised by HMRC in this case would appear to fall into the latter.
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