FS providers and outsourcing: the potential hidden VAT cost

It is clear following Axa Denplan (CJEU Case 175/09), that services which fall within the description of 'payment processing' will only qualify for VAT exemption in very limited circumstances. 

Where exactly the boundaries of the relevant legislation lie however, has been tested in a steady succession of cases since Axa Denplan, with the most recent of these - Target Group Limited v The Commissions for Her Majesty’s Revenue & Customs [2018] UKFTT 0226 (TC), providing a useful summary of the previously enunciated principles.

The question for the First Tier Tribunal (FTT) in Target Group was in summary, whether services provided by an outsourcing company to a lender qualified for exemption - either because they consisted of the 'transfer or receipt of, or any dealing with money' or because they constituted 'transactions involving current accounts'.

In summary, the services involved setting up customers’ direct debits, allocating payments to different customers’ loan accounts, issuing statements to the lender, and seeking to recover outstanding amounts. 

While the FTT agreed that certain features of the services fell within the exemption, they concluded that the main objective of the services was the collection of debts – emphasising that the collection of an amount which is due, as opposed to overdue, still falls to be treated as a standard rated 'debt collection' service.  

Furthermore, the FTT held, the services could not be “transactions involving current accounts” as for these purposes, the characteristics of a current account were too dissimilar to those of a loan.

At a technical level, this is a lengthy decision which covers a wide range of fundamental principles and questions – including principles of legislative interpretation, whether the VAT treatment of a service is determined by its associated contractual documentation or its substance, and whether there is a 'single supply' or 'multiple supplies' for VAT purposes.

However, from a practical perspective, the message appears to be clear: unless the provider of 'payment processing' services either debits or credits an account itself, or can change accounting entries on the account which is subject to such debits or credits, the exemption does not apply. 

It is also clear that the Courts will continue to look at the overall objective of the services when determining their VAT liability; in short, if the reason that the service or services are being provided is to collect amounts which are either due or overdue, the exemption will not apply.

From the perspective of suppliers of outsourcing services, Target Group is further confirmation that the VAT treatment of services of this nature is complex and clarification should be sought where there is any doubt as to the correct VAT treatment.

Conversely, from the perspective of the recipients of such outsourcing services, the case demonstrates the importance of considering ways of reducing the VAT exposure which could arise if the VAT treatment of services changes from exempt to taxable – for example, restructuring supplies, renegotiating relevant contractual terms and changes to entity structures.