Commissioners for Her Majesty's Revenue and Customs v AXA UK PLC
Denplan, a subsidiary of AXA, provides services to dental practices, including the operation of payment plans between dentists and patients.
Under these payment plans, the patient enters into a contract with the dentist agreeing to pay a monthly fee and signs a direct debit mandate in favour of Denplan. Denplan transmits information about the patient and instructions about payment to the Bankers Automated Clearing System (BACS). BACS operates the debits and the amounts are credited through Denplan to the dentists. Denplan deducts a fee for its services in operating the payment system.
Article 13 of the Sixth Directive (implemented in the UK in Item 1, Group 5 of Schedule 9 to the VAT Act 1994) lists activities that are exempt from VAT. Under article 13B, these include "transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring".
AXA claimed that the fees deducted by Denplan did not attract VAT because they were for services which related to exempt transactions concerning payments and transfers.
At first instance, the VAT Tribunal found that the services, so far as they related to payment handling, were exempt but that the fees were for a number of services (of which payment handling was one) and were to be apportioned.
The High Court agreed that the payment handling services were exempt but concluded that, since the essential element of the transaction between Denplan and the dentists was arranging for payment to the dentists, this was a single service for the purposes of VAT.
The judge analysed ECJ and UK case law on the meaning of "transfer" of monies and particularly the tests established in the ECJ case of Sparekassernes Data Center (SDC) v Skatterministeriet. That decision indicated that a "transfer" had to have the effect of transferring funds and result in changes in the legal and financial situation of the parties.
The judge concluded that, by issuing instructions to effect the debits through the BACS system, Denplan fulfilled these requirements. It caused the debits to be made, even though the process of making the debits and crediting the amounts operated automatically under BACS once instructions had been given.
The judge rejected HMRC's argument that the exemption could only apply where the services were provided by a party which had a similar role to a bank or financial institution.
HMRC appealed. The Court of Appeal referred a number of questions to the European Court, broadly seeking clarification of the tests in the SDC case as applied to services provided by a non-bank and where the payments operate automatically under the BACS system.
The ECJ held that the services provided by Denplan were subject to VAT.
The VAT exemption in article 13B of the Sixth Directive expressly excludes "debt collection or factoring". The ECJ said this exception to the exemption had to be interpreted broadly and was not limited to unpaid debts or debits in default. According to European case law, it includes "transactions designed to obtain payment of a pecuniary debt".
On this basis, the ECJ found that Denplan's services were covered by the term "debt collection and factoring". The object of the service was to benefit Denplan's clients – the dentists – by organising payment of sums due from patients. It was irrelevant that there was no default involved and that the monies were collected as soon as they fell due.
The ECJ, however, confirmed that, in line with case law, the availability of the exemption depends on the nature of the services provided, not on the identity of the person supplying or receiving the service. It did not matter that the supplier was not a bank or other financial institution.
It also concluded that the services provided by Denplan comprised a single supply for VAT purposes.
The decision introduces further uncertainty for taxpayers in interpreting the financial services and insurance exemption in cases where the facts do not fall clearly within existing case law. It also has implications for outsourcing or other services structures which include similar arrangements. The very broad interpretation of the debt collection exception could potentially place many payment-related services outside the exemption.
Parties to arrangements involving payment services should review whether the wide meaning given to debt collection could lead to services being subject to VAT.
Generally, the case is a reminder that VAT risk (including a change of law or application as a result of a decided case or change in HMRC approach) should be clearly allocated between parties to an agreement.