The Supreme Court has ended the long-running dispute between Target Group plc and HMRC concerning the VAT liability of loan administration services. In line with EU law, it is now clear that the exemption for services concerning transfers and payments is narrower than the UK’s Higher Courts had previously suggested.  In a judgment with which the rest of the Court agreed, Lord Hamblen concluded that for the exemption to apply (at 56):

“…the services must in themselves have the effect of transferring funds and changing the legal and financial situation. It is not enough to give instructions to do so thereby triggering a transfer or payment. It is not enough to perform a service which is essential to the carrying out of the transfer or payment, nor one which automatically and inevitably leads to transfer or payment. It is necessary to be involved in the carrying out or execution of the transfer or payment – its “materialisation”. This requires functional participation and performance. Causation is insufficient, however inevitable the consequences.”

Target Group’s role involved giving instructions which automatically and inevitably resulted in payment from the borrowers’ bank accounts to the lender’s.  This was held to be insufficient.

Target Group also failed in its argument that the inputting of entries into the borrowers’ loan accounts with the lender fell within the exemption.  This was because those entries merely recorded expected payments and would be reversed if the payments failed.  Accordingly, these entries did not have the effect of changing the legal and financial situation.

Hui Ling McCarthy KC and Michael Ripley acted for the Respondent (HMRC).

A copy of the judgment can be found here.