[2009] UKFTT 247 (TC)

TC00196

Appeal Number: MAN/2008/0789 

FIRST TIER TRIBUNAL TAX

 VAT – FINANCE  EXEMPTION – INTERMEDIARY SERVICES – Appellant loan broker – details of unsuccessful applicants passed to sister company offering debt management services – were the Appellant’s supplies standard rated referrals of leads – no – was the Appellant performing routine clerical tasks on behalf of sister company – no – the Appellant  brought the customer and sister company together with a view to forming a contract for financial services which included a relevant financial service of payment handling – Appellant negotiated a relevant financial transaction and acted as an intermediary – Appeal allowed.

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	FRIENDLY LOANS LIMITED	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public at Manchester on 25 and 26 June 2009, final written submissions received 31 July 2009

Edmund King counsel instructed by Alcazar Consulting for the Appellant  

Richard Chapman counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing against a liability ruling of HMRC dated 2 September 2005 which declared its supplies to Gregory Pennington Limited standard rated for VAT purposes. The ruling was upheld on review dated 21 May 2008.
2.	The dispute concerned the liability of the supplies made by the Appellant to Gregory Pennington Limited. Both companies were members of the same corporate group but separate legal entities with their own VAT registration. The Appellant acted as a loan broker specialising in domestic property remortgages. The Appellant’s supplies of arranging loans were exempt from VAT. Gregory Pennington provided debt management services which comprised negotiating debt repayment plans for customers who were having problems paying their creditors and the processing of customers’ payments until their debt was cleared. The provision of debt management services by Gregory Pennington was exempt from VAT.
3.	The disputed supply involved the Appellant’s transmission of details of customers who were not eligible for loans to Gregory Pennington for the purpose of offering debt management services. Gregory Pennington paid the Appellant for the supplies of customers’ details. The Appellant argued that it acted as an intermediary between the customer and Gregory Pennington with a view to concluding a contract for debt management services. According to the Appellant its supplies constituted exempt financial services under Article 13B(d)3 of the Sixth Directive and item 5 group 5 of schedule 9 of the VAT Act 1994. In contrast, HMRC contended that the Appellant was not mediating between the customer and Gregory Pennington. The character of the Appellant’s supplies was that of a referral of a lead which was standard rated for VAT purposes. In any event the Appellant did not qualify for the exemption because it was supplying services to another intermediary. The exemption was only available to the Appellant if its services effected an exempt financial transaction, which according to HMRC was not the case in this Appeal.
The Hearing 
4.	The Tribunal heard evidence from Simon Kay for the Appellant. Mr Kay was the Group Finance Director of Think Money group of companies of which the Appellant and Gregory Pennington were members. Mr Kay gave evidence about the operations of the Appellant and Gregory Pennington.
5.	Peter Geelan, the review officer, gave evidence for HMRC. A bundle of agreed documents was supplied to the Tribunal.
6.	The Tribunal heard the Appeal over 25 and 26 June 2009. A copy of the contract for the debt management services of Gregory Pennington was not admitted in evidence. The Tribunal adjourned the hearing so that a copy of the contract could be admitted and to give the parties an opportunity to make representations on the contract. The Tribunal received the last set of representations on 31 July 2009.
The Law
7.	For the purposes of this Appeal reference was made to the provisions of the Sixth VAT Directive which have now been enacted in Directive 2006/112/EC (“VAT Directive”).
8.	Article 13 of the Sixth Directive provides for exemptions from VAT. Paragraph A deals with exemptions for certain activities in the public interest. Paragraph B provides for other exemptions. Sub paragraph (d) sets out six classes of transactions of which 3 is relevant to this Appeal. Thus article 13B(d)(3) provides
“transaction, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring”.
9.	The provisions of Article 13B have been enacted in the Domestic legislation in group 5 schedule 9 VAT Act 1994 which exempts specific financial transactions.
10.	Item 5 group 5 schedule 9 VAT Act 1994 exempts the provision of intermediary services in relation to any financial transaction comprised in item 1, 2, 3, 4, or 6 ( of group 5) (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity.
11.	Note 5 to group 5 defines intermediary services as
For the purposes of item 5 “intermediary services” consist of bringing together, with a view to the provision of financial services―
(a)     persons who are or may be seeking to receive financial services, and
(b)     persons who provide financial services,
together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities.
12.	Note 5A expands upon the definition of intermediary services as
“(5A) 	For the purposes of item 5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries, 	between―
	(a)     a person who provides financial services, and
	(b)     a person who is or may be seeking to receive financial services .
(5B)  For the purposes of notes 5 and 5A “financial services” means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6”.
The Facts 
13.	Gregory Pennington Limited was established in 1993 and one of the first businesses in the United Kingdom to offer debt management services. Gregory Pennington Limited initially operated as a single company but has now developed into a diversified financial services group known today as Think Money of which the Appellant and Gregory Pennington were active members.
14.	The Appellant commenced trading in February 2002, and established as a sister company to Gregory Pennington.  The Appellant provided competitive loan facilities with a focus on secure loans. The Appellant arranged loans with sub-prime lenders for which it received a commission. Mr Kay estimated that the Appellant was only able to offer loans to less than 50 per cent of all enquirers as many of them were over-indebted. The Appellant’s disputed supplies to Gregory Pennington commenced in 2002 and ceased in 2004 following the formation of Think Money group. At the time the income derived from these supplies constituted 25 per cent of the Appellant’s turnover.
15.	A prospective customer made contact with the Appellant via a telephone call. The customer would be responding to the Appellant’s advertisements about loan services. The customer would not be aware at the time of the first contact of the possibility of debt management services. The Appellant’s adviser engaged the customer in a conversation based around a pre-ordained script designed to ascertain whether each customer was suitable for a loan. The script began with questions about the customer’s personal details, the amount and purpose of loan requested. The script then proceeded with questions on the employment status, and income including a question about whether the household monthly earnings over £900. Finally the script dealt with the customer’s debts including questions about County Court judgment debts, arrears with current creditors, whether credit has been refused, and the number of store cards and existing loans. 
16.	The script was used as a guide by the adviser. If during the course of the conversation it became apparent to the adviser that the customer was not suitable for a loan facility, the script was sufficiently flexible to permit the recording of additional information in the notes option on the screen. 
17.	Gregory Pennington with the Appellant devised the questions in the script to ensure that potential customers met the necessary qualifying criteria for debt management services.  The £900 household monthly earnings represented the benchmark for determining eligibility for a loan. The question on County Court judgment debts was relevant in determining the credit scoring of the customer.  The questions on unsecured debts were critical for assessing eligibility for debt management services. The target group for Gregory Pennington were persons owing £2,000 or more with at least two unsecured creditors. Mr Kay accepted that the basic aim of the questions was to decide eligibility for a loan, although they served an underlying purpose of establishing suitability for debt management services.
18.	The adviser applied an electronic scoring system to the customer’s responses which decided whether a loan facility would be given. If not, the adviser offered to put the customer through to Gregory Pennington. The  referral screen stated that
“We have placed you through our scoring system, and there is only one company that is willing to accept your application. They offer special arrangements through a financial solutions company called Gregory Pennington. All the loan companies we deal with are unable to accept your application.
I do think this company may be able to help you, they don’t run any credit checks and I can put you through now. You are under no obligation and the call is free”.
19.	The adviser did not mention that Gregory Pennington offered debt management services. About 20 per cent of customers declined to be put through to Gregory Pennington. If the customer, however, was interested in the services of Gregory Pennington, the adviser put the call on hold, and gave a brief verbal profile and a client identification number to a Gregory Pennington adviser who would then take over the enquiry. The Gregory Pennington adviser used the client identification number to access via a lead screen the information collected by the Appellant’s adviser. This lead screen formed the electronic application for debt management services, and would be added to by the Gregory Pennington adviser.  Mr Kay acknowledged that the Gregory Pennington adviser would have to carry out substantial work before a contract for debt management services was concluded. 
20.	The Appellant’s involvement generally ended once the enquiry had been passed over to Gregory Pennington. A customer, however, could be re-allocated back to the Appellant because details presented to Gregory Pennington were incorrect or incomplete. The Appellant did not recommend any other debt management companies. The Appellant would finish the enquiry if the customer did not want the services of Gregory Pennington. 
21.	The Appellant had no written contract with Gregory Pennington in respect of its referrals. Gregory Pennington originally paid the Appellant £5 for each referral which changed to a periodic flat fee of £2,000 regardless of the number of referrals.
22.	The debt management services offered by Gregory Pennington comprised working out how much the customer could afford to pay off his debts, negotiating a repayment plan with the customer’s creditors, and the collection of monthly payments from the customer which would then be distributed to his creditors. Under the arrangements there was no change to the principal owed by the customer. His creditors still received 100 pence in the £ of the debt. The customer paid Gregory Pennington a fee for its services which consisted of a first payment (the first monthly payment under the repayment plan) and an ongoing fee of 15 per cent of the monthly payment until completion of the repayment plan.  The creditor started to receive  payments at the end of the second month of the repayment plan. Gregory Pennington had no contract with the creditors, and received no fees from them.
23.	Mr Kay estimated about 80 per cent of the Appellant’s referrals took up the debt management services offered by Gregory Pennington. The remaining 20 per cent were offered the facility of a managed bank account with the Royal Bank of Scotland or signposted to the Citizens Advice Bureau. Gregory Pennington did not charge for these services.
24.	Mr Kay stated that about 50 – 100 customers a month opted only for the payment handling service. They were persons who had been previously on a repayment plan.
25.	Gregory Pennington agreed a contract with the customer for its services.  Extracts from the terms of the contract are set out below:
Para 2.1 You agree to appoint us (Gregory Pennington) to act on your behalf as debt counsellors and debt adjusters to provide the Services and you authorise us to negotiate on your behalf with the creditors.
Para 2.2 The agreement will commence on the day you confirm your acceptance of these business conditions and where applicable the account conditions to us ………….or, if earlier, the day when we receive from you in cleared funds your first payment ……..
Para 3.   THE SERVICES WE WILL PROVIDE
Para 3.1 We will review with you the details of your income, outgoings and reasonable living expenses which you provide to us and agree with you a monthly repayment figure which you can afford.
Para 3.2 We will negotiate on your behalf with your creditors and will attempt to agree with them revised payment terms. We will with your approval, negotiate as a matter of priority with the more important creditors first taking into account your arrears with them, the services they provide to you and the steps that they have taken or threatened to take.
Para 3.3 We will in particular attempt to persuade your creditors where appropriate to accept reduced monthly payments from you, not to change interest and to either suspend or withdraw any recovery or similar, proceedings which they may already have taken against you or may have threatened to bring against you ……
Para 3.4  Based upon information provided by you to us. We will prepare and issue to you a draft programme which will take account of the details of your income, outgoings and reasonable living expenses. We will normally only undertake to provide debt management services in relation to unsecured credit and we will not usually provide such services in relation to secured  credit ……
Para 3.5 Following receipt of the first payment, and based upon the information provided by you to us and upon discussions with your creditors. We will prepare and issue a payment programme. The payment programme and fee may vary from the draft programme depending on the accuracy of the information you originally provide to us.
 Para 3.6 The monthly repayments which you make to us  will be paid directly into our client account and we will distribute them amongst your creditors in accordance with the payment programme normally within five working days ……
Paras 3.7 – 3.10 deal with changes in circumstances, opening a GP bank account and attending court
4     YOUR RESPONSIBILITIES
This part of the contract dealt with the customer’s responsibilities of keeping Gregory Pennington informed of changes in circumstances, making the payments under the schedule, and not making payments direct to their creditors.
5	 OUR FEES
Para 5.1 You will be liable to us to pay the fees calculated as follows:
a)	The first payment
b)	The monthly fee.
c)	Any other fees agreed in writing.
6	 & 7 & 8 CANCELLATION
These sections effectively gave the parties the right to cancel the agreement by giving two weeks notice in writing. The customer had a unilateral right to cancel the agreement within seven days of the date of receipt of the contract.
The remaining sections deal with the general conditions of contract, for example data protection, assignment, waiver and English law and jurisdiction.
The VAT Analysis of Gregory Pennington’s Supplies
26.	The VAT analysis of Gregory Pennington’s supplies was critical for the resolution of this Appeal. The parties adopted the analysis decided upon by the VAT & Duties Tribunal in Debt Management Associates Limited v The Commissioners of Customs and Excise (VAT Decision 17880), although they placed emphasis on different aspects of the decision in their submissions. The Appellant accepted that the operations of Debt Management Associates Limited replicated those of the Appellant.
27.	The dispute in Debt Management Associates Limited concerned the VAT treatment of the supply of negotiation services with the creditors. Debt Management contended that they were exempt, whereas HMRC argued for standard rating of the services. HMRC conceded that the payment services were exempt under item 1 group 5 of schedule 9 of the VAT Act. In addition there was a subsidiary dispute about whether Debt Management’s supplies were separate or a composite single supply.
28.	The Tribunal decided that the negotiation service was exempt because Debt Management was acting as an intermediary (Domestic legislation) and negotiating debt (Sixth Directive). The Tribunal held at  paragraphs 24 to 28:
“With respect to Mr Poole, it does not seem to me that this passage supports his argument; on the contrary, I regard it as consistent with the view expressed by the Court of Justice in CSC Financial Services and by Etherton J in BAA plc that these provisions are not to be given a restricted meaning, unwarranted by the words used. The Sixth Directive allows for the exemption of "negotiation, concerning debts", and Group 5 for the exemption of "intermediary services in relation to" "the granting of any credit". I see no need to read into the last of those phrases a requirement that "new" credit must be granted - that is, an entirely new relationship of debtor and creditor. The creditor who grants his debtor some indulgence is, in my view, granting him credit, even if it is additional credit.
I have concluded that there is in fact no incompatibility between the Directive and the United Kingdom legislation; the incompatibility is between the Directive and the Commissioners' interpretation of the 1994 Act, as it was advanced by Mr Poole. In my judgment, the Commissioners have made the same error as the Advocate General in the CSC case, of concluding that art 13B(d) is to be construed restrictively whereas, as the Court of Justice pointed out in paragraph 38 of its judgment in the CSC case, the reference to negotiation is intended to extend the scope of the exemption; all of the other cases cited to me support that view.
I find no support in art 13B for Mr Poole's contention that negotiations, if they are to come within paragraph (d)(3) or, in the domestic legislation, within item 5, must lead, if successful, to a contract; and with the greatest of respect to the Advocate General in the CSC case, I can find nothing in art 13B which justifies paragraph 25 of his opinion. I also do not accept Mr Poole's argument that Note (5) is to be read as if the bringing together of the parties and the conclusion of a contract are cumulative conditions. On the contrary, it seems to me that the words "together with" imply, not a conjunction of the kind for which Mr Poole argued, but an expansion of the scope of the exemption to include "work preparatory to the conclusion of contracts", in distinction to market research and the other descriptions of work which follow, which are excluded.
Article 13B(d)(3) refers to "negotiation, concerning . debts" while the words "debt" and "debts" do not feature at all in Group 5; it refers to "the granting of any credit". Debt and credit are, of course, merely opposite sides of the same coin, and it does not seem to me that there is any difference of substance between the two provisions by reason of the use of dissimilar words.
I am satisfied that, whether one considers the European or the domestic legislation, rejecting the restrictive approach advanced by Mr Poole, that the appellant's negotiation service is an exempt supply. Since the Commissioners accept that the payment handling service is also an exempt supply, it follows that the whole service is exempt. If so, it is immaterial whether there is one supply or two, but it seems to me that I should consider that point, and also the question, if there is only one supply, which element predominates, in case I am found elsewhere to have fallen into error in my first conclusion”
29.	The Tribunal in respect of the subsidiary dispute decided that the negotiation and payment handling services were separate supplies but if they constituted a single supply,  negotiation was the dominant supply:
“Nevertheless, even though, as I accept, it was unlikely that a client would take one part of the service without the other, the fact that he could do so seems to me to point to the conclusion that there are two supplies. The fact that two fees are charged supports that view, though it is not conclusive, just as the Court of Justice has determined that the charging of a single price does not point conclusively in favour of there being a single supply: see paragraph 31 of its judgment in Card Protection Plan. It is certainly, and to my mind obviously, unrealistic to say that the negotiation service is no more than "a means of better enjoying" the payment handling service. Though it is perhaps less obvious, I think the reverse is also true. While the negotiation may be an essential precursor to the making of a single monthly payment, less than the client's contractual liability to his creditors, it seems to me that the payment handling service is capable of standing alone, and that its value is more than "marginal", the test suggested by the Advocate General in the Madgett & Baldwin case,."
I am satisfied that the appellant makes two discrete supplies, even though almost all its clients take both. If, however, there is only one supply, which element is dominant? Mr McGinty told me, as I have mentioned, that the appellant's clients' aim was to achieve a manageable monthly payment, and that in his view it was the payment handling rather than the negotiation which represented the principal part of the supply. That was the conclusion to which Mr Mainprice urged me, should I find that there was only one supply. It was suggested that the payment handling was dominant because the consideration received by the appellant for that service was so much greater - in the first eight months of 2002 the appellant earned over 17 times as much from payment handling as it did from negotiation.
Despite that disparity and for much the same reasons as I have given for my conclusion that there are two supplies, I am satisfied that Mr McGinty is wrong in his view. It seems to me clear that, without the negotiation - and successful negotiation at that - the making, and therefore the handling, of monthly payments cannot begin. The reverse is plainly not the case; as I have already said, it is impossible to view the negotiation as a means of "better enjoying" the payment handling service. On this point, I agree with the respondents (paragraphs 31 – 33)”.
The Appellant’s submissions
30.	Counsel pointed out that the Appellant was a broker attempting to arrange loans for customers. Where the Appellant was unable to arrange a loan, it referred the customer to Gregory Pennington for debt management services. In making the referral the Appellant was doing much more than an introduction or the sale of broker waste. The Appellant created a completed application form for the customer which was of value to Gregory Pennington because it addressed the basic criteria determining the customer’s suitability for debt management. The Appellant had worked with Gregory Pennington on the development of the adviser’s script to ensure that the right questions were asked of the customer. The Appellant was bringing the customer and Gregory Pennington together, which was demonstrated by the fact that 80 per cent of the referrals resulted in a contract for debt management services.
31.	Counsel contended that the Appellant’s activities amounted to negotiation of debts within the meaning of Article 13B(d)3 of the Sixth Directive, and, therefore, exempt from VAT. Counsel relied on the interpretation of negotiation at paragraph 28 of the Court of Justice decision in Ludwig v Finanzamt Luckenwalde [2008] STC 1640 EC:
“In that regard, the court has held that negotiation is an act of mediation, which may consist, amongst other things, in pointing out to one of the parties to the contract suitable opportunities for the conclusion of such a contract, in making contact with another party or negotiating, in the name and on behalf of a client, the detail of the payments to be made by either side, the purpose of such an activity being to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of that contract (see, to that effect, with regard to art 13B(d)(5) of the Sixth Directive, CSC Financial Services, para 39)”.

32.	Counsel argued that Appellant’s activities went far beyond the minimum requirements for negotiation. The Appellant not only pointed out suitable opportunities for a contract but assessed the customer’s suitability for the debt management services offered by Gregory Pennington.
33.	Counsel considered the Appellant’s position was equally as strong under the UK legislation. Counsel held genuine difficulties with HMRC’s contention that the Appellant cannot be an intermediary if it was bringing someone together with another intermediary. The very wording in the legislation of or one of the intermediaries was unambiguous and supported the construction that an intermediary has only to be in chain of intermediaries to qualify for exemption. 
34.	The Court of Justice interpretation of  negotiation  emphasised that the wording of the Sixth Directive did not, in principle, preclude the activity of negotiation from being broken down into separate services and that operators had to be able to chose the form of organisation which, from the strictly commercial point of view, best suited them to perform those different services. 
35.	Counsel submitted that HMRC’s analysis overlooked the fact that Gregory Pennington was providing two exempt supplies of financial services under a single contract with the customer. Gregory Pennington was not simply acting as an intermediary but also supplying a payment handling service which was exempt under item 1 group 5 of the 1994 Act.  The negotiation undertaken by Gregory Pennington to determine the terms of any repayment programme was not a condition precedent to the contract but part of a continuous process resulting in a contract for financial services.  It was, therefore, wrong to limit the relationship between the Appellant and Gregory Pennington as one intermediary to another. Rather the Appellant was bringing the customer and Gregory Pennington together with a view to the provision of financial services,
HMRC’s submissions
36.	HMRC contended that the Appellant’s supplies were standard rated referrals of leads. The supplies could not be characterised as negotiation of debt. The Appellant’s activities were focussed on ascertaining  whether  customers met the criteria for a loan. The questions asked of the customers were derived from the loan scorecard and had no connection with debt management. The Appellant at no stage informed the customers about the option of debt management. It was only when the customer failed the eligibility criteria for a loan that the Appellant advised the customer of the existence of Gregory Pennington. The Appellant did not explain about the debt management services offered, simply advising the customer that Gregory Pennington may be able to help. If the customer said yes his details were automatically transferred to Gregory Pennington and the Appellant had no further contact with the customer.   Gregory Pennington had to do substantial work to convert the referral into a debt management contract. Gregory Pennington paid the Appellant for the referral. The customer did not pay a fee to the Appellant. Counsel for HMRC concluded that the facts demonstrated unequivocally that the Appellant was making something of a wasted lead by selling it to Gregory Pennington. 
37.	Counsel built on his analysis of the character of the supply to show that the Appellant was not acting as an intermediary. His argument was at two levels. The first was that as a matter of fact the Appellant was not engaged in a distinct act of mediation. The Appellant was not bringing the parties together for the purpose of forming a contract. The Appellant was simply selling a lead which may be of use to Gregory Pennington. If, however, the Appellant’s activities equated to preparatory work normally undertaken by an intermediary, it was not preparatory work that was exempt from VAT. At its highest the Appellant brought together the customer and Gregory Pennington for the purpose of debt negotiation which was not an exempt financial transaction but an item 5 intermediary service. The Appellant was not a link in a chain because at the time the Appellant brought the parties together there was no possibility of an end provision of financial services. In order for the Appellant’s to qualify for exemption its activities had to be related to an exempt financial transaction, which was not achievable until Gregory Pennington had successfully negotiated a repayment plan  with the customer’s creditors. 
Reasons
38.	The dispute concerned the VAT liability of the supplies made by the Appellant to Gregory Pennington. The issue was whether the Appellant was acting as an intermediary for the provision of exempt financial services between persons who had failed to meet the criteria for a loan after contacting the Appellant, and Gregory Pennington.
39.	The Tribunal considered that the arguments deployed by HMRC contesting the Appeal fell into three separate categories with each one capable of undermining the Appellant’s case :
(1)	The Appellant’s services were discrete supplies which did not fit the characterisation of negotiation of exempt financial transactions. The services amounted to a sale of leads which were standard rated for VAT purposes (leads dispute).
(2)	The Appellant’s supplies amounted to the completion of an application form which was a clerical task normally performed by Gregory Pennington. Thus the Appellant occupied the same position as Gregory Pennington and not carrying out a distinct act of mediation (sub-contractor dispute). 
(3)	The Appellant was not acting as an intermediary in relation to an exempt financial transaction.  The Appellant was simply introducing a potential client to the negotiation services of Gregory Pennington. The Appellant’s services were too remote from the end provision of financial services, which depended upon the success of Gregory Pennington’s negotiation (related financial transaction dispute).
40.	There are two legal sources for the exemption of financial services provided by an intermediary. The Sixth Directive used the term negotiation rather than intermediary services which was the expression applied in the United Kingdom legislation as enacted in item 5 of group 5 schedule 9 of the 1994 Act. The Appellant considered that the term negotiation was wider than intermediary services. HMRC counsel submitted that there was no incompatibility between the European and Domestic legislation and that the two would stand or fall together.
41.	The Tribunal agrees with HMRC counsel that there was no substantive difference between the terms negotiation and intermediary service, and that they were essentially interchangeable. In any event the Domestic legislation must, as far as possible, be interpreted consistently with the Sixth Directive. As the exemptions for which the Sixth Directive makes provision are of direct effect there is no liability to VAT, if the Appellant can establish the application of either exemption.  
42.	The Tribunal concerned itself principally with the Community law concept of  negotiation in its analysis of  the facts but where appropriate, referred  to  the Domestic legislative provisions.  The relevant provision of the Sixth Directive for this Appeal is article 13B(d)(3) which exempts:
“transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and other negotiable instruments, but excluding debt collection and factoring”. 
The Appellant contended that it was negotiating transactions concerning debts and payments.
43.	The term negotiation in article 13B(d)(3) has its own independent meaning in Community law, and is not to be equated merely with an English dictionary definition.  The Court of Justice has established the following principles in relation to the construction of negotiation:
(1)	In order to be characterised as exempt transactions for the purposes of art 13B(d)(3) the services provided must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in the provisions (Sparekassernes Datacenter [1997] STC 932 at 955).
(2)	The words 'including negotiation' are not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation (CSC Financial Services Ltd v Customs and Excise Comrs (Case C-235/00) [2002] STC 57 at para. 38).
(3)	Article 13B(d)(3) defined exempted transactions according to the nature of the services provided and not the person supplying or receiving those services; the identity and legal type of the person effecting the transactions were therefore irrelevant in determining whether an transaction was exempt. Further, the provisions at issue made no distinction with regard to the specific manner in which the service was performed; accordingly, the fact that a service was performed entirely by electronic means did not exclude it from exemption (Sparekassernes Datacenter [1997] STC 932 at held 1).
(4)	The concept of 'negotiation' applies to the activity of an intermediary who does not occupy the position of a party to a contract relating to a financial product and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation is, in effect, a service rendered to and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side. In that regard, the purpose of such an activity is to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the content of the contract (CSC Financial Services Ltd v Customs and Excise Comrs (Case C-235/00) [2002] STC 57 at para. 39).
(5)	On the other hand, it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject-matter of the contract. In such a case, the sub-contractor occupies the same position as the party selling the financial product and is not therefore an intermediary who does not occupy the position of one of the parties to the contract, within the meaning of the provision in question (CSC Financial Services Ltd v Customs and Excise Comrs (Case C-235/00) [2002] STC 57 at para. 40)
(6)	The wording of the Sixth Directive did not, in principle, preclude the activity of negotiation from being broken down into separate services which might then fall under the concept of 'negotiation of credit' for the purposes of that provision and benefit from the exemption which it provided. It followed from the principle of fiscal neutrality that operators had to be able to choose the form of organisation which, from the strictly commercial point of view, best suited them, without running the risk of having their operations excluded from the exemption provided for in art 13B(d)(1). It was not, therefore, inconsistent with art 13B(d)(1) for the service of negotiation of credit to be divided, as in the instant case, into two services ( Ludwig v Finanzamt Luckenwalde [2008] STC 1640 paras 34 & 35).
The Leads Dispute
44.	Under this dispute HMRC was contending that the Appellant’s supplies did not have the character and perform the function of the financial services exempted. In short the Appellant’s supplies were completely outside the remit of exempt financial transactions. They were simply the sales of potential leads. HMRC’s contention can be best illustrated by the facts of Lead X (Decision number 20904) in which the Tribunal decided that Lead X supplies had nothing to do with the granting or the negotiation of credit, and everything to do with the buying and selling of leads. The facts that led to that conclusion was that Lead X provided a facility whereby a broker could sell leads of potential customers to another broker. The contact of Lead X with potential consumers was limited to  the purpose of enhancing the marketability of the lead not to secure a financial product for the consumer or to match him with the most appropriate broker. The priority of Lead X was to sell leads to the highest bidder which it achieved by creating a market of potential bidders.
45.	This Tribunal considers that the facts of this Appeal were very different from those found in Lead X.  The Appellant in this Appeal was intent on selling a financial product to the customer, which was demonstrated by the 80 per cent take up of Gregory Pennington services by persons referred by the Appellant. The Appellant’s contact with the customer was structured in such a way that if the customer did not meet the criteria for a loan, the Appellant would offer the customer another financial service, namely the debt management services of Gregory Pennington. The Appellant did not market the information to other providers of financial services for the purpose of obtaining the best price. The Appellant only gave the information to Gregory Pennington and in so doing put itself in the position of being directly in between the customer and Gregory Pennington. 
46.	The Tribunal concludes from the facts found in the preceding paragraph that the Appellant’s supplies had a relationship with the customer and Gregory Pennington, and a connection with the commercial transaction between them. The Appellant unlike Lead X was not simply engaged in doing its own thing of selling information for the highest price without regard to whether a financial transaction was effected between the customer and the financial provider. Whether the Appellant’s supplies amounted to negotiation for the purposes of the financial exemption would depend upon further analysis. The Tribunal, however, is satisfied that the Appellant’s supplies did not fit the description of a discrete service of selling leads.
The Sub Contractor Dispute
47.	This dispute was distinguishable from the leads dispute in that the Appellant has a relationship with the parties and a connection with their commercial transaction.  The sub contractor dispute was about whether the position occupied by the Appellant in relation to the parties was one of an intermediary or as a sub-contractor performing tasks on behalf of the financial provider.
48.	The Community law basis for this dispute is found at paragraph 40 of CS Financial Services decision:
“….it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject-matter of the contract”. 
49.	The Domestic law reference is at note 5 to item 5  schedule 9 of the VAT Act 1994which provides that
“For the purposes of item 5 “intermediary services” consist of bringing together, with a view to the provision of financial services―
(a)     persons who are or may be seeking to receive financial services, and
(b)     persons who provide financial services,
together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities”.
50.	The Appellant contended that it was bringing the parties together and providing Gregory Pennington with a completed application form. HMRC rebuffed the Appellant’s contention of adding value to the process, by asserting that the Appellant was simply performing routine clerical tasks on behalf of Gregory Pennington.
51.	The Tribunal finds the following facts in relation to the sub-contractor dispute:
(1)	The Appellant acted as an independent loan broker with a priority of securing loans for its customers. The Appellant was not exclusively engaged with finding customers for Gregory Pennington. The referrals, however, did amount to a significant part of the Appellant’s business in revenue terms, constituting 25 per cent of its annual takings.
(2)	The Appellant was not a party to an agreement between the customer introduced and Gregory Pennington.
(3)	The Appellant screened customers for their suitability for the debt management services offered by Gregory Pennington. This was done in two ways. The Appellant’s representative asked set questions of the customer. The questions had been designed jointly with Gregory Pennington for the purpose of identifying those customers meeting the threshold criteria for debt management services. The representative would also refine the information given by the customer by asking further questions which would be recorded in the notes section of the screen. 
(4)	The Appellant’s introduction of Gregory Pennington to the customer amounted to a strong recommendation of its services which was demonstrated  by the wording of the referral:
Gregory Pennington was the only company willing to accept the application;  Gregory Pennington offered  special arrangements. 
(5)	The Appellant supplied Gregory Pennington electronically with a completed application form.
(6)	The Appellant received a fee from Gregory Pennington for the referrals.
(7)	80 per cent of the customers introduced by the Appellant concluded a contract with Gregory Pennington.
52.	The Tribunal looking at the  totality of the facts found concludes that the Appellant was doing much more than the performance of routine tasks on behalf of Gregory Pennington.  The Appellant was through its screening process actively identifying potential customers for Gregory Pennington, if in the event the customers were not offered loan facilities. The Appellant added value to the process by providing Gregory Pennington with a completed application form. The Appellant steered potential customers in the direction of the services offered by Gregory Pennington which was effective as demonstrated by the 80 per cent take up rate of Gregory Pennington’s services by referred customers.
53.	Subject to the third argument (related financial transaction dispute) the Tribunal is satisfied that the Appellant met the criteria for the Community law concept of negotiation. The Appellant did not occupy the position of a party to a contract, and its activities amounted to something other than the provision of contractual services. Likewise the Appellant fulfilled the requirements of the Domestic legislation. The Appellant brought together persons with a view to the making of contracts. The activities undertaken by the Appellant were preparatory to the conclusion of such contracts.
Related Financial Transaction dispute
54.	HMRC’s third argument is best understood by referring first to the Domestic legislative provisions. Item 5 group 5 schedule 9 VAT Act 1994 exempts 
“The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity”.
55.	HMRC contended that the Appellant could not be an intermediary because at the time it brought the parties together Gregory Pennington could only offer intermediary services of negotiating the customers’ debts with their creditors. Thus the Appellant’s provision of services was not related to a financial transaction comprised in item 1, 2, 3, 4, or 6. Gregory Pennington was providing item 5 services which were specifically excluded from related transactions as defined in item 5, group 5 of schedule 9 to the VAT Act 1994. It mattered not that Gregory Pennington was supplying an exempt item 1 payment handling service because the implementation of that service was dependent upon a successful outcome of the negotiation with the customers’ creditors. In short there was no possibility of an end provision of an exempt financial transaction other than an item 5 intermediary service at the time the Appellant supplied its services.
56.	 Community law applies a similar principle in that the words 'including negotiation' were not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation. The aim of negotiation was to effect if possible a financial transaction as described in article 13B(d)(3). The negotiation was not exempt if it had no relationship with an exempt financial transaction.
57.	The Appellant submitted that Ludwig established the principle that the activity of negotiation could be broken down into separate services. Thus the fact that an Appellant offered its services to another intermediary was not fatal provided the Appellant’s services were in a chain leading to a potential contract for an exempt financial transaction. In this Appeal the Appellant’s services enabled Gregory Pennington to negotiate with the customers’ creditors which if successful would result in a contract including an exempt payment handling service. Further HMRC was misguided with its emphasis on the sequential   analysis of Gregory Pennington’s services. The timing of the services was irrelevant. The Appellant was bringing about a contract under which financial services were provided. Gregory Pennington’s contract with its customers was a single contract under which two supplies were made, one of negotiation and the other of payment handling services.
58.	The Tribunal does not consider that the facts of this Appeal were a “Ludwig” situation. The Appellant was negotiating with the two principals to the potential contract. The end point of the chain was the financial services supplied by Gregory Pennington. There was no contractual link between Gregory Pennington and the customers’ creditors.  Thus the determination of this dispute depended upon the correct analysis of the VAT liability of Gregory Pennington’s supplies and the terms of the contract with its customers.
59.	 In respect of the VAT liability of the supplies the Tribunal decision in Debt Management Associates Limited was critical. The Appellant accepted that Gregory Pennington operated in the same manner as Debt Management Associates Limited The Tribunal decided that the whole service provided by Debt Management Associates Limited constituted exempt financial services, and that decision determined the outcome of the Appeal. The Tribunal, however, considered that it should express a view as to whether there was one supply or two, and also if there was one supply which element was dominant. The Tribunal’s preferred view was that there were two supplies of debt negotiation and payment handling supplies but if it was one supply the debt negotiation services dominated.
60.	HMRC latched onto the Tribunal’s analysis that the dominant supply of  Debt Management Associates Limited was debt negotiation for its proposition that when the Appellant supplied its services, Gregory Pennington was acting as an intermediary. Further that the debt negotiation undertaken by Gregory Pennington was a condition precedent for the eventual contract agreed between the customer and Gregory Pennington. The Appellant disagreed about the nature of the contract. According to the Appellant there was one contract under which two supplies were made. The negotiation was not a condition precedent. The parties either entered into the contract before the negotiation started or on receipt of first payment.
61.	This Tribunal finds HMRC’s analysis flawed. The Tribunal considers that it is the nature of the services under a potential contract rather than the services offered at the time the parties were brought together which determines whether the services of the Appellant were related to an exempt financial transaction.  The Court of Justice in CSC Financial Services Ltd found that the purpose of negotiation was to do all that was necessary to enter into a contract for financial services. Likewise the Domestic legislation in note 5 to group 5 defined intermediary services as the performance of work preparatory to the conclusion of contracts for the provision of financial services. In this respect the Tribunal agrees with the Appellant’s submission that the timing of the services offered by Gregory Pennington was irrelevant. It was the nature of the services offered by Gregory Pennington under the potential contract with its customers that was all important.
62.	Under a potential contract Gregory Pennington agreed to act as a debt counsellor and debt adjuster and provide services on behalf of the customer. The services provided were reviewing details of the customer’s income and expenditure, negotiating with creditors to secure revised payment terms, and a payment handling service. The contract commenced on confirmation of the customer’s acceptance of the business terms, or if earlier the first payment under the contract. The negotiation of revised payment terms was not a condition precedent to the contract. The Tribunal accepts that the activity of negotiation is a necessary preliminary to the formation of any contract but that fact in itself did not make the activity a condition precedent.  In this case the contract terms portrayed the services offered as a package which would be implemented once the customer accepted the business terms or made the first payment. 
63.	 HMRC agreed that Gregory Pennington under the terms of the contract provided supplies of debt negotiation and payment handling, and that Debt Management Associates Limited was correctly decided. Given the nature of HMRC’s agreed standing, the Tribunal considers its submission that debt negotiation was the dominant supply wayward, particularly as it was derived from the fall back position of the Tribunal in  Debt Management Associates Limited.  The Tribunal in that case rejected HMRC’s principal submission that Debt Management Associates Limited made a standard rated single supply of debt negotiation. The preferred decision was that there were two separate supplies of debt negotiation and payment handling which were exempt from VAT. This Tribunal considers that HMRC should have mounted a substantive challenge to the correctness of the decision in Debt Management Associates Limited, if it wished to pursue its stance on debt negotiation being the dominant supply. It did not. Thus this Tribunal adopts the preferred decision in Debt Management Associates Limited of two exempt supplies of debt negotiation and payment handling.
64.	This Tribunal holds that
(1)	The decisive factor in determining whether the Appellant’s supplies were related to financial transactions was the nature of the supplies provided under a potential contract between Gregory Pennington and the customer.
(2)	The timing of the supplies made by Gregory Pennington was irrelevant for deciding whether the Appellant’s supplies were related to an exempt financial transaction
(3)	The debt negotiation supplies were not a condition precedent of the contract. 
(4)	The contract between Gregory Pennington and the customer was for two supplies, one of debt negotiation and the other of payment handling.
(5)	The supplies of debt negotiation and payment handling were exempt financial services under article 13B(d)(3) of the Sixth Directive, and under item 5 and item 1 of group 5 schedule 9 of the VAT Act 1994 respectively.
(6)	The Appellant’s supplies of bringing the customer and Gregory Pennington together were related to a relevant financial transaction.
Decision
65.	The Tribunals finds that
(1)	The Appellant’s supplies did not constitute a discrete service of selling leads.
(2)	The Appellant was doing much more than the performance of routine tasks on behalf of Gregory Pennington.  The Appellant was through its screening process actively identifying potential customers for Gregory Pennington. The Appellant added value to the process by providing Gregory Pennington with a completed application form. The Appellant steered potential customers in the direction of the services offered by Gregory Pennington which was effective as demonstrated by the 80 per cent take up rate of Gregory Pennington’s services by referred customers.
(3)	 The Appellant brought together customers and Gregory Pennington with a view to concluding a contract for financial services of debt negotiation and payment handling which were exempt for VAT purposes.
(4)	The Appellant’s supplies were related to a financial transaction of payment handling as well as debt negotiation.
66.	The Tribunal is, therefore, satisfied that the Appellant was  negotiating financial transactions within the meaning of article 13B(d)(3) of the Sixth Directive and providing intermediary services in relation to an item 1 financial transaction namely payment handling within the meaning of item 5 group 5 of schedule 9 of the VAT Act 1994. The Tribunal holds that the Appellant’s supplies to Gregory Pennington were exempt. The Tribunal allows the Appeal.
67.	The Appeal was commenced before the 1 April 2009. The Tribunal directs in the interests of fairness and justice that the costs regime operating prior to the 1 April 2009 applies to this Appeal. The Tribunal orders HMRC to pay the reasonable costs of the Appellant incurred in this Appeal, and in the absence of an agreement either party may apply to a Tribunal Judge for determination of the costs. 

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 25 September 2009

MAN/