HBOS Plc v Revenue & Customs [2007] UKVAT V20118 (19 April 2007) 

20118
VAT Exemptions – Debt Collection – whether contract giving creditor’s agents power to negotiate terms for payment removes their activity from classification as Debt Collection.  EC Sixth Directive 13B(d) VATA 1994 Schedule 9 Group 5 items 2 and 5.

EDINBURGH TRIBUNAL CENTRE

HBOS PLC	Appellants

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

Tribunal:	T GORDON COUTTS, QC  (Chairman)
J Crerar, WS., NP (Member)
K Pritchard, OBE., BL., WS (Member)

Sitting in Edinburgh on 14 and 15 December 2006.

for the Appellants		Heriot Currie, QC		

for the Respondents	Julian Ghosh, QC
				Elizabeth Wilson

© CROWN COPYRIGHT 2007.

DECISION

Introductory
The Appellant, a major financial institution by itself and with several subsidiaries and associates providing financial services sought a ruling from the Respondents on the VAT status of their arrangements in relation to sums which they were unable or not equipped to recover themselves from their customers.  The Tribunal heard able and well-prepared argument from Senior Counsel on each side.  They heard evidence from Euan McPherson, the Appellant’s employee, whose job title is Head of Recovery Strategy and Analysis and from Douglas James McManus, a Director of Operations for BCW Group, one of the agents hereafter referred to.  The Tribunal saw no season to doubt the reliability or credibility of either of those witnesses.

The issues hereafter referred to may have surfaced as a result of Business Brief 30/03 issued by the Respondents which states “Customs now accept that where a business negotiates payment terms between two parties this is “negotiating debts” and within the scope of the finance exemption which applies to the provision of intermediary services by a person acting in an intermediary capacity and is thus exempt from VAT.”

The issue for the Tribunal
The matter to be determined was, the Tribunal considered, whether services provided to the Appellant by a number of agents in relation to sums said to be due to the Appellant are exempt supplies within the meaning of the legislation quoted below or whether those services are excluded from exemption as being “debt collection”.

The Legislation
The applicable legislation at the time of the appeal was found in Article 13B(d) of the Sixth EEC Directive 77/388 (now replaced by Article 135 of Directive 2006/112/EC) and also in Items 2 and 5 of Group 5 of Schedule 9 VATA 1994.
Article 13B(d) provides for exemption of inter alia 
“the following transactions:
(1)	the granting and the negotiation of credit and the management of credit by the person granting it
(2)	the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit:
(3)	transactions, including negotiation, concerning deposit and current accounts, payments transfer, debts, cheques and other negotiable instruments, but excluding debt collection and factoring:
(5)	transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities, excluding:
-   documents establishing title to goods.
-   the rights or securities referred to in article 5(3):
VATA 1994 Schedule 9 Group 5 provides inter alia by Item 2 “The making of any advance or the granting of any credit” and by Item 5 “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.”

Background
The Appellant had in the past used Agents to obtain payment.  They did so in terms of a contract, of which a sample was produced dated 2000.  At that time the activities of those Agents were standard-rated; that was not challenged.  However after the decision in DMA v The Commissioners (No 17880), the Business Brief above quoted and fuller consideration of what their agents actually did, a revised agreement was devised for the agents to operate under.  In the course of the hearing Counsel for the Respondents pointed out various similarities between the two arrangements and when he sought to maintain standard-rating for the agents service described the fresh agreement, dismissively, as a drafting technique of re-labelling.  Such an approach tends to cloud proper consideration of the issue that it now is before the Tribunal.  The Tribunal is not concerned with labelling or relabelling but with the details of the service provided in terms of a contract between the Appellant and the agent which is currently in force.

In order to assist the Tribunal the witnesses produced various sample transactions and samples of negotiations with debtors.  We do not by agreement quote these in any specific detail because of questions of client and commercial confidentiality.  The basic matters approach and techniques were, however, not in dispute.

Facts
From the evidence of the witnesses and productions we find the following matters as fact.

The Appellant and its associated businesses e.g. Sainsbury Bank, AA Personal Finance, and Intelligent Finance amongst others provide credit facilities to customers by way of loans of various types, credit card facilities or overdraft.  Loan and credit card debts demand a payment every month of part at least of the outstanding balance on a particular date.  In relation to an overdraft special terms and conditions apply which must be complied with, such as for example not exceeding the agreed limit.  Arrears can happen on credit card and personal loan transactions or a current account can go “out of line” in defined circumstances such as the overdraft limit being exceeded.  In such circumstances a debt is said to have “crystallised” in that all arrears on the credit card and personal loan arrangement became payable immediately.  Any overdraft facility is withdrawn and the overdrawn amount must be paid in full immediately.  Customers are told of their obligation to make immediate payment in terms of their contract by way of a default notice from the bank.

The Appellant has an in-house recovery department which usually (in 89.9% of cases) can deal with the sum due.  It has authority to vary the terms of agreements between the Appellant and its customers.

About 10% of the situations prove difficult or complex.  The Appellant does not consider it has the skills or resources available in-house in such situations to follow up recovery of the sums due.  An example is failure by customers to respond to the default notice either because of change of address or through unwillingness to make contact with the Appellant for any reason.

In such circumstances the Appellant will refer matters to one of its agents to operate under the said revised agreement entitled “Provision of debt negotiation services”.  That agreement provides in Schedule 3 Part 3:

“Services
Halifax may from time to time instruct the Supplier (i.e. one of the aforementioned agents) to perform one or more of the following services which the Supplier will carry out if it accepts the instructions from Halifax:-
•	Telephone and letter debt negotiation services
•	Field debt negotiation services
In the course of fulfilling these primary negotiation services, suppliers would be expected to undertake the following services:-
•	Recover lost or stolen cards and cheque books
•	Legal action including defended actions and attendance at court.
•	Trace and negotiation services
•	Pre sue and status reports
Debt Negotiation Services:
Debt Negotiation Services are defined as the management and action of impaired balances, where the purpose is to negotiate clearance of the outstanding amounts due for customers whose accounts are still open or have been closed by Halifax.  The Supplier will typically renegotiate the terms on which credit is granted to the borrower with a view to maximising recoveries by Halifax.  This will usually be in the form of extending the terms of the existing loan including lengthening the repayment term thereby reducing monthly repayments, within the limits of authority delegated by Halifax to the Supplier.  The Supplier will oversee the transmission of the funds from the customer to Halifax.  The negotiations will be conducted in line with Halifax’s policy.”

The Schedule goes on to illustrate and detail the services which may be involved in the provision of debt negotiation services.  Almost all the agents’ work can be said to fall under the debt negotiation services paragraph above quoted.  The remaining services if they are performed form part of the overall negotiation services.  We do not consider those to be of sufficient quantity or materiality to affect our view on classification.

The progress of matters in the hands of the agent is that they first receive communication from the Appellant giving details of the outstanding amount to be recovered.  Thereafter the agent will contact the customer by letter.  That letter contains the following by way of stick and carrot :

“We have been instructed by HBOS Group plc in our capacity of credit management professionals to recover the above noted amount to which your account is currently in arrears or overdue.  As an active customer of our clients we would wish for you to retain that status and continue to make repayments as previously agreed, however this can only be achieved if we can agree repayment of the above amount.
Failure to make repayment may end in litigation and the full balance of this account becoming due at that point.  We do not wish that course of action to be undertaken, and we have an opportunity now to address this issue.
Please contact these offices immediately on the telephone number quoted where one of our agents is waiting to take your call.
Please do not ignore this request as we will have no alternative other than to take further action which may be detrimental to your overall credit rating.
Call us now, we can help.”

Thereafter usually the customer contacts the agent by telephone but if not the agent will contact the customer.  The agent rarely visits a customer.

Following on that, various conversations may take place between the agent and the customer.  The Tribunal was provided with sample transcripts of such conversations.

In order to obtain some result for the Appellant the agent may extend the time to pay – the outstanding sum of course is legally due at once and could be sued upon – or may arrange and has authority to arrange for an appropriate level of payment over time and further may, if the agent deems it appropriate, offer a compromise for immediate payment or reduce the outstanding sum in order to achieve a one-off payment or a payment schedule which the customer can afford and is acceptable to the Appellant.  All of this is subject to the overall authority and agreement of the Appellant.

We find that if an agent does any of these things it is as a matter of fact varying the terms of the contract between the Appellant and the customer as a result of which the customer obtains an advantage in the matter of time to pay or of reduction of the outstanding sum or both.  The Appellant has the advantage of obtaining some at least of the money due to it by some stage.  It is only very occasionally that virtually immediate full payment is secured (less than 1% of cases).  If one agent does not succeed in securing any payment then another may be instructed or, with permission of the Appellant the customer may be sued.  Counsel for the Appellant, in response to a question did not contend that by the above activities the agent was granting credit.

The agents collect and transmit money collected to the Appellant and are remunerated by a commission on the sums recovered.

We record that we were given evidence about the extent to which the agents employees are given instruction and training in negotiation skills and in the requirements imposed upon them under the Data Protection Act 1998, Money Laundering Legislation and by regulatory bodies such as the Office of Fair Trading, and the Credit Services Association.  That training is important and could not be disregarded as a factor relevant to the Tribunal’s decision.  It is noted, however, that the summary objective as set out in one of the agents Training Manuals states “What do you want?  Full payment.  When do we want it?  Now” which accurately summarises the guiding principle of debt recovery.

Argued for the Appellant
The nature of the services provided by agents is such that it constitutes the negotiation of credit within the meaning of Article 13B(d)(1) but also falls within the definition of the granting of credit.  Doing things antecedent to and directly leading to the result sought to be achieved is of the general nature of arranging the granting of credit.  See Customs and Excise Commissioners v CSMA (1998) STC 111.  Further in CSC Financial Services Ltd v The Commissioners [2002] STC 587 at paragraph 39 the Court held “Negotiation is a service rendered to and remunerated by a contractual party as a distinct act of mediation.  It may consist… 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 the other side.  The purpose of negotiation is therefore 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 the contract”.

Applying CSC Financial Services Ltd to the present facts the negotiations between the customer and the agent generally have as a result a variation of the terms of the contract between the parties.  The interest which the agent does have in the new terms agreed between the agent and the customer is an indirect commercial interest only.  See CEC v BA plc (2003) STC 35.  That is not an interest in the contract within the meaning of CSC.

The agent grants credit on behalf of the Appellant.  It is not a financial institution but in varying the contract and departing from the absolute legal position of the parties the agent grants credit on behalf of the Appellant within the meaning of 13B(d)(1) of the Sixth Directive and Item 2 of Group 5 Schedule 9 VATA 1994.

With regard to the exemption, exclusion of debt collection and factoring the terms debt and credit are merely opposite sides of the same coin.  See DMA v The Commissioners (No 17880).  The Appellant has shown that negotiation has taken place in relation to either debt or credit and that therefore falls within Article 13B(d)(1) and (3) of the Sixth Directive.

The agents also supply intermediary services as envisaged at item 5.  Negotiation is not an essential ingredient of intermediary services.  See Bookit Ltd v HMRC (2005) STC 1481 and in the Court of Appeal 2005 EWCA CIV 550.  If a service provided by the agent does not constitute negotiation it qualifies as a provision of intermediary services.

The Respondents’ argument that if there is debt negotiation that is ancillary to the principal service of debt collection is incorrect.  The supply made by the agents is one of negotiation with customers to reach a situation where the customer will make a series of payments which they can afford and which is acceptable to the Appellant.  That is the service of bringing about a situation which is satisfactory to both customer and the bank.  Other functions which the agent may perform in relation to the customers and the Appellant can only be regarded as ancillary to the main supply of debt negotiation services.

Argued for the Respondents
Under reference to the agreement the bundle of services supplied consists of managing work flow, issuing account customers and other documentation, negotiating settlement of outstanding amounts, instructing and managing external agents, receipt of outstanding amounts from customers and transmitting these to the Appellant.  These are a clearly circumscribed series of transactions and perform the essential functions of a debt collection service.  The essential aim of the services is maximising recoveries for the Appellant.  The agent agrees not to promote the possibility of debt reduction initially and recovery of the outstanding debt in full remains the dominant aim.  Debt negotiation as used in the agreement is simply a label for debt collection services.  The agent is acting for the bank and not for the debtor so if a benefit does accrue to a debtor for the debt collection services it is incidental to the principal aim of the services.  As an exclusion the concept of debt collection must be construed broadly and understood a supply to all possible forms of that operation – Finanzamt Grob-Gerau v MKG Kraftfahzeuge-Factory GmbH (2003) STC 951 at paras 58, 62-3, 71-72.  In MKG the Court stated at 77 “…In accordance with its objective character, the essential aim of factoring is the recovery and collection of debts owed to a third party.  Therefore factoring must be regarded as constituting merely a variant of the more general concept of debt collection, whatever the manner in which it is carried out.”    Further at 78 “…the term ‘debt collection’ refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt..”

According to the above the European Court regarded debt collection as a bundle of services and when classifying a transaction which comprises a bundle of features and acts regard must be had to all the circumstances and to “the essential features of the transaction”.  See Card Protection Plan Ltd v CCE (1999) (STC 270) para 29.  A service is ancillary to a principal service if it does not constitute for customers an end in itself but a means of better enjoying the principal service supplied.  The dominant aim of the services in question here is obtaining payment of debts so the principal supply is debt collection.

None of the services provided can be singled out as the principal supply.  They constitute the essential elements of debt collection within the meaning of article 13B(d)(3).

Negotiation means services rendered to and remunerated by a contractual party as a distinct act of mediation and debt management. Commissioners v CCE (No 17880) is an example of distinct acts of mediation concerning debts.  A debt management agent provides a principal service of debt negotiation services because his dominant aim, for which he is paid by the debtor, is to mediate between debtor and creditor bringing them together with a view to improving the debtors legal or financial position regarding the debt, typically by renegotiating the terms of the loan.  Here the agent works for the creditor.  If a supplier agrees to an extended repayment date he does so for the purpose of maximising recovery.  Even if there were a distinct act of mediation under the terms of the said agreement it is still taxable because the aim of such an act is maximising recoveries i.e. principal services of debt collection.   

Furthermore if the ability to extent payment dates on informal terms amounts to a grant of credit that would fall to be taxed as an intrinsic element of debt collection since it is the means by which payment of the debt is enforced.  In any event it is ancillary to the principal service because it is a means to better recover the full debt.

With reference to the domestic legislation the agents are not providing intermediary services since they are not bringing together with a view to the provision of financial services persons who are or may be seeking to obtain financial services and persons who provide these.  The supplier does not have as its aim bringing together debtor and creditor for the supply of financial services.  The supplier’s aim is debt collection.

Further Consideration
While the Tribunal was considering the complexities of the matter after the conclusion of the argument they called for further submissions by way of a Direction dated 16 January 2007 giving the parties an opportunity to consider the possibility that the supply to the Appellant was a mixed supply of taxable and exempt services.  Parties did not wish to be heard further on the matter but submitted helpful argument in writing.  Neither party wished to put forward the proposition that the supply was a mixed supply and invited the Tribunal of new to determine the nature of the supply as a single supply for VAT purposes considering that an attempt to apportion between different elements of the whole transaction would artificially split the service.

Decision
The Tribunal did not consider it helpful to follow the Respondents in their argument relating to an “essential aim”, derived from para 77 of the MKG case for the reason that the circumstances in that decision were entirely different.  Factoring is not anything like the transaction here in issue; it is a simple sale after which the original debtor has no continuing interest.  The Tribunal noted but was not particularly concerned about the aims of parties.  It is what they actually do that is critically important.

It is the clear view of the Tribunal that, borrowing the words from CPP, that the dominant purpose of the entire economic arrangement was the recovery of money due to the Appellants.  The Tribunal are of this view despite the wording of the revised agreement, and despite arguments for the Appellants that they perceive the service they receive as one of debt negotiation.  That said they have no doubt whatsoever that negotiations and skilled negotiations at that, required to be undertaken and were undertaken and that a substantial discretion was given to the trained staff of the agents in how they achieved their purpose.

The Tribunal were unable to find that the negotiation involved in the recovery of money for the Appellant was an aim in itself, although it might be a desirable feature for various reasons.  They find that it was truly ancillary to the dominant purpose of debt recovery.  Further it does not fall to be regarded as “intermediary services” in terms of the domestic legislation since we do not find that the agents act in an intermediary capacity in relation to both debtor and creditor.  In short, the service supplied to the Appellant was a single supply of debt recovery.  Further and for the avoidance of any doubt raised by p10 and 12 hereof the Tribunal finds that the service does not fall to be regarded as the granting of any credit.

That being so the appeal must fail.

In coming to that conclusion the Tribunal did not need to involve itself in the construction of the exemption provisions.  However it is plain that but for the exemptions in Article 13B of the Sixth Directive all financial transactions would in the normal course be taxable.  The Directive by its wording gives exemption to transactions and negotiations concerning debts but removes from that exemption ancillary negotiations and discussions which take place in the activity of debt collection itself, which is wholly removed from the exemption granted.

Result
In the result the Tribunal dismiss the appeal.

T GORDON COUTTS, QC
CHAIRMAN

RELEASE:  19 APRIL 2007

EDN/06/35