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Cite as: [2009] BTC 5048, 2009 GWD 3-58, [2009] BVC 48, [2008] ScotCS CSIH_69, [2009] STI 192, 2009 SLT 79, [2008] CSIH 69, 2009 SC 215, [2009] STC 486

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Nimmo Smith

Lord Reed

Lord Drummond Young

[2008] CSIH 69

XA80/07

OPINION OF THE COURT

delivered by LORD NIMMO SMITH

APPEAL

under section 11 of the Tribunals and Inquiries Act 1992

HBOS PLC

Appellant;

against

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents:

_______

Appellant: Currie, Q.C.; Tods Murray LLP

Respondents: Ghosh; Shepherd and Wedderburn LLP

30 December 2008

Introduction

[1] This is an appeal by HBOS plc against a decision of the Edinburgh VAT and Duties Tribunal ("the Tribunal") dated 19 April 2007 dismissing the appellant's appeal against a decision of the Commissioners dated 18 April 2006.

[2] HBOS, as is well known, is a major financial institution. It and its subsidiaries and associated businesses, such as Sainsbury's Bank plc, Automobile Association Personal Finance Ltd and Intelligent Finance, a division of Bank of Scotland plc, amongst others (all hereinafter collectively referred to as "HBOS") provide inter alia financial services. These include the provision of credit facilities to customers by way of loans of various types, credit card facilities or overdrafts. Customers with loans and credit card facilities are required to make a payment every month of part at least of the balance outstanding on a particular date. In relation to an overdraft special terms and conditions apply and must be complied with. For example, the agreed limit must not be exceeded.

[3] For some time HBOS used agents to obtain payment of some of the sums then due which they were unable or not equipped to recover themselves from their customers. HBOS sought a ruling from the Commissioners on the VAT status of these arrangements. By letter dated 18 April 2006 the Commissioners gave their decision, concluding that the supply made by the agents was "a single debt collection ... with any other activities being ancillary to it". Being dissatisfied with this, HBOS appealed to the Tribunal.

The relevant legislation

The European legislation

[4] The starting point is EC Council Directive 77/388 of 17 May 1977 on the harmonisation of legislation in Member States concerning turnover taxes ("the Sixth Directive"). It recites that -

"a common list of exemptions should be drawn up so that the Communities' own resources may be collected in a uniform manner in all the Member States:"

and

"the obligations of taxpayers must be harmonised as far as possible so as to ensure the necessary safeguards for the collection of taxes in a uniform manner in all the Member States;".

Title X deals with exemptions. Article 13 deals with exemptions within the territory of the country and is divided into two parts, A and B. Part A confers exemptions for certain activities in the public interest. Part B is entitled "Other Exemptions". So far as relevant it provides:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

[(a) to (c)]

(d) the following transactions:

1. the granting and the negotiation of credit and the management of credit by the person granting it;

[2]

3. transactions, including negotiation, concerning deposit and

current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

[4 to 6]."

The United Kingdom legislation

[5] Section 4 of the Value Added Tax 1994 Act provides inter alia:

"(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."

Section 5(2)(a) provides that "supply" in the Act includes all forms of supply, but not anything done otherwise than for a consideration. Section 31(1) provides that a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9. Group 5 in Schedule 9 is entitled "Finance" and contains a number of items, of which the following are relevant:

"2. The making of any advance or the granting of any credit.

5. The provision of intermediary services in relation to any transaction comprised in item ... 2 ... (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity."

Schedule 9 includes notes by reference to which, as provided in section 96(9), the items in the schedule are to be interpreted. Notes (5) to (5B) to Group 5 provide:

"(5) 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.

(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 issues before the Tribunal

[6] The Tribunal was presented with three issues. As set out in the grounds of appeal, these were:

(1) Whether the agents' services fall within Article 13B(d)(1) or within Item 2 of Group 5 of Schedule 9 to the VAT Act 1994 ("Item 2")? Article 13B(d)(1) exempts "the granting and the negotiation of credit" and Item 2 exempts the "granting of any credit".

(2) Whether the agents' services fall within Article 13B(d)(3)? Article 13B(d)(3) exempts "negotiation concerning ... debts ..., but excluding debt collection and factoring".

(3) Whether the agents' services fall within Item 5 of Group 5 of Schedule 9 to the VAT Act 1994 ("Item 5")? Item 5 exempts "the provision of intermediary services in relation to any transaction comprised in Item 1, 2, 3 or 4 ... by a person acting in an intermediary capacity". Item 2 includes "the ... granting of any credit".

[7] What the Tribunal had to consider was therefore, in general terms, as the Tribunal put it,

"whether services provided to the appellant by a number of agents in relation to sums said to be due to [HBOS] are exempt supplies within the meaning of the legislation ... or whether those services are excluded from exemption as being 'debt collection'."

The Tribunal held that the latter was the case.

The facts found by the Tribunal

[8] The Tribunal heard evidence from Euan McPherson, Head of Recovery Strategy and Analysis with HBOS, and from Douglas McManus, Director of Operations of BCW Group and previously Managing Director of Apex Credit Management Limited. The Tribunal regarded both of these witnesses as being credible and reliable, and accepted their evidence. The Tribunal made findings in fact based on that evidence and on the documents before it. What follows is derived from the Tribunal's findings in fact, supplemented to some extent by reference to the witness statements of Mr McPherson and Mr McManus and by certain of the documents; all of these were referred to before us without objection.

[9] Arrears may arise 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 become 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.

[10] HBOS has an in-house recovery department which usually, in 89.9% of cases, can deal with the sums due. It has authority to vary the terms of agreements between HBOS and its customers. About 10% of the situations prove difficult or complex. HBOS does not consider that 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 HBOS for any reason.

[11] In such circumstances HBOS will refer matters to one of its agents in order to obtain payment. They do so in terms of a standard contract, the terms of which have varied from time to time. One sample, dated 2000, was before the Tribunal. At that time the services provided by the agents were standard-rated for VAT, and this was not challenged by HBOS. After the Tribunal decision in Debt Management Associates Ltd v The Commissioners of Customs & Excise (2002) VAT Decision 17880; [2003] STI 609 ("DMA"), the Commissioners issued Business Brief 30/03 which stated:

"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."

[12] Following this, HBOS adopted a revised standard contract to govern relations between themselves and their agents. The agent in question was referred to therein as "the Supplier". By clause 2.1 of Part 2 of the Schedule the Supplier undertook to perform the "debt negotiation services" as set out in Part 3 of the Schedule. The more detailed provisions of the contract which are relevant for present purposes were as follows. Part 2 of the Schedule provided inter alia:

"3. PAYMENT

3.1 In consideration of the provision of the Services, [HBOS] shall make payment to the Supplier in accordance with the provisions of Part 4 of the Schedule.

...

3.3 The parties agree and accept that the Services provided under this Agreement constitute Debt Negotiation Services and as such are exempt from VAT under the permission granted within the HM Customs & Excise business brief dated 23 December 2003. On this basis invoices issued for such Services will not include Value Added Tax.

3.4 In the event of a change in legislation or Customs ruling covering such Services the parties will require to comply with such legislation or ruling and VAT will be payable by [HBOS] on subsequent invoices or retrospectively as decreed by Customs.

3.5 In the event of a ruling from Customs that the Services are subject to VAT, the parties agree that they will work together to submit an appeal against that ruling if such an appeal is justified in the view of [HBOS]. It is agreed that [HBOS] will be responsible for meeting the costs of submitting any appeal."

Under the heading "Services" in Part 3 of the Schedule there were inter alia the following provisions:

"[HBOS] may from time to time instruct the Supplier to perform one or more of the following services which the Supplier will carry out if it accepts the instructions from [HBOS]:-

· 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 [HBOS]. The Supplier will typically renegotiate the terms on which credit is granted to the borrower with a view to maximising recoveries by [HBOS]. 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 [HBOS] to the Supplier. The Supplier will oversee the transmission of the funds from the customer to [HBOS]. The negotiations will be conducted in line with [HBOS]'s policy.

Key Activities

Purpose

Scope

To manage and action accounts to negotiate clearance of outstanding amounts due with customers or clients of [HBOS] whose accounts have been closed in accordance with [HBOS]'s policy.

· Manage and control workflow

· Issue account, customer and other documentation.

· Negotiate settlement of outstanding amount.

· Instruct and manage external agents.

· Receipt of outstanding amounts from customers or clients of [HBOS] for transmission to [HBOS], financial transactions and reconciliation.

By Part 4 of the Schedule, provision was made for the "price" to be paid by HBOS to the agent. It stated:

"The price shall remain fixed and unchangeable during the term of this Agreement and shall apply to all cases handled by the Supplier, including those allocated prior to the date of this Agreement."

In the box which followed, under the heading "Category", provision was made for a composite rate for first, second, and third and subsequent placements, "regardless of activity". The other heading was "Price (as % of sum recovered following debt negotiation)", with room for the insertion of the rate applicable to each category.

[13] Almost all of the services provided by the agents can be said to fall under the provision headed "Debt Negotiation Services", quoted above. The remaining services, if they are performed, form part of the overall services. The Tribunal did not consider these to be of sufficient quantity or materiality to affect their view on classification.

[14] The progress of matters in the hands of an agent is as follows. The agent will first receive a communication from HBOS giving details of the outstanding amount to be recovered. Thereafter the agent will contact the customer by letter. Such a letter typically contains the following passage:

"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 you to retain that status and continue to make repayments as previously agreed, however this can only 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."

The Tribunal described this passage as "stick and carrot". After this letter is sent, 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 HBOS the agent may extend the time to pay; or may arrange for an appropriate level of payment over time; and further may offer as a compromise reduction of the outstanding sum in order to achieve a one-off immediate payment or a payment schedule which the customer can afford and is acceptable to HBOS. All of this is subject to the overall authority and agreement of HBOS. The Tribunal found that if an agent did any of those things it was as a matter of fact varying the terms of the contract between HBOS and the customer, as a result of which the customer obtained an advantage in the matter of time to pay or of reduction of the outstanding sum or both.

[15] HBOS in such a case has the advantage of obtaining some at least of the money due to it at some stage. It is only very occasionally, in less than 1% of cases, that virtually immediate full payment is secured. If one agent does not succeed in securing any payment, then another may be instructed or, with permission of HBOS, the customer may be sued.

[16] The agents collect money and transmit it to HBOS. They are remunerated, in terms of clause 3.1 of and Part 4 of the Schedule to the standard contract, by a commission paid by HBOS on the sums recovered.

[17] The Tribunal heard 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 relevant legislation and by regulatory bodies. The Tribunal accepted that training was important and could not be disregarded as a factor relevant to its decision. The Tribunal noted, however, that the summary objective as set out in one of the agents' training manuals states: "What do we want? Payment In Full!!! When do we want it? Now!!!" The Tribunal said that this accurately summarised the guiding principle of debt recovery.

[18] As part of his evidence, Mr McPherson provided an overview of the relevant services. He said that the idea behind referring the matter to the agents was that they provided a specialist negotiation service. This meant that rather than simply trying to get the customer to pay all the money they owed (which frequently the customer simply did not have) the agents approached the matter by discussing with the customer ways in which the customer might pay their debt or debts and changing certain terms of the agreement between the customer and HBOS, e.g. by writing off some of the debt or debts or increasing the term of the loan. By using this approach, he said, the agents reach a stage where the customer has agreed to make payments in a way which is acceptable to the customer, but which is also acceptable to HBOS. Even if HBOS are not able to recover the entire debt or debts using this method, this is preferable to their not recovering anything, which would be likely to happen if the agents did not intervene. He concluded by saying:

"Where agreement is reached, the result is a 'win-win' situation under which the customer has a payment regime which suits their financial circumstances and under which HBOS will receive at least a proportion of the debt(s) due."

Mr McManus gave similar evidence. He concluded:

"Our operatives go through an intensive and ongoing training process to ensure that they are highly skilled in negotiation techniques. By using these techniques in respect of the customers whom HBOS refer to us, we create a situation whereby we are able to secure payment of a proportion of the amounts due from the customer, while ensuring that the customers have agreed to pay amounts which they can afford. For HBOS, securing payment of at least a proportion of the debt(s) is far preferable to receiving no payment at all."

The relevant authorities

[19] Counsel were in agreement as to the principal authorities which are relevant to our decision. They disagreed on the consequences of the application of these authorities to the facts found by the Tribunal. It therefore seems convenient to set out here, in chronological order, the main passages to which reference was made in the course of counsel's submissions, and to discuss them later, after setting out the facts and the issues arising in this appeal.

[20] In Muys' en De Winter's Bouw- en Aannemingsbedrijf BV v Staatssecretaris van Financiën (Case C-281/91) [1997] STC 665 ("Muys") the European Court of Justice ("the ECJ") said:

"12 It should be held in limine that deferred payment of the purchase price of goods, in return for payment of interest, may in principle be regarded as a grant of credit which is exempt within the meaning of [Article 13B(d)(1) of the Sixth Directive].

13 Although the exemptions provided for in Article 13 are to be interpreted strictly (see Case 348/87 Stichting Uitvoering Financiële Acties v Staatssecretaris van Financiën [1989] ECR 1737), nevertheless, in the absence of any specification of the identity of the lender or the borrower, the expression 'the granting and the negotiation of credit' is in principle sufficiently broad to include credit granted by a supplier of goods in the form of deferral of payment. Contrary to the Commission's view, the wording of that provision in no way suggests that there is any limitation on the scope of Article 13(B)(d)(1) only to loans and credits granted by banking and financial institutions."

[21] In Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) [1997] STC 932 ("SDC") the ECJ said:

"66. In order to be characterized as exempt transactions for the purposes of points 3 and 5 of Article 13B, the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points. For 'a transaction concerning transfers', the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation. A service exempt under the Directive must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank. In this regard, the national court must examine in particular the extent of the data-handling centre's responsibility vis-à-vis the banks, in particular the question whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions."

[22] Customs and Excise Commissioners v Civil Service Motoring Association Ltd [1998] STC 111 (C.A.) ("CMSA") related to the question whether supplies of services by the association to a bank in connection with a credit card scheme, in respect of which the bank paid commissions to the association, were exempt from VAT by reason of item 5 of Group 5 of Schedule 6 to the Value Added Tax Act 1983, which comprised "the making of arrangements for any transaction comprised in item 1, 2, 3 or 4". Item 2 was in the same terms as in the VAT Act 1994. Mummery LJ, who delivered the leading judgment, said at page 118:

"The critical question is whether the expressions 'negotiation of credit' [in Article 13B(d)(1)] and 'making of arrangements for any transaction for granting of any credit' [reading together items 2 and 5 in the 1983 Act] are to be construed as implicitly restricted to activities in relation to particular transactions for the specific grant of credit. Neither the purpose nor the context of the exemption justify placing this restricted meaning on the wide general language of the directive and of the 1983 Act. Both the 'negotiation of credit' and 'the making of arrangements' for the granting of credit refer to the doing of things antecedent to, and directly leading to, the results sought to be achieved by the doing of those things. The result to be attained is of a general rather than a specific nature, namely the 'granting of any credit'. In some cases intermediaries between principals will be involved in achieving that result. In other cases they will not. It is neither expressly nor impliedly necessary that they should be involved as a condition of the application of the exemption to those who do not actually grant credit. ... "

[23] In Card Protection Plan Ltd. v Customs and Excise Commissioners (Case C-349/96) [1999] ECR I-973; [1999] 2 AC 601 ("CPP") the House of Lords made a reference to the ECJ for a preliminary ruling on the test for determining inter alia whether a transaction consisted of a single supply or a number of distinct supplies. The insurance company provided to their customers inter alia indemnity against the loss or theft of their credit cards and also services which included a computerised record of cards and the rendering of assistance to customers in notifying card-issuing companies and obtaining new cards after a loss. The ECJ answered the questions on this point in these terms:

"26. By its first two questions, which should be taken together, the national court essentially asks, with reference to a plan such as that offered by C.P.P. to its customers, what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately.

27. It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provisions in the Sixth Directive. In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.

28. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] ECR I-2395, 2411-2412, paras. 12-14, concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place.

29. In this respect, taking into account, first, that it follows from article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, secondly, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied: Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) (Joined Cases C-308/96 and 94/97) [1998] STC 1189, 1206, para. 24.

31. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances such as those described in paragraphs 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this: see, to that effect, Madgett and Baldwin, at p. 1208, paras. 45 and 46.

32. The answer to the first two questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by C.P.P. are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply."

[24] When the case returned to the House of Lords (Card Protection Plan Limited v Customs and Excise Commissioners (No. 2) [2002] 1 AC 202), Lord Slynn of Hadley said at paragraph 22:

"It is clear from the Court of Justice's judgment that the national court's task is to have regard to the 'essential features of the transaction' to see whether it is 'several distinct principal services' or a single service and that what from an economic point of view is in reality a single service should not be 'artificially split'. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided."

At paragraph 25 Lord Slynn, in using the phrase "the essential feature of the scheme or its dominant purpose", treated the two expressions as being synonymous.

[25] In CSC Financial Services Ltd v Customs and Excise Commissioners (Case C-235/00) [2001] ECR I-10237; [2002] STC 57; [2002] 1 WLR 2200 ("CSC") the ECJ considered a reference from the High Court of Justice of England and Wales on questions relating to the interpretation of the expressions "transactions in securities" and "negotiation in securities" within the meaning of Article 13B(d)(5). In the course of its judgment the ECJ said:

"37 Article 13(B)(d)(5) of the Sixth Directive does not define the meaning of 'negotiation in securities' for the purposes of that provision.

38 Clearly, 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.

39 It is not necessary to consider the precise meaning of the word 'negotiation', which also appears in other provisions of the Sixth Directive, in particular, Article 13B(d)(1) to (4), in order to hold that, in the context of Article 13B(d)(5), it refers to the activity of an intermediary who does not occupy the position of any 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 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. 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.

40 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 subcontractor 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.

41 In view of all the foregoing considerations, the answer to the national court's question must be that, on a proper construction of Article 13B(d)(5) of the Sixth Directive,

- 'transactions in securities' means transactions liable to create, alter or extinguish parties' rights and obligations in respect of securities;

- 'negotiation in securities' does not cover services limited to providing information about a financial product and, as the case may be, receiving and processing applications for subscription, without issuing them."

[26] In DMA the appellant carried on the business of managing its clients' debts. Its service consisted in negotiating with the creditors a repayment plan and in collecting monthly payments from the clients and distributing them to the creditors. In the course of his decision, the Chairman, Mr Colin Bishop, said at paragraph 24: "The creditor who grants his debtor some indulgence is, in my view, granting him credit, even if it is additional credit." At paragraph 27 he said:

"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."

[27] In Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01) [2003] ECR I-6729]; [2003] STC 951 ("MKG") the Bundesfinanzhof referred to the ECJ the following questions:

"(1) Can a factoring company which buys debts and assumes liability for the risk of loss in relation to those debts ["true factoring"] be said to be using goods and services received by it for the purposes of its transactions?

(2) Do such activities involve taxable transactions or at any rate transactions for the purposes of Article 13B(d) of [the Sixth Directive] which may be taxed to the extent that the Member States have conferred on taxable persons a right to opt for taxation? Which of the transactions listed in Article 13B(d) are involved?"

In relation to the second question the ECJ said:

"60 By this question, the national court seeks to ascertain whether, should the first question submitted for a preliminary ruling be answered in the affirmative, transactions carried out by a company which engages in true factoring constitute taxable transactions within the meaning of Article 17(2) of the Sixth Directive.

61 The national court asks, more specifically, whether true factoring is subject to VAT or falls within one of the activities exempted from VAT pursuant to Article 13B(d) of the Sixth Directive, activities which may, however, be taxed where, as in the main proceedings, the Member State concerned has allowed taxpayers a right of option for taxation and the undertaking in question has expressly waived exemption of the transactions carried out by it relating to true factoring.

62 In answering this question, it should be remembered that the exemptions provided for in Article 13 of the Sixth Directive constitute independent concepts of Community law which are intended to avoid divergences in the application of the VAT system as between one Member State and another and must be placed in the general context of the common system of VAT (see, in particular, Case C-240/99 Skandia [2001] ECR I-1951, paragraph 23).

63 In addition, it is settled case-law that the terms used to specify the exemptions provided for by Article 13 of the Sixth Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see, inter alia, Case C-409/98 Mirror Group [2001] ECR I-7175, paragraph 30).

64 It should also be noted that the transactions exempted by virtue of Article 13B(d)(3) of the Sixth Directive are defined solely in terms of the nature of the services listed, since no reference is made to the status of the persons supplying or receiving them. Furthermore, it is clear from the Court's case-law that, given the objectives pursued by the common system of VAT of ensuring legal certainty and the correct and straightforward application of the exemptions provided for in Article 13 of the Sixth Directive, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question (see, inter alia, Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 33).

...

70 It is therefore necessary to view the final clause of Article 13B(d)(3) in its context and to interpret it in the light of the spirit of the provision in question and, more generally, of the scheme of the Sixth Directive.

71 As derogations from the general application of VAT, the exemptions envisaged in Article 13B(d)(3) of the Sixth Directive must be interpreted in a manner which limits their scope to what is strictly necessary for safeguarding the interests whose protection those derogations allow (see, to that effect, paragraph 63 of this judgment).

...

77 ... [T]he term debt collection must be interpreted as encompassing all forms of factoring. 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.

78 ... [T]he term 'debt collection' refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemptions set out in the first part of Article 13B(d)(3) of the Sixth Directive.

...

80 The answer to the second question submitted for a preliminary ruling must accordingly be that an economic activity by which a business purchases debts, assuming the risk of the debtors' default, and, in return, invoices its clients in respect of commission, constitutes 'debt collection and factoring' within the meaning of the final clause of Article 13B(d)(3) of the Sixth Directive and is therefore excluded from the exemption laid down by that provision."

[28] In Bookit Limited v Revenue and Customs Commissioners [2005] STC 1481 (affirmed by the Court of Appeal, [2006] STC 1367), Odeon Limited ("Odeon") was the holding company of a group which owned and operated cinemas. Bookit Limited ("Bookit") was another company in the Odeon Group which operated a call centre through which an intended cinema-goer ("the Customer") might book and, by the use of a debit or credit card, pay for a seat for a given future performance at a specified cinema in the chain. For the service it provided to the Customer Bookit charged a handling charge. In the course of his judgment, Sir Andrew Morritt V-C said:

"
[47] As I indicated previously the claim for exemption must be considered against the provisions of Article 13B(d). Though Bookit relied on paragraph 1 its primary case lay under paragraph 3. Accordingly the first step is to identify any relevant payment or transfer. A payment or transfer for the purpose of paragraph 3 is the execution of an order to transfer a sum of money from one account to another so as to effect a change in the legal or financial situation. This is clearly established by the decision of the ECJ in SDC paragraph 53 and by the Court of Appeal in [Customs and Excise Commissioners v FDR Ltd [2000] STC 672] paragraphs 37 and 38. In this case there are two payments or transfers, (1) the payment or transfer of the price of the ticket and the card handling fee from the Customer (or its card issuer in the case of a credit card) to the account of Bookit with Girobank ... and (2) the payment or transfer of the ticket price from Bookit's account with Girobank to the account of Odeon ...

[48] The key authorities to which I have referred at some length already throw light on the connection between the payment or transfer and the supplier of the service under consideration. Thus, although the method by which the payment or transfer is effected is immaterial the relevant service must be more than the provision of such technical or electronic assistance as that method dictates, see SDC, paragraph 37. The court must examine the responsibility of the service provider vis-à-vis the bank making the transfer and in particular whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions, see SDC, paragraph 66. These principles were reiterated in CSC paragraph 28. In that case CSC failed to qualify for exemption on the ground that the service it provided was a 'transaction...in shares' because, although it carried out all the necessary paperwork, it did not itself issue the units.

[49] But there is an important distinction between this case and CSC. In CSC the ECJ was concerned with Article 13(B)(d)(5). That paragraph refers to 'transactions...in shares'. By contrast paragraph (3) exempts, not merely payments and transfers but 'transactions...concerning...payments, transfers...'. Accordingly the fact that Bookit does not itself make the transfer in the sense of effecting the debit and credit is not fatal to its claim to exemption.

[50] 'Transactions...concerning...payments, transfers' include 'negotiation'. This term was considered by the ECJ in CSC. In paragraph 39 of its judgment in CSC the ECJ described 'negotiation' as a service rendered by an intermediary to and remunerated by a contractual party as a distinct act of mediation, such as pointing out opportunities, making contacts or negotiating the details of the payment to be made. It distinguished the position of the intermediary from that of a party to the contract or a sub-contractor of one of the parties. ...

[51] Applying these principles I would reject the claim of Bookit insofar as it is based on the second payment to which I have referred in paragraph 47 above. The payment by Bookit to Odeon was the necessary consequence of the fact that it was the agent of Odeon for the purpose of selling the cinema tickets. But the same cannot be said of the first payment. ... [T]hat payment was made to Bookit for and on its own account. It was a payment by or on behalf of the Customer. It did alter the legal and financial situation. The card handling services provided by Bookit to the Customer were more than technical or electronic assistance but were the essential preliminaries to any remote payment by the Customer being effected. They were not rendered as a party to the contract between the Customer and Odeon, nor as the sub-contractor of either of them. They were separately remunerated by the card handling fee paid by the Customer. They constituted activities distinct from those of any other party.

[52] I have some doubt whether the services performed by Bookit for the Customer are strictly acts of mediation or negotiation so as to satisfy that part of Article 13(B)(d)(3) as includes 'negotiation'. They seem to me to be more executive than that. But whether that is so or not the services rendered by Bookit to the Customer are properly to be regarded as 'transactions...concerning...payments, transfers...' whether or not they are specifically included in that expression by reference to the word 'negotiation'."

[29] In College of Estate Management v Her Majesty's Commissioners of Customs and Excise [2005] UKHL 62; [2005] 1 WLR 3351, Lord Walker of Gestingthorpe said at paragraph 30:

"In the course of this appeal there has been much discussion of para 30 of the judgment of the Court of Justice [in CPP]. In my opinion it is clear that this paragraph (which uses the introductory words 'in particular') is dealing with a particular case exemplified by the Madgett and Baldwin case. It is not asserting that every distinct element of a supply must be a separate supply for VAT purposes unless it is 'ancillary'. 'Ancillary' means (as Ward LJ [2004] STC 1471, 1482, para 39 rightly observed) subservient, subordinate and ministering to something else. It was an entirely apposite term in the discussion in the British Telecommunications case [Customs and Excise Commissioners v British Telecommunications plc [1999] 1 WLR 1376] (where the delivery of the car was subordinate to its sale) and in the Card Protection Plan case itself (where some peripheral parts of a package of services, and some goods of trivial value such as labels, key tabs and a medical card, were subordinate to the main package of insurance services). But there are other cases (including ... the present case) in which it is inappropriate to analyse the transaction in terms of what is 'principal' and 'ancillary', and it is unhelpful to strain the natural meaning of 'ancillary' in an attempt to do so. Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services .... Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services ..."

His Lordship also emphasised (at paragraph 36) the need for circumspection before interfering with the decision of the tribunal on the characterisation of supplies for VAT purposes.

[30] Finally, in Barclays Bank plc v The Commissioners for Her Majesty's Revenue and Customs (2008) VAT Decision 20528; [2008] STI 1072 ("Barclays"), Barclays Bank plc appealed against a decision that certain supplies made to it by D, a South African company, were a single supply of debt collection services so that the appellant was liable to a reverse charge under section 8 of the VAT Act 1994. The issue was whether the services supplied by D to the appellant in relation to customers with overdue Barclaycard accounts were exempt as "transactions, including negotiation, concerning...payments, debts" or as "the negotiation of credit" or whether they were taxable as being within the exception for debt collection. Alternatively the same issue arose under UK legislation where the exemptions for financial transactions do not exclude debt collecting. It was common ground that there was a single supply of services. In the course of their decision to dismiss the appeal, the Tribunal said:

"12. The way the Court reached its decision in MKG was to find that, in accordance with its objective character, the essential aim of factoring was the recovery and collection of debts owed to a third party, and therefore it constituted part of the more general concept of debt collection. We understand the reason why the Court said that debt collection transactions are clearly different in nature from the transactions set out in the first part [of] art 13B(d)(3) to be that those transactions are designed (or have the essential aim) of carrying out the exempt transaction itself. Thus the simple assignment of a debt for consideration is exempt as a transaction concerning debt, but the same transaction in the course of factoring is not because (viewed objectively) it has a different essential aim. We accept that debt collection should not be construed so widely that there is no scope left for the listed exempt transactions in art 13B(d)(3), but on our interpretation there is plenty of scope left for the exempt transactions. Accordingly, we consider that we should ask ourselves whether, in accordance with its objective character, the essential aim of what D does is the recovery and collection of debts, or whether, so viewed, its essential aim is the carrying out of the listed exempt transactions. We do not therefore agree with [counsel's] persuasively argued approach that if something falls squarely within the listed exempt transactions it cannot also fall within debt collection.

13. Debt collection refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt. The Court included factoring, which takes place even before the debt is due, within the general concept of debt collection. It follows that debt collection cannot therefore have the narrow meaning of enforcement of debts, for example through the courts, occurring at a later stage than the Services supplied by D, as contended for by [counsel]."

At paragraph 17 the Tribunal said:

"Our answer to the question whether, in accordance with its objective character, the essential aim of what D does is the recovery and collection of debts, or whether, so viewed, its essential aim is the carrying out of the listed exempt transactions, is that it is clearly the former. The description of the Services in the Agreement is to engage in telephone negotiations with customers with the objective of securing a full or the minimum payment, or the promise of such payments, and the key aim of the negotiator is to secure either a full or the minimum payment. We consider that this amounts to debt collection. ... We have no difficulty in accepting that D does carry out transactions within the list of exempt [transactions] if considered in isolation; what they do is primarily negotiation and the negotiation concerns debts, payments are made either immediately or as a result of promises, and in the course of doing so further credit may be negotiated. But whether the transactions are exempt or taxable as debt collection depends on their essential aim viewed objectively, which in our view is debt collection."

The Tribunal's decision

[31] During the course of the procedure before the Tribunal it was confirmed that neither party wished to put forward the proposition that the supply in question was a mixed supply. The parties invited the Tribunal 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".

[32] In reaching their decision, the Tribunal stated that they did not consider it helpful to follow the Commissioners in their argument relating to an "essential aim", derived from MKG, paragraph 77. They said that this was because the circumstances in that decision were entirely different; factoring was not anything like the transaction here in issue, it was a simple sale after which the original creditor had no continuing interest. The Tribunal said that they were not particularly concerned about the aims of the parties (HBOS and the agents), it was what they actually did that was critically important. The Tribunal continued:

"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 [HBOS]. The Tribunal are of this view despite the wording of the revised agreement, and despite arguments for [HBOS] 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 [HBOS] 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 [HBOS] was a single supply of debt recovery. Further and for the avoidance of any doubt ... the Tribunal finds that the service does not fall to be regarded as the granting of any credit".

The appeal to this Court

Grounds of appeal for HBOS

[33] In their grounds of appeal, HBOS allege that the Tribunal erred in law in a number of respects. The Tribunal failed to address, or in any event, properly to apply, the decisions in CSMA, CSC, DMA and Bookit. Instead of having regard to these relevant authorities, the Tribunal formulated their own legal test - to identify the dominant purpose of the entire economic arrangement. The Tribunal wholly misunderstood the principle addressed and decided by CPP, which they relied on as authority for the "dominant purpose" test. That case was concerned with the criteria to be adopted in deciding whether there is, in any particular case, a single supply or a multiple supply. Specifically, where the transaction consists of more than one element, whether there is a principal supply of one element to which the other elements are merely ancillary, or whether there is a multiple supply of two or more of the elements. CPP was not concerned with how the nature of a supply or supplies should be determined, and yet the Tribunal used the test set out in CPP to determine the nature of this supply by the agents. As a result of that misunderstanding the Tribunal reached a conclusion at odds with the findings in fact - in particular the finding that what the agents did was debt negotiation - and was wrong in law. It is also alleged that the Tribunal erred in concluding that the service provided by the agents did not fall to be regarded as the granting of any credit, and that the agents did not act in an intermediary capacity in relation to both the debtor and creditor. These findings were inconsistent with the finding in fact that the agents could agree to vary the time for payment or the amount to be paid.