DECISION
1. This
is an appeal by Paymex Limited (“the Appellant”) as the representative member
of a group of companies which includes Blair Endersby Limited (“Blair
Endersby”) against decisions of HMRC dated 15 August 2007 and 2 October 2007
that supplies made by Blair Endersby in connection with consumer Individual
Voluntary Arrangements (“consumer IVAs”) are taxable supplies for VAT
purposes. The Appellant claims that the supplies are exempt within both the EU
legislation, namely Art 13B(d)(3) of the Sixth Directive and Art 135(1)(d) of
the Principal VAT Directive, and the relevant domestic legislation (Value Added
Tax Act 1994 (“VATA”), s 31, and Sch 9, Group 5, item 5).
2. The
Paymex group also includes Baines & Ernst Limited (“Baines & Ernst”),
which provides debt management services.
The facts
3. We
had substantial documentary evidence before us and we heard from three
witnesses for the Appellant and an expert witness called by HMRC. The three
witnesses for the Appellant were: Nicholas Morgan, who is an insolvency
practitioner and was part of the senior management team employed by Blair
Endersby from May 2005 to 2009; Andrew Wisedale, who has been employed by Baines
& Ernst as operations director since 9 February 2004; and Timothy
Greenwood, the head of group internal audit for the Appellant since May 2007
who was employed by Baines & Ernst from May 2006 to May 2007 and worked
across all the group companies. The expert witness was Norman Cowan FCA,
FABRP, MCIArb, MEWI, an insolvency practitioner of Wilder Coe LLP, whose
specialist field is insolvency, having taken insolvency appointments since
1980.
4. From
this evidence, which included witness statements of the Appellant’s witnesses,
reports of Mr Cowan, and oral evidence and cross-examination of all the
witnesses, we find the following facts.
Outline of the IVA procedure
5. The
Individual Voluntary Arrangement (“IVA”) procedure was introduced by the
Insolvency Act 1986. Modifications were made by the Enterprise Act 2003 to
streamline the procedure. It enables an insolvent individual to make a
proposal for an IVA with his creditors.
The arrangement must take the form of a composition in satisfaction of the
individual’s debts or a scheme of arrangement of his affairs.
6. An
IVA will normally include all the debtor’s unsecured debts. The rights of
secured creditors, such as mortgage lenders, cannot be affected without their
consent, and those creditors will accordingly usually remain outside the IVA.
7. The
principal benefit of an IVA for a debtor is that it gives him protection
against unsecured creditors. If the proposal is approved by 75% in value of
the creditors present in person or by proxy voting on the resolution it is
binding, subject to any challenge on grounds of unfair prejudice or material
irregularity, on creditors who were entitled to vote at the meeting (whether or
not present or represented), or who would have been entitled if they had had
notice of the meeting.
8. In
common with other insolvency procedures, the IVA can only be conducted by a
licensed insolvency practitioner (“IP”), licensed either by the Department for
Business, Innovation or Skills or by one of a number of recognised professional
bodies (“RPBs”). Blair Endersby employs IPs (one of whom, at the relevant
time, was Mr Morgan) to enable them to undertake the IVA work; however, much of
the background work is done by members of Blair Endersby’s staff who are not
formally qualified.
9. There
are a number of stages to the IVA process, which we shall describe in greater
detail below. By way of introduction however, the IP, or members of staff,
will collect information from the debtor as to his financial circumstances,
advise the debtor as to the best course of action in his particular
circumstances and draft the proposal. At the stage when a proposal is ready
for submission for approval by creditors the IP acts as a Nominee, with
statutory responsibility for making a report to creditors, and at relevant
times up to April 2010 to the court, as to whether, in the opinion of the
Nominee, the proposal has a reasonable prospect of being approved and
implemented. And when a proposal is approved, the Nominee will usually (though
not invariably) act a Supervisor of the IVA, at which time his responsibilities
are governed by the arrangement. These duties include monitoring the
performance of the IVA, collecting payments from the debtor, and accounting to
the creditors.
The IVA processes: Baines & Ernst
10. Blair Endersby
commenced its involvement in the IVA business in 2004, and in 2005 employed its
first IPs. Before that time Baines & Ernst had been carrying on a debt
management business. Baines & Ernst is a well-recognised name in the field
of debt management. It conducted television advertising in the early 2000s.
Although in the early stage of its start-up Blair Endersby also sought to
develop a high profile, from 2006 the group came to use the Baines & Ernst
name to attract business to the group generally, including therefore both debt
management and IVAs. Since 2007 there has only been what Mr Wisedale described
as a single point of entry under the Baines & Ernst name.
11. Consequently,
although there were occasions on which a debtor making enquiries about an IVA
would contact Blair Endersby in the first instance, in the main this initial
contact was with Baines & Ernst.
12. Initial contact
would normally take place by a telephone call made by the individual to Baines
& Ernst. Baines & Ernst operated a computerised system for collecting
initial information, known as Baines & Ernst Product Selector, or BEPS.
This system is designed to record basic information from the individual,
including address, occupation, and date of birth, along with the debt position,
focussing on unsecured debts, and the debtor’s income and expenditure and
assets, particularly any equity in property. The system has an algorithm
which, following input of all the basic information, will itself set out the
options available based on the profile that has been presented. Typically,
more than one option, such as bankruptcy, IVA and debt management, will be
presented. Baines & Ernst will then discuss with the individual the
advantages and disadvantages of those options.
13. If the IVA
option is thought to be the most appropriate way to proceed, then as part of
this initial telephone contact the Baines & Ernst operative makes a start
at completing an IVA application form. This is a form that must be completed
and signed by the debtor, but the opportunity is taken in the initial contact
for the form to be pre-populated with information taken down by the initial
adviser. The form sets out (i) personal details, (ii) a description and value
for each debt, including secured debts, the contracted payments for each debt
and whether legal proceedings have been commenced, (iii) background information
as to when the debtor’s financial problems commenced, and the reasons for those
problems, and what steps the debtor had already taken to manage his debts, (iv)
details of the debtor’s home, including financial details for a home owned by
the debtor, (v) table of monthly income and expenditure, and (vi) other assets.
14. The work carried
out by Baines & Ernst in relation to its IVA service was governed by an
Authorisation Form. That form indicated that the service carried out by Baines
& Ernst was limited to introducing the debtor to a qualified insolvency
practitioner. Once that introduction was made, the form points out that it
will be the IP’s responsibility to liaise with the debtor and the creditors.
Baines & Ernst will liaise with the debtor, the creditors and the IP in
order that it can carry out its introduction service.
15. The
Authorisation Form sets out what is outside the scope of the services of Baines
& Ernst:
“4. What we do not do
4a We do not lend you money or give you
any credit facilities.
4b We do not give you legal advice.
4c We do not issue payments to your creditors
as part of the IVA service.
4d We do not give you advice on how
to, or contact your creditors in order to: restructure your debt
repayments; or settle your debts early.”
16. The
Authorisation Form refers to an Administration Payment which is to be paid by
the debtor for the IVA service to be provided under the agreement, calculated
from the financial information provided by the debtor. It is used to cover the
initial costs of collecting and reviewing the debtor’s documentation, liaising
with creditors (if this were done) and passing the case to the IP.
17. Following the
initial telephone call a Welcome Pack brochure was posted to the debtor, and
this included the Authorisation Form. The debtor is asked to return the signed
Authorisation Form.
18. The initial
information obtained from the debtor in the initial telephone call had to be
confirmed and supported by documentation. Baines & Ernst arranged a home
visit to enable the IVA application form to be finalised and signed and for
documents to be collected. These documents included identification checks for
money-laundering purposes, an authority form to enable information to be
obtained from creditors by Blair Endersby and a direct debit mandate in favour
of Blair Endersby so that, if a payment proposal were agreed, regular payments
could be made from the debtor’s bank account. Once that had been done the case
could be passed over to the IP and to Blair Endersby.
19. The stage of
initial advice and information-gathering, carried out largely, if not
exclusively, by Baines & Ernst, was not part of the service supplied by
Blair Endersby which is the subject of this appeal. The Administration Fee has
always been subject to VAT. This has been treated at all times as a separate
taxable supply by Baines & Ernst. We find that Blair Endersby did on
occasion provide this introductory service, and used terms and conditions
similar to those used by Baines & Ernst, but that service was operated in
the same way as the service undertaken by Baines & Ernst, and was a
separate service from that, or those, carried out by Blair Endersby after the
introduction to the IP was made.
The IVA processes: Blair Endersby
20. In this section
we find the facts relating to the IVA process as undertaken by Blair Endersby,
acting in part through its employed insolvency practitioners.
21. On receipt of
the debtor’s documents, these would be scanned by Blair Endersby and returned
to the debtor. Any updates are made in respect of the debtor’s credit
commitments, and the file is then passed to the Blair Endersby member of staff
who has the responsibility of drafting the debtor’s proposal (“the drafter”).
This process includes consultation by telephone with the debtor.
22. This
consultation by Blair Endersby with the debtor is a more detailed fact-finding
and advisory process than that carried out at the initial stages by Baines
& Ernst. Such a consultation is provided for in guidance note Statement of
Insolvency Practice 3 (“SIP3”) issued under procedures agreed between the
insolvency regulatory authorities acting through the Joint Insolvency Committee
(“JIC”), and approved by them and the recognised professional bodies in respect
to insolvency practice. This states, with respect to initial contact with the
debtor, that the IP should offer to meet the debtor personally, or arrange for
a suitably experienced member of staff to do so. If the debtor declines the
offer, the IP or member of staff may conduct the initial interview by
telephone. In the case of consumer IVAs of the nature dealt with by Blair
Endersby, the almost invariable practice was for these interviews to be by
phone.
23. The interview
proceeds along standard lines, designed to accord with the SIP3 guidelines.
This includes advising the debtor of the different roles the IP would perform
during the process, as Nominee and Supervisor, and the different duties and
responsibilities that they entail, to the debtor, the creditors and to the
court. SIP3 refers in this respect to the need for the debtor to be informed
that the duty of the IP as Nominee is to perform an independent, objective
review of the proposal for the purpose (up to April 2010) of reporting his
opinion to the court and generally balancing the interests of the debtor and
the creditors.
24. This interview
also entails a further review of the debtor’s financial circumstances. The
guidance indicates that the IP should exercise his professional judgment to
satisfy himself that the debtor has received appropriate advice on his position
and that the options available to him and the consequences of his decision to
propose an IVA have been fully explained to him. In the case of Blair
Endersby, this role was carried out by a suitably-trained member of staff;
Blair Endersby had extensive training programmes. SIP3 also provides that,
before recommending an IVA, the IP should be reasonably satisfied, on the basis
of the financial information obtained, that the debtor’s proposed payments will
be sustainable.
25. It was accepted
by Mr Morgan, and we find, that the giving of appropriate advice to the debtor,
as to the suitability or otherwise of an IVA, as opposed to other possible
approaches, such as debt management and bankruptcy, is a very important part of
the process. In Mr Morgan’s words, in cross-examination, “… the advice is key
to everything”.
26. Once it has been
determined on this basis that an IVA is the most appropriate way to proceed,
then, based on the information received from the debtor, the proposal to be put
to creditors is drafted by the drafter. Although this reflects the debtor’s
financial position, it is not an exercise undertaken in isolation from the
likely requirements of the creditors. Those requirements are well-known to
Blair Endersby, and have become more standardised over time through the
adoption of standard conditions for IVAs produced by the Association of
Business Recovery Professionals (R3) – of which Blair Endersby’s IPs are members
– and the use by major creditors of voting houses, with standard modification
requirements.
27. Voting houses
are instructed to act by major creditors to vote on IVA proposals. The voting
houses are instructed to seek standard modifications to an IVA proposal that is
made by a debtor. Part of the role of the drafter is to anticipate such
requirements and to seek to build them into any proposal. The shape of the
initial proposal that will go to creditors is very much influenced by the
positions known to be adopted by the creditors in question. These modification
requirements cover areas such as the Nominee and Supervisor’s fee, the minimum
amount of dividend in the £, the date of commencement of dividend payments, the
treatment of equity in the home (typically by release through re-mortgage), and
provisions for certain events or debtor behaviour to constitute a failure of
the IVA. These requirements are explained to a debtor in order to seek to
achieve a workable proposal and to manage a debtor’s expectations.
28. Creditors are
unwilling to alter their own form of modification. Each creditor typically
considers its own modification to be in the most appropriate form. However, we
heard, and we accept, that it has been possible on occasion for Blair Endersby
to procure the removal of modifications of a creditor with a low percentage of
the outstanding debt in favour of modifications of a more substantial
creditor. But this is the exception; creditors prefer to apply their own
modifications.
29. The process of creditors
seeking modifications has been affected by the adoption within the industry,
from February 2008, of a new IVA Protocol. This protocol introduced the
Standard Consumer IVA (or SCIVA), which sets out some basic requirements,
including terms and conditions, format and standards, and standardises the
format of the proposal. One of the stated aims of the protocol is to improve
efficiency in the IVA process and avoid the need for modifications wherever
possible, without affecting the creditors’ voting rights.
30. Following
further internal review, and the completion of checklists, the proposal is
drafted. Blair Endersby’s client administration department prepares a letter
of engagement addressed to the debtor from the IP. The letter of engagement is
a substantial document. It includes provisions covering the following:
(1)
Confirmation that the IP, having reviewed the information provided by
the debtor as to the debtor’s financial position, is willing to act as the
Nominee if the debtor decides to proceed with proposing an IVA.
(2)
It encloses a leaflet published by R3, “Is a Voluntary arrangement Right
For Me”, which aims at helping people understand what is involved and what
alternative insolvency related procedures are available.
(3)
It advises the debtor to attend the company’s offices to discuss the
leaflet and the course of action that the debtor wishes to take. This is a
meeting of the nature referred to in SIP3. The letter of engagement suggests
that the IP may, if the debtor is unable to attend, be willing to conduct the
meeting over the telephone. As with the earlier review, in almost every case
these meetings took place by telephone.
(4)
It is explained that the IP is an employee of Blair Endersby, but that
the office of Nominee is a personal appointment. It goes on to explain that
Blair Endersby’s services are additional to the statutory duties of the
Nominee. However, although this distinction is important from the statutory
perspective, there was only a single charge rendered by Blair Endersby, and no
separate Nominee fee. The debtor is asked to send a cheque for the first
month’s contribution; the balance of the fee is met from the contributions that
are proposed to be made under the IVA.
(5)
The duties and responsibilities of the Nominee are again explained in
full. The letter states:
“As Nominee I have a duty to perform an independent
objective review and assessment of the proposals for the purposes of reporting
my opinion to the Court [note: this requirement ceased from 6 April 2010] and
generally balancing your interests and those of your creditors. This duty of
independence and objectivity arises irrespective of the extent of my
involvement in assisting you to draft your proposals. My duties as a Nominee
cannot be fettered by any instructions from you or any third party.”
(6)
The debtor is reminded of the requirement under the Insolvency Act and
Rules that all assets and liabilities must be disclosed.
(7)
The draft proposal and draft Statement of Affairs are enclosed. It is
made clear that these are subject to any amendments the debtor might wish to
make and modifications that creditors might request be included. The R3 and
Blair Endersby’s own standard terms and conditions, which apply to the
proposal, are also enclosed.
(8)
The debtor is advised that no further goods or services should be
obtained on credit, and that no assets should be disposed of except in the
ordinary course of trade.
31. The letter of
engagement refers back to Blair Endersby’s terms of business. As we have
found, the terms and conditions given to the debtor at the outset were almost
invariably those of Baines & Ernst, although Blair Endersby did use similar
conditions in relation to its own initial activities. We do not consider that
anything turns on the reference to terms and conditions in the letter of
engagement. To the extent that there were no such terms for Blair Endersby in
a particular case, the reference would have no effect. If there were, then all
the reference in the letter of engagement does is to state that the letter of
engagement and the terms of business constitute the entire agreement between
the parties. The terms of business do not therefore constrain the role of the
IP or Blair Endersby under the letter of engagement.
32. Blair Endersby
discusses the engagement letter and the proposals with the debtor. The letter
of engagement is then signed by the debtor and posted back to Blair Endersby.
At that point Blair Endersby becomes the Nominee.
33. The proposal
document is headed with the name of the relevant county court in which jurisdiction
the debtor resides, and with the words “Proposal for Voluntary Arrangement with
Creditors pursuant to Part VIII of the Insolvency Act 1986”. It sets out the
background to the financial circumstances of the debtor, including steps taken
by the debtor to resolve his financial difficulties. It sets out as an
appendix a statement of assets and liabilities and their estimated values.
Where the debtor owns a property, the proposal will deal with what the debtor
is prepared to offer by way of equity release through re-mortgage. This is an
aspect that is covered in the IVA Protocol, which provides that the release of
home equity should be attempted six months prior to the end of the IVA. The
protocol includes a statement of the debtor’s monthly income and expenditure
and sets out the monthly contributions that the debtor proposes to make,
including additional contributions if net income in excess of that disclosed is
received. The IVA Protocol requires monthly contributions to be increased by
50% of any net surplus one month after a review.
34. The proposal
sets out in a further appendix an estimate of the likely outcome of the IVA and
a comparison with the situation that would be likely to arise in the event of
the debtor’s bankruptcy. The Nominee is identified, and typically the Nominee
is proposed to act as the Supervisor of the voluntary arrangement. There is a
section detailing the Nominee’s fee, expressed as a specific sum, plus
disbursements, and the Supervisor’s fee calculated as a percentage of the
realisations, less the Nominee’s fee. A separate fee is payable if there is a
need for an additional meeting of creditors to consider a variation to the
arrangement.
35. Proposed dates
of distributions to creditors are set out. These are made at the discretion of
the Supervisor when he believes that there are sufficient funds held in order
that a realistic and cost effective distribution can be made. The estimate
will set out, for each of the anniversaries of the five-year arrangement, the
anticipated distributions based on the realisations set out in the appendix,
detailing the estimated outcome. The estimates are also subject to the
satisfactory agreement of creditors’ claims, the availability of funds and any
later variations.
36. The proposal
document is a professional document. To draft it requires a detailed knowledge
of insolvency issues, and the practice of establishing an IVA. It also
requires a detailed and systematic examination of the debtor’s position,
financial and personal, and knowledge of the sort of proposals that may be
acceptable, or on the other hand, unacceptable to creditors. However, at the
drafting stage no contact is made with the individual creditors.
37. Once the
proposal has been signed by the debtor, a meeting of creditors must be convened.
Prior to 6 April 2010, the Nominee was required to submit a report to the court
stating whether, in his opinion, the proposed IVA had a reasonable prospect of
being approved, and whether, and if so when and where, the creditors’ meeting
should be called. That requirement no longer applies; the Nominee’s report is
instead made to the creditors.
38. SIP3 states
that, in considering the proposal, the IP should bear in mind a number of
questions: Is it feasible? Is it fair to creditors? Is it an acceptable
alternative to formal insolvency (bankruptcy)? Is it fit to be considered by
creditors? Is it fair to the debtor?
39. The Nominee
convenes the meeting of creditors and gives notice of the meeting to all known
creditors and to the debtor. With the notice to creditors there are enclosed
the debtor’s proposal, including the summary statement of affairs, the
Nominee’s comments on the proposal, an explanation of the voting rules at the
meeting, a creditor’s guide to insolvency practitioners’ fees, a proxy form and
a statement of claim form for the purpose of proving the creditor’s debt.
40. We heard
evidence, and we accept, that it is almost invariably the case in the IVAs
dealt with by Blair Endersby that the meeting is held on paper, by way of
proxies given to the Nominee or his representative, or voting by way of fax and
e-mail. The Nominee himself does not conduct the meeting. This function is
performed by a suitably-trained member of Blair Endersby’s staff. This
individual chairs the meeting. He was described in Mr Morgan’s evidence as a
“meeting of creditors negotiator”, but we do not accept that this was a title
in any formal sense, nor do we accept it on its face as descriptive of his
function at the meeting. In common with other evidence describing the operations
of Blair Endersby as “negotiation”, we consider this to be a question of law
for us to decide.
41. At the stage of
the creditors’ meeting the proposal will have been put forward on the basis of
known requirements of those creditors for which information is available. This
will have been discussed in advance with the debtor. The creditors, or the
voting houses acting for them, may put forward modifications to the proposal. The
vote of a creditor, which may have been given by proxy or indicated up to seven
days in advance of the meeting, may be conditional on certain modifications
being accepted. These modifications have to be put to the debtor by the
Nominee in order to obtain his agreement to the modification. There are three
possible outcomes of a meeting. The proposal may be approved without
modification, it may be subject to modifications which are agreed by the debtor
and then approved, or it may be rejected. In the latter two cases, the
responsibility of the Blair Endersby employee chairing the meeting is to
discuss matters with both the creditors and the debtor to see if a proposal can
be agreed and approved. Examples of matters that can typically arise include
cases where creditors take a view on lifestyle sacrifices a debtor should be
asked to make, including the continued ownership of certain assets, such as a
car. To facilitate further consideration of such issues, the meeting can be
adjourned for up to 14 days.
42. Following
conclusion of the meeting the chairman issues a report. This sets out whether
or not the proposal has been approved, the person appointed as Supervisor,
details of any modifications to the original proposal and the results of the
voting procedure. The Insolvency Service is informed of the details of the
IVA, which are placed on a register.
43. On approval of a
proposal (by the 75% majority to which we have previously referred) the role of
the Nominee normally changes to that of Supervisor of the IVA. It is possible,
but not common, particularly in consumer IVAs, for the Supervisor to be a
different insolvency practitioner from the one acting as Nominee. Where this
might happen is in the case of an IVA for a trader, where the proposal requires
the Supervisor to conduct a business, which would require particular skills and
experience.
44. It is only if a
proposal is approved that Blair Endersby becomes entitled to any fee or
remuneration for the insolvency practitioner acting as Nominee, or for acting
as Supervisor. The only amounts that, in accordance with the letter of engagement,
are deducted from the cheque paid by the debtor in respect of the first month’s
contribution are for the costs of registering with the IP’s insurer and any
reasonable disbursements. Otherwise, if the proposal is not approved (and
subject to the rejection not being attributed to the debtor) the contribution
is returned to the debtor.
45. According to
SIP3 the main duty of a Supervisor is to ensure that the IVA proceeds in
accordance with the terms of the agreed proposal. The R3 Standard Conditions
provide that the Supervisor’s primary function is to supervise the debtor’s
performance of his obligations under the arrangement and to administer the
IVA. Mr Morgan’s evidence was that the role of the Supervisor is to pay money
to the creditors. We accept that is one of the roles. In practice the debtor
sets up a direct debit or standing order to enable payment of the agreed
contribution to be made on a monthly basis. Funds received are held in a
separate bank account. From this the Supervisor will take fees and
disbursements, and the balance is remitted to creditors in accordance with the
proposal. Blair Endersby’s cash receipts and payments systems are automated.
46. In the
supervision of the debtor’s performance Blair Endersby also monitors payments
and missed payments, and in the case of missed payments will write to the
debtor to remind him of the obligations under the IVA, and to ask if there has
been any change of circumstances, so that the creditors can be advised of the
situation. We find that Blair Endersby does not, by this correspondence, seek
to enforce payment of any amount by the debtor, or demand that the debtor make
a payment. After two months arrears Blair Endersby will write to the debtor to
advise him that a failure to make payments for three months might result in the
failure of the IVA, and that protection from creditors will come to an end.
This letter says that, if the debtor is able to pay the outstanding amount he
should do so immediately in the usual way. We find that this letter is seeking
to advise the debtor of the consequences of missed payments, but is not a
demand for payment.
47. The Supervisor
has a more general supervisory role with regard to the implementation of the
proposal. Some IVA proposals proceed as envisaged from start to finish.
Others involve changes in circumstances of debtors, sometimes for the better, such
as an increase in income; other times for the worse, such as illness or
unemployment. In these circumstances it would normally be the case that a
further meeting of creditors would be convened to consider if revisions might
be made to the proposal. This would typically entail the presentation of a
revised offer from the debtor, and possibly an offer of full and final
settlement. These “variation meetings” are subject to a vote in the same way
as the earlier meeting for approval of the proposal. This can entail
significant work for the Supervisor and his team. As we have noted, this work
is the subject of an additional fee as provided for in the proposal.
48. During the
currency of the supervision Blair Endersby makes an annual report to creditors,
in accordance with the Insolvency Rules 1986. This sets out the progress of
the contributions required to be made under the arrangement, a review of the
debtor’s income and expenditure, an update on the drawing of remuneration in
respect of the Nominee’s fee and disbursements and the Supervisor’s fee, and a
schedule of creditors’ claims received. The review of the debtor’s financial
position may lead to the need for revisions to the proposal as described above.
49. The IVA may
terminate on a successful conclusion, or it may come to an end by reason of
failure or default. Where failure has occurred, the SIP3 guidance is that the
Supervisor should notify the creditors accordingly and advise them what action
he has taken or proposes to take. The R3 standard terms and conditions contain
provisions for this event. In the case of default, the Supervisor has
statutory power to initiate bankruptcy proceedings against the debtor.
Expert witness evidence
50. We had the
benefit of two expert witness reports of Norman Cowan, a chartered accountant
and licensed insolvency practitioner, who was called by HMRC and who gave oral
evidence.
51. In his first report
Mr Cowan sets out the issues he was asked to address as follows:
“The issues I have been asked to address are the
concept of an Individual Voluntary Arrangement (IVA), together with the overall
methodology; procedures and compliance obligations of an Insolvency
Practitioner (IP) in respect to IVAs.
This covers the professional work and obligations
from when the IP is first approached by an individual with financial problems,
termed ‘the Debtor’, through to the IP carrying out the functions of a
Supervisor in order to obtain a satisfactory conclusion for the Debtor so that
all creditors are satisfied.
I have been asked to set out the services of a Debt Management
Company (DMC) and to distinguish them from that of an IP carrying out the
duties in respect of preparation, administration with respect to IVAs.”
52. Mr Cowan makes
it clear in his first report that he has no practical experience of debt
management plans, and accordingly had based his findings in this respect on the
documentation provided by the Appellant. We do not consider that a comparison
between an IVA and a debt management plan is a useful line of enquiry for the
purpose of our determination of this appeal. We can well understand why this
became a subject for submissions, having regard to the tribunal decision in Debt
Management Associates (2002; VAT decision 17880), which we shall consider,
and the way in which the Appellant made its original claim, but what matters is
the nature of the supply that Blair Endersby makes for the consideration, or
considerations, it receives. That involves a non-comparative analysis of Blair
Endersby’s own operations in the IVA process, and an application of the
relevant law to that analysis, and we do not consider that this can be assisted
by a comparison with another business, engaged in a different, though related,
insolvency procedure.
53. Nevertheless, Mr
Cowan’s reports, and his oral evidence, is highly material to the analysis of
the nature of the business of conducting IVAs generally. Mr Cowan was clear in
his evidence that he did not have the experience of consumer IVAs that Blair
Endersby did; his experience is of the more bespoke end of the market.
However, we make the following findings of fact from the evidence given by him,
in so far as we have not already made findings above.
54. Insolvency practitioners
are required to be licensed. A licence can be obtained from the Department for
Business, Innovation and Skills, or from one of a number of recognised
professional bodies. Those bodies have rules to ensure that the IP is a fit
and proper person so to act, and have monitoring and disciplinary functions. An
IP must pass the Joint Insolvency Examination Board examination and have the
necessary practical experience to carry out insolvency work.
55. An IP has duties
to the court, and the court is entitled to exercise control in appropriate
circumstances. An IP can also become liable in negligence.
56. Before acting as
an office holder in any insolvency procedure an IP must have security in the
form of a General Penalty Bond for the proper performance of the IP’s
functions. This is renewable annually. The bond is issued by an insurance
company and provides a blanket cover for all appointments up to a specified
limit. The bond ensures reimbursement should the IP illegally withdraw funds
without the means of repayment. Upon becoming an office holder in a particular
case (and in this respect, for periods since 1 January 2003, becoming a
Nominee), the IP must notify the insurance company and take out a specific bond
to cover that case, at a premium based on the assets subject to the IVA.
57. Mr Cowan’s
evidence of the IVA procedure, although coming from a different standpoint in
terms of the nature of the IVAs he had undertaken, did not differ materially
from the evidence of the Appellant’s witnesses. However, it was helpful in
emphasising the essential intermediary role of the IP, and his staff, or, as Mr
Cowan put it the “to-ing and fro-ing” that the IP has to do between the debtor
and the creditors.
58. The starting
point, as we have found, is the initial advice to the debtor and the
fact-finding process. The proposal is drafted and the debtor is given the
opportunity to read and understand it. It has to be agreed by the debtor.
59. The proposal and
all the documents that go with it, including the Nominee’s report, are sent to
the creditors for the purpose of voting on the proposal. When the creditors
send in their voting intentions Mr Cowan ensures that the proxy has been
correctly completed, and that the amount of the debt substantially accords with
the information given by the debtor.
60. At the
creditors’ meeting to approve the proposal, Mr Cowan’s preference is to have
the debtor in his office. This is to be able to deal with last-minute votes.
If those votes are against the proposal, Mr Cowan discusses that with the
debtor and asks him for his views. If the debtor is prepared to make a
modification, then that can be agreed immediately and the IVA can be approved.
61. This was one
example of the to-ing and fro-ing theme to which Mr Cowan repeatedly returned,
describing the role of the IP on another occasion as that of a “go between”.
He also accepted, in cross-examination, Mr Cordara’s description of the process
as “shuttle diplomacy”. He explained this role by reference to Blair
Endersby’s own training flow charts. These illustrated the process of
agreement being reached, and the need for the IP or his staff repeatedly to
have contact with the debtor and the creditors to ascertain if agreement can be
secured. The IP has to do the best for both the debtor and the creditors.
That is the reason for the inclusion of an IP in the process. If the creditors
do not understand a debtor’s particular problem, it is for the IP to explain it
to them. The flow of information from the debtor, through the IP, to the
creditors is a crucial element of the process. Mr Cowan went on to describe
the position of the IP as “between two stools”. His role is not to work for
the debtor as such, but to try to assist creditors so that they can draw
conclusions that will ultimately mean that they agree the proposal. The IP
endeavours to facilitate the creditors’ agreement to the proposal. The IP
operates in the nature of a conduit between the debtor and creditor.
62. As regards the
supervisory stage of the IVA process, Mr Cowan, when questioned, agreed that
the role of the Supervisor is to ensure that the right amount of money reaches
the right creditor on the right date in respect of the right debt. He also
agreed that this would be the debtor’s main aim. However, the role of the
Supervisor is not simply to handle money. The IP must seek to ensure that the
debtor pays the Supervisor what is required under the IVA. The Supervisor has
to agree the creditors’ claims and pay the creditors in accordance with the
arrangement. However, it is no part of the Supervisor’s role to enforce
payment under the proposal.
63. The debtor knows
that if he continues to perform his obligations under the IVA, then at the end
he will have settled his debts fully. The debtor is not concerned with the
performance by the Supervisor of his statutory duties. However, part of the
responsibility of the IP is to ensure that the debtor is performing his
obligations under the proposal. This includes advising him of the consequences
of failing to do so, such as bankruptcy, but falls short of any enforcement
role. The advice in this respect is given in the best interests of the debtor.
The statutory insolvency framework
64. An IVA is made
and conducted in the context of a statutory framework, subject to the
supervision of the court. The relevant statutory provisions are to be found in
Part VIII of the Insolvency Act 1986 (“IA”) and the Insolvency Rules 1986 (as
amended). The following does not set out the statutory provisions in detail,
but summarises their content and effect.
65. The provisions
distinguish, in the first instance, between provisions which apply in a case
where an interim order is sought, and those cases where there is no such
application. An interim order is appropriate in circumstances where the debtor
is at risk of bankruptcy or other enforcement proceedings; if the order is made
it confers protection on the debtor against a number of proceedings which might
otherwise be brought against him. The court can only make an interim order if
it is satisfied that the debtor intends to make a proposal for an IVA, and the
Nominee is willing to act in relation to the proposal (IA, ss 252 – 255).
Section 256 imposes obligations on a Nominee in these circumstances, before the
interim order ceases to have effect, to submit a report to the court, including
as to whether the proposed IVA has a reasonable prospect of being approved and
implemented.
66. The making of an
interim order is very much the exception. Most IVAs fall under the procedure
that applies if no interim order is sought or made. The commencement of that
procedure is governed by s 256A IA under which the following criteria must be
met:
(1)
The debtor must intend to make a proposal for an IVA.
(2)
If the debtor is an undischarged bankrupt, he must have given notice of
the proposal to the official receiver and, if there is one, to the trustee of
his estate.
(3)
The debtor is required to submit to the Nominee a document setting out
the terms of the IVA which the debtor is proposing. As we have seen, in
practice the work of drafting the proposal is not done by the debtor, but by
Blair Endersby. However, as a matter of form, once the debtor has agreed the
contents of the proposal, he will submit it to the insolvency practitioner who
is to be the Nominee.
(4)
The debtor must also submit to the Nominee a statement of affairs,
containing prescribed information. This will also have been drafted by Blair
Endersby.
(5)
The Nominee must then submit a report to the creditors (before 6 April
2010 the report had to be submitted to the court) stating:
(a)
whether, in his opinion, the voluntary arrangement which the debtor is
proposing has a reasonable prospect of being approved and implemented;
(b)
whether, in his opinion, a meeting of the debtor’s creditors should be
summoned to consider the debtor’s proposal; and
(c)
if in his opinion such a meeting should be summoned, the date on which,
and time and place at which, he proposes the meeting should be held.
67. In the event of
default, the debtor can seek the appointment of a replacement insolvency
practitioner to act as Nominee (s 256A(4) IA).
68. The obligation
to summon the creditor’s meeting (whether in the light of an interim order or
otherwise) is imposed on the Nominee (s 257(1) IA). The date and time of the
meeting are as set out in the Nominee’s report. Section 258(1) requires the
creditor’s meeting to decide whether or not to approve the Nominee’s proposal.
It can approve modifications to the proposal if the debtor consents to them.
Section 258 imposes certain specific requirements on the creditor’s meeting,
but it is otherwise carried out in accordance with the Insolvency Rules. If
the meeting declines to approve the proposal, the court may discharge any
interim order, under s259(2) IA.
69. The effect of
approval of the proposal is set out in s 260 IA, subsections (1), (2) and (2A)
of which are worth reproducing:
“(1) This section has effect where the meeting
summoned under section 257 approves the proposed voluntary arrangement (with or
without modifications).
(2) The approved arrangement—
(a) takes effect as if made by the debtor at the
meeting, and
(b) binds every person who in accordance with the
rules—
(i) was entitled to vote
at the meeting (whether or not he was present or represented at it), or
(ii) would have been so
entitled if he had had notice of it,
as if he were a party to the arrangement.
(2A) If—
(a) when the arrangement ceases to have effect any
amount payable under the arrangement to a person bound by virtue of subsection
(2)(b)(ii) has not been paid, and
(b) the arrangement did not come to an end prematurely,
the debtor shall at that time become liable to pay
to that person the amount payable under the arrangement.”
70. Section 260(4)
and (5) also deal with any outstanding interim order or bankruptcy petition if
a proposal is approved. Section 262 provides a mechanism by which the
meeting’s decision may be challenged by an interested person (a debtor or a
creditor).
71. The Nominee or
Supervisor has a number of further obligations whilst acting in the course of
an extant IVA. If it appears to the Nominee or the Supervisor that the debtor
has been guilty of a criminal offence in connection with the arrangement, he
must report the matter to the Secretary of State, and provide relevant
information (s 262B IA). The Nominee or Supervisor must render all assistance to
the prosecuting authority and can, in default, be directed to do so by the
court.
72. The activities
of the Supervisor are themselves, in certain instances, subject to the
intervention of the court. This can take place at the instigation of a debtor,
creditor or any other person, dissatisfied by anything decided, done, or
omitted to be done, by the Supervisor. In that case the court can confirm,
reverse or modify a decision of the Supervisor, give him directions or make
such other order as it thinks fit. The court can also intervene, when it is
inexpedient, difficult or impracticable for a replacement Supervisor to be
appointed without the court’s assistance, and make such an appointment. The
Supervisor can himself also apply to the court for directions in relation to
any matter arising under the voluntary arrangement (s 263 IA).
73. More detailed
regulation of the IVA process is contained in the Insolvency Rules. The areas
covered include:
(1)
Contents of the proposal. Rule 5.3 sets out that the proposal
must include a short explanation from the debtor why, in his opinion, an IVA is
desirable, and give reasons why his creditors might be expected to concur with
such an arrangement. There is a detailed list of matters which must be stated,
or otherwise dealt with, in the proposal. The proposal has to be accompanied
by the statement of affairs. Rule 5.5 makes provision for what the statement
of affairs must comprise, which is to supplement or amplify, so far as is
necessary for clarifying the state of the debtor’s affairs, what has been
included in the proposal.
(2)
Notice of proposal. Rule 5.4 provides that the debtor must give
written notice of the proposal to the intended Nominee. This is, in practice,
honoured in form rather than substance, as it is the proposed Nominee, or his
staff, who prepares the proposal for approval by the debtor.
(3)
Nominee’s report. Rule 5.14A concerns the Nominee’s report. It
prescribes the documents that must be delivered to creditors (and, in
appropriate circumstances, others, such as the official receiver).
(4)
Creditors’ meetings. The summoning and conduct of the creditors’
meeting, and consequential reporting requirements, are dealt with by Rules 5.17
– 5.29. The chairman of the meetings, in the case of Blair Endersby, is
usually an experienced employee, rather than the Nominee himself; this is
permitted by Rule 5.19. The chairman acts as proxy-holder (Rule 5.20). Rule
5.21 sets out the entitlements of creditor’s to vote, and how that entitlement
is calculated, by reference to amounts of debt. The chairman is responsible
for admitting or rejecting claims of persons to be entitled to vote as
creditors (Rule 5.22); this is subject to appeal to the court.
(5)
Approval and modification of proposal. It is Rule 5.23 that
provides for the requisite majority for approval or modification of a proposal,
namely 75% or more (in value) of those present in person or by proxy voting in
favour. The chairman’s decision is subject to appeal to the court.
(6)
Hand-over of property. Rule 5.26 makes provision for property
included in the IVA to be put into the Supervisor’s possession. However, this
was not a feature of the IVAs that are the subject of this appeal. In those
IVAs, assets remained in the possession of the debtor. Any realisations of
assets were performed by the debtor, and any refinancing of the debtor’s home,
for which provision might be made in the proposal, in order to release equity,
was carried out by the debtor, and not by the Supervisor or by Blair Endersby.
(7)
Report of creditors’ meeting. The chairman is required to
prepare a report of the meeting, as set out in Rule 5.27. This is sent to the
creditors and, by rule 5.29, to the Secretary of State.
(8)
Supervisor’s accounts and reports. Rule 5.31A requires the
Supervisor to keep accounts and records of the Supervisor’s acts and dealings,
including records of all receipts and payments of money. These can be required
to be made available to the Secretary of State (Rule 5.32).
(9)
Fees and expenses. Rule 5.33 limits the fees and expenses to
agreed remuneration and disbursements made by the Nominee prior to approval of
the IVA and fees, costs, charges and expenses sanctioned by the IVA or are such
as would be payable in the debtor’s bankruptcy.
(10)
Completion of the IVA. On final completion of the IVA, Rule 5.34
provides that the Supervisor must send notice to the debtor and creditors with
a summary report of all receipts and payments, and explaining any differences
in implementation from the original proposal. A copy has to be sent to the
Secretary of State.
Insolvency practitioners
74. Under s 388, a
person who is proposed or approved as a nominee or supervisor of an IVA acts as
an insolvency practitioner in relation to an individual.
75. Section 389 IA
makes it an offence for a person to act as an insolvency practitioner in
relation to an individual at a time when he is not qualified to do so, unless
he is authorised to act as a nominee or supervisor under s 389A. This requires
the person to be a member of a body recognised for the purpose by the Secretary
of State. A body can only be recognised if it maintains and enforces rules for
securing that its members: (a) are fit and proper persons to act as nominees
and supervisors, and (b) meet acceptable requirements as to education and
practical training and experience.
76. Accordingly,
only insolvency practitioners and those authorised under s 389A IA can act as
nominees or supervisors in relation to an IVA.
77. The Insolvency
Practitioners Regulations 2005 make provision in connection with the regulation
of insolvency practitioners. We need not set the provisions out in any
detail. We are satisfied on the evidence that authorisation as an insolvency
practitioner is an onerous process, requiring the passing of professional
examinations, continuing professional development and the maintenance of high
professional and ethical standards.
The VAT law
(1) EU law
78. Article 2 of the
Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of
Member States relating to turnover taxes - common system of value added tax:
uniform basis of assessment, 77/388/EEC (“the Sixth Directive”) provided that
the supply of services effected for consideration shall be subject to VAT. A
number of exemptions from liability to VAT were contained in Title X to the
Sixth Directive. Under Article 13(B), these exemptions related to certain
activities other than those in the public interest.
79. The Sixth
Directive has been repealed and replaced by Council Directive (EC) 2006/112/EC
of 28 November 2006 on the common system of VAT as the source of Community
legislation on VAT (“the Principal VAT Directive”). By Article 414, the
Principal VAT Directive entered into force on 1 January 2007. Pursuant to
Article 411, the Sixth VAT Directive was repealed from this date, subject to
the time limits listed in Annex XI, Part B, for the transposition into national
law and implementation of these Directives.
80. The Appellant’s
request for a liability ruling came after the entry into force of the Principal
VAT Directive. We refer therefore only to the specific terms of the Principal
VAT Directive. However, as there is no material difference between the Sixth
Directive and the Principal VAT Directive in these respects, our findings are
equally applicable to the period when the Sixth Directive was in force.
81. Article 2(1)(c)
of the Principal VAT Directive provides that VAT shall be payable on the supply
of services for consideration within the territory of a Member State by a taxable person acting as such.
82. Title IX to the
Principal VAT Directive covers exemptions. Chapter 2 sets out exemptions in
the public interest. Chapter 3 makes provision for exemptions for “other
activity.” So far as we shall be required to refer to it, Article 135(1)
states:
“1. Member States shall exempt the following
transactions:
(a) insurance and reinsurance transactions,
including related services performed by insurance brokers and insurance agents;
(b) the granting and the negotiation of credit and
the management of credit by the person granting it;
(c) 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;
(d) transactions, including negotiation, concerning
deposit and current accounts, payments, transfers, debts, cheques and other
negotiable instruments, but excluding debt collection;
…”
(2) The Value Added Tax Act 1994
83. Section 31(1) VATA
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 and an
acquisition of goods from another member State is an exempt acquisition if the
goods are acquired in pursuance of an exempt supply.”
84. Schedule 9 sets
out a series of groups of goods and services that qualify for exemption from
VAT under domestic law. Group 5 covers Finance. Its relevant provisions read as
follows:
“Item No.
1. The issue, transfer or receipt of, or any dealing
with, money, any security for money or any note or order for the payment of
money.
2. The making of any advance or the granting of any
credit.
2A. The management of credit by the person granting
it.
…
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.
…”
85. The statutory
Notes accompanying the above items provide as follows:
“(1) Item 1 does not include anything included in
item 6.
(1A) Item 1 does not include a supply of services
which is preparatory to the carrying out of a transaction falling within that
item.
…
(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.”
Discussion
86. The essential
question in this case is whether the services provided by Blair Endersby to its
client, the debtor, are, as the Appellant argues, exempt supplies, or, as HMRC
submits, standard-rated supplies.
87. It is common
ground that exemptions represent exceptions from the general rule that VAT
should ordinarily be charged on the supply of services for a consideration, and
accordingly exemptions fall to be construed restrictively, whilst not depriving
them of their intended effect. We were taken to a number of authorities of the
Court of Justice (“CJEU” or “ECJ”) that make this clear: Sparekassernes
Datacenter (SDC) v Skatteministeriat (Case C-2/95) [1997] STC 932, at [20],
and Velvet & Steel Immobilien und Handels GmbH v Finanzamt
Hamburg-Eimsbüttel (Case C-445/05) [2008] STC 922 at [14]. The position is
summarised in Commissioners for Customs and Excise v Axa UK plc (Case
C-175/09) [2010] STC 2825, where the CJEC held (at [25]) that:
“It is also clear from the case law that the terms
used to specify the exemptions set out in art 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 goods and services supplied for
consideration by a taxable person. Nevertheless, the interpretation of those
terms must not deprive the exemption in question of its intended effect (see,
to that effect, Don Bosco Onroerend Goed (para 25)
and the case law cited; Future Health Technologies
(para 30); and EMI Group Ltd v Revenue and Customs Comrs (Case C-581/08) [2010] STC 2609,
para 20).”
88. The correct
approach is also helpfully distilled in the judgment of Chadwick LJ in Expert
Witness Institute v Customs and Excise Commissioners [2002] STC 42. After
referring to the requirement for strict interpretation of the terms of the
exemptions, he said, in the context of an issue on the construction of the
phrase “aims of a civic nature” (at [17]):
“It does not follow, however, that the court is
required to give to the phrase 'aims of a civic nature' the most restricted, or
most narrow, meaning that can be given to those words. A 'strict' construction
is not to be equated, in this context, with a restricted construction. The court
must recognise that it is for a supplier, whose supplies would otherwise be
taxable, to establish that it comes within the exemption, so that if the court
is left in doubt whether a fair interpretation of the words of the exemption
covers the supplies in question, the claim to the exemption must be rejected.
But the court is not required to reject a claim which does come within a fair
interpretation of the words of the exemption because there is another, more
restricted, meaning of the words which would exclude the supplies in question.”
89. According to the
settled case law, the exemptions constitute independent concepts of EU law the
purpose of which is to avoid divergencies in the application of the VAT system
as between one member state and another. As regards the exemptions for
financial transactions, the services in question must, viewed broadly, form a
distinct whole, fulfilling the specific, essential functions of a financial service
described in Article 135 (Axa, at [24], [27]).
90. In order to
answer the question whether the services supplied by Blair Endersby fall within
one or more of the exemptions, we must have regard to the nature of those
services themselves. The services are not defined in terms of the person
supplying or receiving the service (Axa, at [26]). Where the
transactions in question relate to the sphere of financial transactions, the
exemption is not subject to the condition that the transactions must be carried
out by a certain type of institution or legal person (see SDC, at para
38, Velvet & Steel at para 22 and Axa, at [26]). Nevertheless,
in order to be an exempt transaction, the transaction in question must relate to
the sphere of financial transactions (Velvet & Steel, at para 22).
91. The principal
submission made by Mr Cordara and Mr King, on behalf of the Appellant, is that
Blair Endersby makes two supplies to it clients; a supply of negotiation concerning
debts, and a supply of payment handling. Each of these, it is said, are
separate supplies that are in themselves exempt. Alternatively, if that is
wrong and there is a single supply, the submission is that the predominant
element of that supply is negotiation, which is exempt.
92. Against this,
for HMRC, Mr Beal submits that the supplies made by Blair Endersby are supplies
of professional services, akin to supplies of legal or accountancy services,
and that this is a single supply. He points to the fact that the service is
supplied in the context of the implementation and operation of a statutory
insolvency procedure. He submits that in order to be classified as an exempt
supply of the negotiation of credit there would have to be an underlying
transaction that either was, or at least was capable of being, an exempt supply
of credit, and argues that no such transaction can be identified here. Whilst
his primary submission is that in any event the services provided by Blair
Endersby ought not properly to be characterised as the “negotiation of credit”,
nor the supply of payment services, he also submits that if the role of the
Supervisor were to be characterised by reference to the receipt and
distribution of payments pursuant to the terms of the IVA, that service would
be one of debt collection.
93. In the course of
the hearing Mr Cordara put forward a further alternative submission, namely
that the service of effecting the IVA, in so far as it is capable of being a
free-standing supply in its own right, is also a supply of a transaction
concerning debts and payments. He bases this alternative submission on the
fact that it is only at the stage of a legally binding IVA having been achieved
that results in the consideration for the supply becoming payable. The only
VAT supply is where there is a successful conclusion of the IVA (at least at
the Nominee stage). He argues that although this cannot be achieved without
negotiations having taken place, the actual achievement of the transaction as
also part of the service. He submits, on this basis, that this is a
transaction concerning debts: it has legal significance, and in principle delivers
the benefits that the customer is seeking, namely a clearly-structured
timetable to pay and debt forgiveness, in the context of an enforceable legal
framework.
Single supply or separate supplies
94. We turn first to
consider whether what Blair Endersby supplies to its client is a single supply
or two separate supplies. The classic test is found in Card Protection Plan
v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270 (“CPP”),
where the Court of Justice said (at paras 29 – 30):
“29. In this respect, taking into account, first,
that it follows from art 2(1) of the Sixth Directive that every supply of a
service must normally be regarded as distinct and independent and, second, 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 (see Customs and Excise Comrs v Madgett and
Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206,
para 24).”
95. The
identification of a principal and one or more ancillary supplies is one instance
where the Court of Justice has held that there is a single supply. But it is
not essential for there to be such an analysis. Thus, in Levob
Verzekeringen BV and another v Staatssecretaris van Financiën
(Case C-41/04) [2006] STC 766, the Court of Justice, after referring to para 30
of the Court’s judgment in CPP, said (at para 22):
“The same is true where two or more elements or acts
supplied by the taxable person to the customer, being a typical consumer, are
so closely linked that they form, objectively, a single, indivisible economic supply,
which it would be artificial to split.”
96. More recently,
in Axa, the CJEU gave the following guidance, in the context of a series
of transactions effected by an intermediary in the course of the payment of
debts due from a patient to a dentist under a dental plan (at [20] – [22]):
“20. Since that service encompasses various actions,
it must, in the first place, be determined whether, for VAT purposes, and in
particular the interpretation of the provision referred to in the questions
referred, Denplan supplies its clients with several distinct and independent
services requiring separate assessment or a single complex service comprising
several elements (see, to that effect, in particular Levob Verzekeringen BV
v Staatssecretaris van Financiën (Case C-41/04) [2006] STC 766,
[2005] ECR I-9433, paras 18 and 20; Ministero dell'Economia e delle Finanze
v Part Service Srl (Case C-425/06) [2008] STC 3132,
[2008] ECR I-897, paras 48 and 49; and Don Bosco Onroerend Goed BV v
Staatssecretaris van Financiën (Case C-461/08) [2010] STC 476, para
34).
21. Indeed, in certain circumstances, several
formally distinct services, which could be supplied in isolation and thus give
rise, separately, to taxation or exemption, must be considered to be a single
transaction when they are not independent. This is particularly true where two
or more elements or acts supplied by the taxable person to the customer are so
closely linked that they form, objectively, a single, indivisible economic
supply, which it would be artificial to split (see, to that effect, Part
Service (paras 51 and 53); RLRE Tellmer Property sro v Financni
reditelstvi v Usti nad Labem (Case C-572/07) [2009] STC 2006,
[2009] ECR I-4983, paras 18 and 19; and Don Bosco Onroerend Goed (paras
36 and 37)).
22. According to the court's case law, where a
transaction comprises a bundle of features and acts, regard must be had to all
the circumstances in which the transaction in question takes place in order to
determine whether there are two or more distinct supplies or one single supply
(see, to that effect, in particular Levob Verzekeringen (para 19); Aktiebolaget
NN v Skatteverket (Case C-111/05) [2008] STC 3203,
[2007] ECR I-2697, para 21; and Don Bosco Onroerend Goed (para 38)).”
97. In Debt Management
Associates Limited v Customs & Excise Commissioners (VAT decision
17880, 7 November 2002) the VAT and Duties Tribunal (chairman Colin Bishopp)
considered the nature of supplies made by the appellant in carrying on a debt
management business, which has certain parallels with the IVA services supplied
by Blair Endersby. The tribunal found in that case that the appellant carried
on a negotiation service that was an exempt supply, and it was accepted by the
commissioners that the payment handling service was also exempt. After
referring to the passages in CPP we have set out above, the tribunal
decided that, although it was unlikely that a client would avail itself of one
part of the service without the other, the fact that this could be done pointed
to the conclusion that there were two supplies, and that – although not
conclusive – the fact that two fees were charged supported that view.
98. Whilst taking
full account of the tribunal’s reasoning in Debt Management Services, we
have reached a different conclusion in this case on the question whether Blair
Endersby makes a single supply, or more than one supply. We take the view that
the service provided by Blair Endersby, although comprising a number of
elements, is essentially in economic terms a single service of the provision to
the client of the means whereby his debts can be restructured so as to provide
him with protection from his creditors, an achievable cash flow and debt
repayment schedule, and, if the arrangement reaches its planned conclusion, an
element of release from part of his indebtedness. That supply, when made by a
single supplier, is in our view a single indivisible economic supply which it
would be artificial to split. Whilst it is correct that it is possible that
the service could be split between the fact-finding and Nominee element and the
Supervisor stage, in our view that does not lead to the conclusion that each
element is of itself a separate supply, unless they are, exceptionally, carried
out by two separate suppliers. Where, as is normally the case, both elements
are carried out by one supplier, the elements are so closely linked as to
amount to a single supply.
99. The way in which
the price is charged is not decisive. In the same way as the charging of a
single price does not point conclusively in favour of their being a single
supply (see CPP at para 31), the making of separate charges for the two
elements does not mean that there are two supplies (Levob, at para 25).
Indeed, on the facts of this case, the two fees were interlinked; the fee for
the supervisory stage was calculated after deduction of the Nominee fee, and a
global fee was collected through the payment arrangements. This supports the
view that, as carried out by Blair Endersby, those elements are parts of a
single indivisible economic supply.
The nature of the supply
100.Having
decided that the service supplied by Blair Endersby constitutes a single
supply, we turn to a determination of the nature of that supply. We have
referred to Debt Management Associates, and the finding by the tribunal
in that case that there was an exempt supply of a negotiation service, along
with the acceptance by the commissioners that the payment handling service was
exempt. We heard evidence on the comparisons and contrasts between that case
and this. However, as we indicated earlier, we did not derive any material
assistance from such a comparative analysis. We consider that the right
approach is for us to determine objectively, on the facts we have found as to
the services provided by Blair Endersby, in substance the nature of Blair
Endersby’s supply for VAT purposes.
101.As we have
described it above, we have found that Blair Endersby supplies a service to its
debtor clients of the means whereby debts can be restructured so as to provide
protection from creditors, an achievable cash flow and debt repayment schedule,
and if the arrangement is successful, an element of release from indebtedness.
Such a service, provided for a consideration, is a taxable supply for VAT
purposes unless it falls within an exemption. Where, as we have found, there
is a single supply, the Appellant’s position is that the supply is of “negotiation
concerning … debts”, and that the exemption in this respect in article 135(1)(d)
of the Principal VAT Directive therefore applies. HMRC say that although there
is a negotiation element to the service provided by Blair Endersby, that
element is but a small part of the overall supply of professional services.
The exemption does not apply, and the supply overall is taxable.
102.Where, as in
this case, a supply is made up of a number of elements and activities, it is
necessary for us to identify the predominant or core element or elements of the
supply. Mr Cordara took us to Customs & Excise Commissioners v FDR Ltd
[2000] STC 672 and the judgment of Laws LJ in the Court of Appeal. What is
required where there are multiple acts of supply is a fair and reasonable
approach to the question how the consideration given by a supplier for his
reward should be categorised for VAT purposes (at [54]). The first question is,
as put by Nolan LJ in Bophuthatswana National Commercial Corp Ltd v Customs
and Excise Commissioners [1993] STC 702 at p 708, “what is the true and
substantial nature of the consideration given for the payment”. That may
identify a single or unitary supply, the nature of which – and thus whether it
is taxable or exempt – may be clear. But it may also lead to the conclusion
that there are a number of elements of the supply which are integral to each
other or “physically and economically indissociable”. In those circumstances
it is necessary to look at the elements which comprise the core in order to
determine whether the taxable or exempt elements predominate (see Laws LJ, FDR
at [55]).
103.In this case
the overall service provided by Blair Endersby does comprise a number of
elements which are each integral to the supply that is made. These are the
provision of advice, fact-finding and information gathering, drafting the
proposal and preparation of other essential documents, intermediating between
the debtor and his creditors, holding and chairing a meeting to approve the
proposal and any modifications, supervising the implementation of the proposal,
collecting payments from the debtor and making distributions to the creditors,
monitoring compliance by the debtor and proposing modifications in the event of
changes in circumstances. We must therefore examine these elements to
determine what elements are taxable, and what are exempt, and which
predominate.
104. Mr Beal
submitted that the supplies made by Blair Endersby in return for their fees
were supplies of professional services akin to legal or accountancy services.
He referred to the fact that, as was not disputed, the package of different
activities undertaken by Blair Endersby required the exercise of professional
judgement, care and skill. Mr Beal argued that the analysis was simple: Blair
Endersby were providing the professional services of an insolvency
practitioner. The Appellant was seeking to over-refine the issue, by seeking
to shoe horn its case into the Procrustean bed of an exemption from VAT. Mr
Beal drew our attention to the professional and ethical standards an IP is
required to observe, the need for accreditation by a recognised professional
body and the arduous process of becoming a licensed IP. In carrying out their
duties in connection with an IVA, as well as other insolvency procedures, IPs
are required to have regard to both the debtor and the creditors. But this,
argued Mr Beal, does not lead to the conclusion that an IP is acting in this
respect as an intermediary. What the IP does is to facilitate or give effect
to a specific insolvency procedure which is a statutory alternative to
bankruptcy.
105.In support of
his submission, Mr Beal referred us to three cases where, he said, the ECJ has
explicitly recognised that the provision of professional services is a
standard-rated supply. The first is EC Commission v Netherlands (Case
235/85) [1987] ECR 1471, where the ECJ held that the services of bailiffs and
notaries in the Netherlands, although regulated by public law, constituted
economic activities and were taxable, and not within the exemption for bodies
governed by public law. EC Commission v Netherlands was applied by the
ECJ in the second of the cases referred to in this connection by Mr Beal, that
of Ayuntamiento de Sevilla v Recaudadores de las Zonas Primera y Segunda
(Case C-202/90) [1991] ECR I-4247, where the activities of independent tax
collectors appointed under Spanish legislation by local authorities were held
to be outside the exemption for bodies governed by public law.
106.With respect
to Mr Beal, we can find nothing of assistance in these two cases. The Netherlands case was firstly concerned with whether the bailiffs and notaries
carried on economic activities, and secondly on the scope of the public law
exemption. That exemption did not apply where the bailiffs and notaries were
not themselves part of the public administration, but carried on an independent
economic activity. But the exemptions with which we are here concerned have no
public administration requirement. They are applicable to independent economic
activities. Similar remarks may be made about Ayuntamiento de Sevilla,
where the decisive factor was the independent character of the tax collectors’
activities.
107.The third
case referred to by Mr Beal in this context was Levob. As well as
considering the question of single or separate supplies, Levob also
looked at the place of supply of the services at issue in that case, namely the
customisation of computer software. The ECJ held that the relevant place of
supply rules were concerned, not with the professions themselves, but with the
services provided by those professionals and similar services. Here Mr Beal
argued, the ECJ had no difficulty in recognising that a supply of professional
services by a professional will both be standard-rated and may well be
determinative of the place of supply. He invited us to adopt the same approach
to establishing the nature of Blair Endersby’s supplies. Again, we derive no
assistance from this reference to Levob. The acceptance in that case of
the taxable nature of the supplies, and the application of the place of supply
rules there, does not throw any light upon the nature of Blair Endersby’s own
supplies. Nor, in the same way that we reject comparison with debt management
services as an approach to the question we have to determine, do we derive any
assistance from reference to the taxable nature of the activities of other
liberal professionals, such as lawyers and accountants, whose business may from
time to time involve negotiation. The fact that a service is a professional
service does not itself prevent it from being an exempt supply, if it falls
within the terms of an applicable exemption. Whilst accepting the professional
status of an IP, and the professionalism with which an IP’s services are
provided, what we must do is to undertake an objective economic assessment of
the underlying nature of those services. Only in this way can we determine
whether the service that is provided is taxable, or exempt.
108.This approach
is confirmed by Sparkassernes Datacenter (SDC) v Skatterministeriat
(Case C-2/95) [1997] STC 932, a case that in part concerned Article 13B(d)(3)
of the Sixth Directive, the precursor to Article 135(1)(d) of the Principal VAT
Directive. It was held that the transactions exempted were defined by
reference to the nature of the services provided and not to the type of person
supplying those services or effecting those transactions. The Court of Appeal
has adopted the same approach in FDR and in Customs and Excise
Commissioners v Electronic Data Systems Ltd [2003] STC 688.
Negotiation
109.Mr Beal was
critical of the liberal use of the term “negotiation” throughout much of the
written witness evidence on behalf of the Appellant. We share his disquiet in
this regard. The use of that term, without regard to its legal interpretation,
added nothing to the factual analysis we were required to make, and we have
placed no reliance on the assertions in the witness evidence that various
activities undertaken by Blair Endersby themselves involved negotiation. What
matters is not how the Appellant (or indeed anyone else) seeks to describe the
activities of Blair Endersby, but the economic substance of those activities.
110.In
determining whether the service supplied by Blair Endersby included negotiation
concerning debts, and if so to what extent, we take as our starting point the Court
of Justice judgment in CSC Financial Services Ltd v Customs and Excise
Commissioners (Case C-235/00) [2002] STC 57. That case, which concerned
the services provided by a call centre to a financial institution concerning
investment in units in a unit trust. The exemption in question was that in
what was formerly article 13B(d)(5) of the Sixth Directive (now article
135(1)(f) of the Principal VAT Directive), which exempts “transactions,
including negotiation … in shares … and other securities”. After noting that article
13B(d)(5) did not define the meaning of “negotiation in securities” for the
purposes of that provision, the Court went on (at [38] to [40]):
“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, art 13B(d)(1)–(4), in order to hold that,
in the context of art 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 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.”
111.This
construction of article 13B(d)(5) has since been adopted by the ECJ in Volker
Ludwig v Finanzamt Luckenwalde (Case C-453/05) [2008] STC 1640 (at [23]).
In that case the ECJ went on to elaborate on what had been said in CSC
Financial Services. The Court said (at paras 38 – 39):
“… The concept of negotiation does not, therefore,
necessarily presuppose that the negotiator, as sub-agent of the main agent,
enters into direct contact with both parties to the contract, in order to
negotiate its terms, provided, however, that his activity is not limited to
dealing with some of the clerical formalities related to the contract.
39. In addition, the very fact that the terms of the
credit agreement have been fixed in advance by one of the parties to the
contract cannot, as such, preclude the supply of a negotiation service for the
purposes of art 13B(d)(1) of the Sixth Directive, given that, as stated in the
previous paragraph, the activity of negotiation may be limited to pointing out
to one party to the contract suitable opportunities for the conclusion of such
a contract.”
112.It is
important to recognise that negotiation is not limited to direct contact with
both counterparties, nor to the achievement, through proposal and
counter-proposal, of an agreed outcome. The essential element is that, for a
consideration, a service of a distinct act of mediation is performed by a
person who does not occupy the same position as one or other of the
counterparties. It may involve as little as pointing out opportunities to one
counterparty for the conclusion of a contract with another, or as much as
involvement in the detailed negotiation of individual elements of the contract.
There can be negotiation in the sense of article 135(1)(d) even if one party’s
position is fixed, if what is done is to point out to another party the
opportunities for the conclusion of such a contract.
113.Mr Beal’s
primary submission was that to regard the Nominee stage of the IVA procedure as
involving the IP in providing an exempt supply of debt negotiation would be to
mis-characterise the much more extensive role played by the Nominee in the IVA
process. We will come to that submission. But we should first deal with an
alternative case put for HMRC, namely that in order to be classified as an
exempt supply of the negotiation of credit or debt, there would have to be a
transaction that either was or at least was capable of being an exempt supply
of credit. There is, Mr Beal argued, no such transaction in this case.
114.Mr Beal
referred us to what the Advocate General (Jääskinen) said in the recent case of
Skandinaviska Enskilda Banken AB Momsgrupp v Skatteverket (Case C-540-09(
[2011] All ER (D) (Mar) (“SEB”) at [46]: the definition of what
constitutes a financial transaction should be considered with regard to the
economic context of the transaction. In that case what was in issue was the
provision of an underwriting guarantee in respect of an issue of shares. The
Advocate General did not consider that article 13B(d)(2) should be limited to
credit guarantees; he reasoned that institutions providing banking and
financial services could provide both credit and other types of guarantee, and
that, as article 13B(d) exempts almost all activities of such institutions,
article 13B(d)(2) should be read in the wider sense (at [42]). This wide
reading was in turn tempered by the requirement that the service must relate,
as a whole, to the sphere of financial transactions. The view of the Advocate
General was that the underwriting guarantee service related to the sphere of
financial transactions. However, he took the view that article 13B(d)(2) did not
exempt the underwriting guarantee, as there was no other specified party to the
guarantee. Nevertheless his opinion was that the underwriting guarantee
amounted to a transaction in securities within article 13B(d)(5).
115.In the course
of his opinion the Advocate General also referred to Velvet & Steel (at
para 24) to the effect that the purpose of exempting financial transactions has
been discerned by the court as to alleviate difficulties connected in
determining the tax base and the amount of VAT deductible, as well as to avoid
the increase in the cost of consumer credit. Nevertheless, despite none of
these difficulties being apparent in a share underwriting for a fee, the CJEU subsequently
held, agreeing with the Advocate General, that the underwriting guarantee
service was exempt under article 13B(d)(5).
116.In reaching
this conclusion, the Court referred (at [30] – [31]) to the tests for the
application of article 13B(d)(5), namely that the trade in securities involves
acts which alter the legal and financial situation as between the parties (SDC,
paras 72 and 73) and those which are liable to create, alter or extinguish
parties’ rights and obligations in respect of securities (CSC Financial
Services, para 33).
117.By way of
preliminary observation, the Court referred (at [18]) to the fact that the
underwriting guarantee fell within the scope of the Sixth Directive as a supply
of services effected for consideration. Mr Beal submitted that, on this basis,
that it was necessary, before examining whether the terms of an applicable
exemption were met, to explore first whether or not there was a transaction
capable of amounting to a supply of services for a consideration. He argued
that in the case of an IVA there is no underlying transaction between the
creditors and the debtor for consideration. There has been the operation by
statute of an insolvency procedure. The debtor does not give any
consideration, in the EU sense of reciprocal performance as described in Town
and County Factors v Revenue and Customs Commissioners (Case C-498/99)
[2002] ECR I-7173 (at [18]). The debtor is not providing anything to the
creditors in order to be released from the full ambit of his contractual
duties. The IVA procedure is a statutory alternative to bankruptcy, designed
to produce a better outcome for creditors than would otherwise result. The
arrangement is by statute binding on the debtor and the creditors, including
dissenting creditors. This, Mr Beal submitted, is the antithesis of a
consensual contractual transaction for the supply of services.
118.In Customs
and Excise Commissioners v BAA plc [2003] STC 35, the issue was whether
commissions paid by a bank to a subsidiary of BAA (BAAE) for various services
performed by BAAE in relation to the issue and use of a credit card fell within
the expression “negotiation of credit” within article 13B(d)(1) of the Sixth
Directive. The Court of Appeal, upholding both the VAT Tribunal and the High
Court, held that they did. It held that the agreement between the bank and
BAAE contained details of the credit to be offered to card-holders, and that it
was immaterial whether and to what extent that offer was the result of
negotiation between BAAE and the bank. BAAE performed introductory services,
but those services were not typical of the services performed by the grantor or
grantee of credit. BAAE was not itself a party to the grant of credit by the
bank to a card holder, nor was it a sub-contractor of such a party.
119.Mr Beal
referred us the only reasoned judgment, that given by Sir Andrew Morritt V-C.
Rejecting a submission from the commissioners’ counsel that the decision of the
Court of Appeal in Customs and Excise Commissioners v Civil Service Motoring
Association [1998] STC 111 could not survive the ECJ judgment in CSC
Financial Services, the Vice-Chancellor said (at [30]):
“Both recognise that negotiation is an exercise
preliminary to and connected with the relevant transaction. In both the
negotiator was remunerated by commission. In neither is it suggested that the
negotiator should be able to affect the terms of the transaction.”
120.What Mr Beal
says about this is that it shows that negotiation involves, and necessarily
presupposes, an underlying relevant transaction. At one point his argument was
that a transaction concerning debts should be construed as a transaction giving
rise to a debt. However, at a late stage of the hearing he moved away from
that position, putting the more limited submission that what was needed was an
underlying transaction for consideration that falls within the exemption. He
accepted that a contractual variation of a debt for consideration would be an
exempt transaction. The key point was the absence of consideration.
121.In our view
there is nothing to support Mr Beal’s submission that the underlying
transaction that is the subject of negotiation has itself to be a transaction
capable of being a supply of services for consideration. The reference in the
judgment in SEB at [18] to the supply being for a consideration is to
the actual supply at issue, namely the underwriting guarantee, and not to the
underlying transaction in securities. Nor is there anything in BAA that
supports the proposition that the relevant transaction must itself be a
relevant supply. The proper approach, in the case of negotiation, in our view,
is to consider if what has been done by the intermediary is so closely related
to the alteration of the legal and financial situation of the counterparties,
or the creation, alteration or extinguishment of the rights and obligations of
those counterparties as to fall within the financial services exemption. If
the service of an intermediary gives rise, or is designed to give rise, to such
an outcome in relation to a debt, it does not, in our view, matter if that
outcome is, or is not, one that would in itself be a supply for VAT purposes,
is for consideration or is an outcome that is the consequence of statute.
122.It follows
that we do not accept that it is material that, as Mr Beal submitted, in an IVA
there is no underlying service provided by the creditors to the debtor which is
being provided for consideration, and that instead what is taking place is the
operation of a statutory insolvency procedure. Mr Beal argued that there is no
underlying economic transaction taking place, merely the operation of a form of
insolvency procedure sanctioned by the State, and that accordingly Blair
Endersby did not negotiate any transaction which had fallen or was capable of
falling within the terms of article 135(1)(b) or 135(1)(d). We do not agree.
If what Blair Endersby does for the remuneration it receives amounts to
negotiation, then in our view it is negotiation concerning debts, as it is
intrinsically connected to the alteration, by statute, of the legal and
financial situation of the counterparties, and to the alteration or
extinguishment, again by statute, of the rights and obligations of the debtor
and the creditors.
123.Furthermore,
we do not accept that negotiation concerning debts, within the terms of article
135(1)(d), is, as Mr Beal submitted, an extension to the exemptions for
underlying financial transactions. That this is not so can be seen clearly
from Velvet & Steel where the ECJ held that the assumption of an
obligation to renovate buildings could not fall within the exemption in article
13B(d)(2) of the Sixth Directive (now article 135(1)(c) of the Principal VAT
Directive) because it was not, by its nature, a financial transaction. In Velvet
& Steel the ECJ considered a number of terminological differences that
had arisen in different language versions of the Sixth Directive provision. In
some the expression “assumption of obligations” had a general meaning; in
others it referred to pecuniary obligations. The Court held (at para 20) that
the scope of that phrase could not be determined on the basis of an exclusively
textual interpretation. The Court went on (at paras 21 – 22):
“21. Concerning the context in which the expression
is used, it is clear that the exemption provided for in art 13B(d)(2) of the
Sixth Directive concerns, in addition to the assumption of obligations, the
negotiation and assumption of credit guarantees or any other security for money
and the management of credit guarantees. It is common ground that all those
transactions are, by their nature, financial services.
22. The same conclusion is also valid for the other
transactions set out in subparas 1 and 3 to 6 of art 13B(d) of the Sixth
Directive. Thus, subpara 1 concerns credit; subpara 3, deposit and current
accounts, payments, transfers, debts, cheques and other negotiable instruments;
subpara 4, legal tender; subpara 5, shares and other securities; and subpara 6,
management of special investment funds. Although those transactions, defined
according to the nature of the services provided, do not necessarily have to be
carried out by banks or other financial institutions (see, to that effect, SDC, para 32; Finanzamt Groß-Gerau v
MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01) [2003] STC 951,
[2003] ECR I-6729, para 64; and Abbey National plc v
Customs and Excise Comrs (Case C-169/04) [2006] STC 1136,
[2006] ECR I-4027, para 66), they relate, nevertheless, as a whole, to the
sphere of financial transactions.”
124.On this basis
we accept Mr Cordara’s submission in this respect that a negotiation concerning
a debt is by its own nature a financial transaction, and thus comes within the
scope of the exemption in its own right. It is not an extension of any other
exemption, but stands to be construed on its own terms within the context of
the sphere of financial transactions falling within article 135(1). It is not
necessary to identify another underlying transaction that would itself fall
within the exemption in order to find, if it be the case, that the provision of
a service of negotiation concerning debts is exempt.
125.Nor, in our
view, is Mr Beal’s argument supported by the reference to the purpose of the
exemption for financial transactions referred to in Velvet & Steel
(at para 24). Although in the context of a service of negotiations concerning
debts for a fee issues of tax base and the amount of VAT to be deducted do not
commonly arise, we consider that the objective of avoiding an increase in the
cost of consumer credit is self-evidently applicable to a process designed to
alleviate the otherwise insolvent position of an individual debtor.
126.Turning then
to the question whether the services supplied by Blair Endersby do comprise
“negotiation concerning debts” within article 135(1)(d), we consider that, on
the authority of CSC Financial Services, SDC and SEB, the
following are the tests we should apply:
(1)
Is the service one of a distinct act of mediation?
(2)
Is Blair Endersby a person that does not occupy the position of debtor
or creditor, or as a subcontractor of one or both of them?
(3)
Are the services supplied by Blair Endersby not typical of the services
performed by a debtor or creditor?
(4)
Is the purpose of the activity undertaken by Blair Endersby to achieve a
change in the legal or financial situation of debtor and creditors, or to
create, alter or extinguish the rights and obligations of the debtor and
creditors in relation to the debts?
127.It is clear
that (2) and (3) are satisfied in this case. The only questions therefore are
whether the services provided by Blair Endersby can properly be described as a
distinct act of mediation, in the sense described by the ECJ in CSC
Financial Services, and whether the purpose of Blair Endersby’s services is
as set out in (4). Mr Cordara submits that the exemption refers to the
facilitation or conducting some form of consensual offer and acceptance
relating to debts, such as part satisfaction and forgiveness, and that this
perfectly describes what is done by Blair Endersby in this process. Mr Beal
argues that, although Blair Endersby faces towards both debtors and creditors
it does not discharge that role with a view to bringing a debtor or creditor
together for the provision of credit or for a contract to be formed. It is, he
submits, making professional services available to a debtor as an alternative
to bankruptcy, in order that both the debtor and creditors may benefit.
128.Mr Beal
referred us to Swiss Re Germany Holding GmbH v Finanzamt München für
Körperschaften (Case C-242/08) [2010] STC 189, where the ECJ held that the
transfer of a portfolio of life reinsurance contracts was not an exempt banking
or reinsurance transaction, nor was it by its nature a financial transaction
within the meaning of article 13B(d) of the Sixth Directive (see para 48). The
Court held (at para 49) that this interpretation was confirmed by the purpose
of the exemptions, including the avoidance of an increase in the cost of
consumer credit. Since the carrying out of the transaction at issue was
unrelated to such a purpose, that transaction could not benefit from the
exemption.
129.Mr Beal
argued that the IVA procedure and the services discharged by Blair Endersby are
not equivalent to a financial transaction; they are not equivalent to
negotiation of a specific credit agreement. The services go much wider than
that.
130.Customs
and Excise Commissioners v Electronic Data Systems Ltd [2003] STC 688
concerned whether certain administrative services supplied by EDS to a bank in
connection with the making of loans, including the making of payments and
transfers of funds, constituted “transactions, including negotiation,
concerning … payments [and/or] transfers” within the meaning of article
13B(d)(3) of the Sixth Directive. In his judgment Jonathan Parker LJ referred
to the need to interpret the exemptions strictly, but not restrictively, and
said (at [129]):
“There is, as it seems to me, a degree of inherent
tension between on the one hand the need to interpret the exemptions strictly
and on the other hand the adoption of a purposive approach to the
interpretation of the wide and general words. In my judgment, that tensions
falls to be resolved by interpreting the exemptions in a way which does not
have the effect of extending their scope beyond their fair meaning, as
ascertained by adopting a purposive approach to their interpretation.”
131.Lord Justice Jonathan
Parker then referred to SDC, setting out (at [135]) a number of propositions
derived from the ECJ’s judgment in that case. This emphasised the functional
aspects of the payment transfer services provided by EDS. Mr Beal argued on
this basis that the essential and specific function discharged by Blair
Endersby in the performance of its services was not the negotiation of a credit
agreement between the creditors and the debtor. However, SDC was
concerned with transactions concerning the transfer of funds, for which the
Court held that the functional aspects were decisive, so that the service did
not have to be provided directly to the end customer by the bank. That is a
different question to that we must consider.
132.We are
satisfied that the services supplied by Blair Endersby are related to a
financial transaction which has as its purpose both a change in the legal and
financial situation of the debtor and creditors, and the alteration and/or
extinguishment of their respective rights and obligations in relation to those
debts. It is of no consequence, in our view, that this is the result of a
statutory insolvency procedure, rather than a contractual arrangement, or that
the process requires a licensed insolvency practitioner to act as Nominee and
Supervisor, or that the IP is a professional person, licensed by a regulatory
body, carrying out his role subject to professional and ethical obligations.
133.Mr Cordara
argued that at its core the IVA process is, unlike other insolvency procedures
such as bankruptcy or liquidation, consensual. In essence, there must be a
consensual deal, brokered by the IP and Blair Endersby, between the debtor and
the creditors. Mr Beal on the other hand argued that the relationship between
the debtor and the creditors in an IVA process is a statutory one, through the
Insolvency Act and Rules. He compared the position to the liquidation of a
company, and to the bankruptcy of an individual, which in neither case, he
submitted, woukld involve a commercially-negotiated transaction.
134.Without
saying anything about the position in any other insolvency procedure, in
relation to the IVA process we agree with Mr Cordara. There is a statutory
framework, but it is one designed in the first place to regulate the process
whereby, the debtor and a sufficient majority of creditors can reach agreement
on a proposal put forward by the debtor, and secondly it is only after such an
accord has been achieved that the statutory affects of an IVA come into play.
The essence of the process is the making of a proposal by the debtor and the
approval of it by creditors, within the statutory framework and procedure. Nor
does it matter that certain creditors might not approve the proposal but
nevertheless be bound by the decision of a 75% majority. It is not necessary
for a negotiation to succeed for it to fall within the exemption, and
accordingly it is clear that the exemption can apply even if the intermediation
does not result in agreement by all creditors.
135.We also find
that the services do constitute, within the meaning of CSC Financial
Services, a distinct act of mediation. On the facts we have found the role
of the IP, and of Blair Endersby, throughout the process is one of
intermediary. This role was emphasised by the evidence we heard, particularly
from the expert witness Mr Cowan. Blair Endersby was, in substance, a
go-between in its relations with the debtor and creditors. That role was not
confined to the meeting of creditors. It pervaded all aspects of the process.
At the stage after the initial advice on the suitability of an IVA, when
proposals were being discussed with the debtor and the proposal for the IVA
itself was in preparation, and even before any contact was made with the
creditors, Blair Endersby used its knowledge of the positions likely to be
adopted by creditors to advise the debtor as to appropriate proposals to put
forward. The fact that creditors, or their voting houses, typically insist on
their own form of modifications to the proposal for the IVA does not, on the
authority of Ludwig, prevent this element of the process from
constituting negotiation. What Blair Endersby was doing was pointing out these
positions to the debtor, and thereby the opportunities for putting together an
acceptable proposal. Any modifications were discussed with both the debtor and
creditors in a form of “shuttle diplomacy” as was described in the evidence.
Once the proposal was approved, and the supervisory stage was reached, the role
of the Supervisor also included intermediation in those cases where a change of
circumstances might result in proposals to modify the arrangement.
Payment handling service
136.It was not
disputed that the supervisory stage involves an element of payment handling.
On Mr Cordara’s primary submission that the supervisory stage involves a
separate supply, he submitted that the supply was of a payment handling
service. He relied upon SDC, where the Court said (at para 66):
“In order to be characterised as exempt transactions
for the purposes of points (3) and (5) of art 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.”
137.We are
satisfied that, applying this test, the receipt by Blair Endersby of payments
from debtors and the making of distributions to creditors falls within the
description of a transaction concerning payments in article 135(1)(d) of the Principal
VAT Directive. We also accept Mr Beal’s submission that, in so far as the
activities of the Supervisor extend beyond payment handling or transfers of
funds, these would not be within that particular exemption. These activities
extend to supervising and reporting on the progress of the arrangement, monitoring
compliance, and ensuring that overall fairness is being maintained, in addition
to the services around modifications to the arrangement which, as we have
described, in our view represent part of the negotiation service.
138.Our
conclusion regarding the payment handling service is subject, however, to the
submission made by Mr Beal that the services provided by Blair Endersby in this
respect fall to be categorised as debt collection, and accordingly are taken
out of the exemption by the express exclusion in article 135(1)(d). In this
connection he referred to Axa. That case concerned the services
operated by a member of the Axa group, Denplan, for dentists which were
designed to support the operation of their practices. Principal amongst these
was the operation of payment plans between dentists and their patients.
Denplan acted as the agent of the dentist in receiving payments due to the
dentist. Denplan received payments from patients by direct debit, provided
payment advices to the dentists and contacted those patients from whom it had
not received payment. After payment was received, Denplan accounted to the
dentist, less certain deductions, including fees charged to the dentist. Those
fees were charged to VAT, and Axa claimed that they constituted consideration
for exempt financial services under article 13B(d)(3) of the Sixth Directive.
139.The ECJ held
that the service provided by Denplan was covered by the term “debt collection
and factoring” in article 13B(d)(3) and was thus precluded from the exemption.
The object of the service was to benefit Denplan’s clients, namely dentists, by
payment of the sums due to them from their patients. That service was
therefore intended to obtain the payment of debts. The Court held that Denplan
was, in return for remuneration, responsible for the recovery of the debts and
provided a service of managing those debts for the account of those entitled to
them. The term “debt collection and factoring” is an exception from the
derogation from the general application of VAT provided by the exemption and
accordingly must be interpreted broadly. It refers to financial transactions
designed to obtain payment of a pecuniary debt see Finanzamt Groß-Gerau v
MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01) [2003] STC 951). By
undertaking the recovery of debts for the account of those entitled to them,
Denplan freed its clients of tasks which, without its intervention, those
clients as creditors, would have had to perform themselves, tasks consisting in
requesting the transfer of the sums due to them, via the direct debit system.
140.Mr Beal
showed us two domestic decisions, which he said were consistent with the
approach of the Court of Justice in Axa. One was in the Court of
Session, HBOS plc v Revenue and Customs Commissioners [2008] CSIH 69,
where the issue was the treatment of supplies by agents of HBOS to whom
defaults in making payments would be referred. The services were described as
Debt Negotiation Services. It had been held by the tribunal that the dominant
purpose of the arrangement was the recovery of money due to HBOS. Elements of
negotiation involved in the recovery of money was not an aim in itself,
although it might be a desirable feature. The Court agreed that the essential
aim or dominant purpose of the service supplied was debt recovery. The
exercise of skills by the agent, including those that might be described as
negotiation directed to that end, were elements in the debt collection service,
but negotiation was not an end in itself, let alone an essential aim.
141.In the second
case, Barclays Bank plc v Revenue and Customs Commissioners in the VAT
Tribunal (No 20528, 9 January 2008), there was a similar arrangement under
which customers of Barclaycard failing to make minimum credit card payments
would be placed in a delinquency cycle. Services were provided to Barclaycard
by operatives in South Africa who would make telephone calls to Barclaycard
customers in the UK who had overdue interest and principal payments owing on
their Barclaycard accounts. The agreement with Barclaycard described the
services as “engaging in outbound telephone negotiations with Customers whose
accounts are delinquent with the objective of securing” full or minimum payment
or promise of full or part payment. The tribunal (chairman Dr John Avery
Jones) held that, in accordance with its objective character, the essential aim
of the service was the recovery and collection of debts.
142.In our view
all of these cases are distinguishable from this appeal. All involved services
provided to the creditor, whereas Blair Endersby’s services are provided to the
debtor. This is a material factor, and we agree in this respect with the
tribunal in Barclays when, after referring to the observation derived
from MKG that the exempt transactions 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, it said (at para 16) that this was not to
be taken to mean that it does not matter whether negotiations are carried on
for the debtor or creditor. Debt collection by its nature can only be
performed for the creditor.
143.Mr Beal
argued that the direction of the supply in this respect is not material. He
said that it would not be unusual for a debtor to bear the cost of a debt
collection service, and that it would be a simple matter for contracts to be
written so as to provide for the debtor to be charged. We accept that, but
that would not in our view be decisive of the question. What matters is the
economic substance, and the essential aim of the service, irrespective of who
pays for it.
144.In
determining the economic substance and the essential aim, it is necessary to
look at the transactions in their own context. In this case that context is
the establishment and supervision of a voluntary arrangement. It has as its
essential aim the provision for the debtor of an alternative to bankruptcy,
protection from creditors and a means of paying debts over time, with some debt
release. Recovery and collection of debt is clearly an aim of the creditors,
but that is not the question that has to be addressed. What is material is the
essential aim of the service provided by Blair Endersby to the debtor for the
consideration that the debtor pays. We have found as a fact that Blair
Endersby does not seek to enforce payment by the debtor, or make any demand in
this respect. What Blair Endersby does, in our view, is materially different the
activities of the taxpayers in each of Axa, HBOS and Barclays.
The service provided by Blair Endersby is not a debt collection service.
Conclusion
145.We have found
that the service supplied by Blair Endersby, covering both the Nominee and
Supervisory stages in the IVA process, constitutes a single supply. We have
found further that this single supply is made up of a number of elements, of
which part is negotiation of debts and part is transactions concerning
payments, and not debt collection. Although there are other elements to the
service, including advice on the suitability of an IVA, overall supervision of
performance of the IPA and reporting to creditors and, up to 6 April 2010, the
court, and those elements are themselves integral and key to the overall
process, it is clear to us that all these aspects of the service are ancillary
to the core elements of negotiation and payment handling, and that accordingly,
viewed overall, the supply is exempt as falling within article 135(1)(d) of the
Principal VAT Directive.
146.We do not
consider that it is necessary for us to decide as between negotiation and
payment handling which is the dominant element of the supply. Both are exempt,
and it is only necessary for us to determine whether the dominant elements are
those that are exempt or those that are taxable (FDR). However, were it
necessary for us to have done so, we would find that negotiation is the core
supply; the intermediary role of Blair Endersby dominates the whole process, in
particular at the Nominee stage, including the formulation of the debtor’s
proposals in the knowledge of the creditors’ likely positions, the drafting of
the proposal document, receipt of creditors’ voting intentions and
modifications, and any adjustments to the proposal prior to approval. The extent
of intermediation during the Supervisory stage depends on whether modifications
are required to be made to the proposal, but even if no such intermediation is
required, the negotiation element of the IVA process overall is, in our view,
so fundamental, that it is the core element of the single supply.
147.Finally, in
view of our conclusion that Blair Endersby’s supply is exempt as falling within
article 135(1)(d) of the Principal VAT Directive, since that has direct effect
there is no need for us to consider the application of the corresponding
provisions of the VATA.
Appellant’s alternative argument
148.We referred
earlier to an alternative argument raised by Mr Cordara during the hearing to
the effect that the service of Blair Endersby in effecting the IVA, if this
were a free-standing supply in its own right, is also a supply of a transaction
concerning debts and payment. As we have found in favour of the Appellant on
its primary case, and in view of the fact that, as Mr Cordara himself
acknowledged, this alternative argument raises a novel point, we do not think
it would be right for us to express a view on it in this appeal.
Decision
149.For the
reasons we have given, we allow this appeal.
Costs
150.As this
appeal is “current proceedings” we directed pursuant to para 7(3), Sch 3,
Transfer of Tribunal Functions and Revenue and Customs Order 2009 that rule 29
of the Value Added Tax Tribunals Rules 1986 should apply to this appeal.
151.We direct
that HMRC pay the Appellant’s costs of this appeal, such costs to be assessed on
the standard basis by a costs judge, if not agreed.
Application for permission to appeal
This document contains full findings of fact and reasons
for the decision. Any party dissatisfied with this decision has a right to
apply for permission to appeal against it pursuant to Rule 39 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application
must be received by this Tribunal not later than 56 days after this decision is
sent to that party. The parties are referred to “Guidance to accompany a
Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and
forms part of this decision notice.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 26 May 2011
