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Steve Allen of VAT Advisers Limited highlights a further selection of recent VAT cases.

Tribunal says New Pitch was a Residual Cost for Rugby Club

This case concerns an appeal against an HMRC assessment for wrongly-claimed input tax. The Appellant is a not-for-profit rugby club run by volunteers and a management committee. It has three principal sources of income as follows:

• Playing and non-playing subscriptions
• Bar profits
• Sponsorship/advertising

The club had been in decline for a number of years, and hoped to attract new and better players by building a new pitch with improved facilities, coaching, and kit. The opportunity given for pitch-side advertising would bring in much-needed funding to go towards achieving this aim. With the introduction of ‘showpiece events’, there was also an opportunity for the sale of match day programmes and charging for admission.

The cost of the new pitch was funded mainly by a Rugby Football Union (RFU) grant, which had required definite assurance that it could be properly maintained. The RFU had also sought assurances on the levels of future playing, bar takings, advertising and sponsorship, before the funding was agreed.

As the club made exempt supplies (members’ subscriptions for playing rugby) and taxable supplies (sponsorship, advertising, match day admissions and match day programmes), it was partially exempt. HMRC argued that the input tax on the construction costs of the new pitch were wholly attributable to the exempt playing subscriptions (and so could not be repaid), but the Appellant contended the new pitch related to both taxable and exempt supplies, and should be treated as a residual cost for the purposes of its partial exemption calculations. It said the pitch project could never have gone ahead without the intention of raising sponsorship monies, and would not have been sustainable on membership subscriptions alone. The Judge considered the test of whether the inputs are directly and immediately linked to the particular taxable transaction, quoting Mayflower Theatre Trust, whereby the test was “not for the closest link but for a sufficient link”, and found that there was a direct and immediate link between the cost of the development of the pitch and the taxable supply of advertising rights.

HMRC argued that there was a considerable time lapse between the construction of the new pitch and the supply of advertising rights. During the relevant period, there were no taxable outputs against which the input tax could properly be offset, which, in HMRC’s opinion, was an irrevocable bar to the input tax being treated as residual. However, as HMRC had not previously raised this point, and the Appellant had not come prepared to argue it, it was decided not to consider this point at this stage. The appeal was left open for 28 days to enable HMRC to give further thought to this point, and whether further negotiations with CRFC were needed.

Cirencester Rugby Football Club (TC00718)

ECJ says Payment Handling Service to Dentists is Taxable Supply of Debt Collection

The disputed issue was whether fees received for the provision of payment handling services to dentists, in connection with the operation of a dental plan, came within the scope of the VAT exemption for financial services.

The Appellant company, which was a member of the VAT group of a financial services plc, provided a range of administrative and support services to dentists. The core activity was the provision of payment handling services in respect of payment plans, under which a patient agreed to pay his or her dentist a fixed monthly sum in return for a specified level of dental care each year. For each monthly payment made by the patient, the Appellant charged the dentist a fee. It collected the payment from the patient by direct debit and, after paying an insurance premium to cover emergency treatment and deducting its fee, transferred the balance to the dentist. The payments by the patient to the Appellant, and by the Appellant to the dentist, were both made via BACS.

The Appellant argued its services constituted a single exempt supply of payment handling services.  HMRC, however, contended that the payment handling services, if viewed in isolation, were not exempt.  Moreover, if any of the Appellant’s supplies did fall within the exemption, they were ancillary to the overall administrative services, with the result being that they were part of a single composite taxable supply.

The Court first considered the nature of the Appellant’s services, and whether or not they constituted a single supply. It concluded that the Appellant provided a single service which concerned the ‘transfer of the sum due each month from the patient to the dentist’. The Court held that the Appellant was being paid for the recovery of debts, and that it provided a service of managing those debts for the account of those entitled to them.

Therefore, the service constituted an exempt transaction concerning payments, unless it was ‘debt collection or factoring’, which was a service specifically excluded from exemption. The Court then considered the nature of debt collection and factoring. Given that it is to be construed broadly, it held that the Appellant’s services fell within those terms. The Appellant was freeing its dentist clients from their need to request payment. It did not matter that the service related to debts that are not in default, and did not involve any coercive measures to obtain payment. As such, the Appellant’s services were not exempt.

This is a surprising judgment in that, on the one hand, the Court has taken a wide view of the nature of transactions involving payments that is more in tune with how the UK courts have seen it compared to the courts and tax authorities in many other Member States. On the other hand, none of the questions referred nor any of the suggested answers by the Commission, the Member States, or the Appellant, suggested that the services might be taxable debt collection. The judgment represents a substantial increase in what had previously been understood as the scope of debt collection and factoring. 

HMRC will be as surprised by this as anyone else. It sought the reference hoping the ECJ would clamp down on what it considers to be too liberal an approach to the exemption by UK courts for payment transfer service providers. The questions put to the ECJ sought to clarify the boundaries between payment transfers carried out by banks and services provided by third parties. In particular, was it necessary for third parties to carry out activities such as the making of account entries, or credits and debits to bank accounts, for the exemption to apply? The Court has made it clear that this is not necessary, and that a service comprising the moving of money from one account to another is an exempt payment transfer even if the supplier does not itself carry out the mechanics of the transfer. However, this is subject to the issue of debt collection.

Axa UK Plc, European Court of Justice (C-175/09)