The High Court, considering appeals against decisions on VAT issues ([2006] BVC 2,395) arising from a series of securitisation programmes, held that the method whereby a company deployed debts due from its credit card holding customers for the purpose of raising working capital did not involve the making of supplies for VAT purposes.

Facts

The taxpayer traded in the UK providing finance to credit card customers and to those taking out personal loans. Whilst the taxpayer's core business consisted of making exempt supplies of credit, it did make some taxable supplies. As a partially exempt trader, the taxpayer was entitled to recover a proportion of the VAT incurred on overheads and residual expenditure and it had agreed a special method of calculating that apportionment subject to certain exclusions, including amounts due from the assignment of receivables and sums receivable from cardholders whose accounts had not been securitised. Credit card holders’ accounts which had been securitised were known as designated accounts.

Customs decided that the agreed method was flawed and withdrew it with effect from 1 July 2003. However, the taxpayer continued to apply the agreed method, slightly modified, and Customs issued assessments totalling £3.3m to recover input tax overclaimed. In July 2003, the taxpayer submitted a voluntary disclosure in the sum of £8.9m in respect of input tax said to have arisen from its misunderstanding of the agreed special method and the inclusion in the calculation of sums receivable from cardholders whose accounts ‘at that particular time’ had not been securitised. Customs refused to act on the voluntary disclosure.

The taxpayer subsequently appealed against a decision of the Manchester VAT and Duties Tribunal dismissing its appeals from four decisions of Customs on VAT issues arising from its involvement in a series of securitisation programmes by which the taxpayer deployed debts owing to it by its credit card holding customers on a rolling basis, for the purposes of raising working capital ([2006] BVC 2,395; Decision No. 19,413).

Issues

Whether the method by which the taxpayer deployed the debts accruing due to it from its credit card customers for the purposes of raising working capital involved it in the making of supplies (‘the output issue’); whether Customs had been entitled to withdraw the special method; and whether the taxpayer's servicing of its designated customers’ accounts used residual inputs (‘the input issue’).

Decision

Briggs J dismissed the appeal on the output tax issues and allowed the appeal in part on the input tax issues.

Securitisation and assignment of receivables

The assignments of receivables were not supplies for VAT purposes. The essential point of the securitisation structure was to enable the banks to bundle up and transfer a selection of their receivables, otherwise than by way of security, to a separate legal person or persons, so that those persons could use them as security for borrowings, and then pass the resulting cash flow to the banks, otherwise than by way of loan. That was exactly what the structures achieved. The assignment of receivables by the banks to their respective receivables trustees did not constitute or involve the making of a supply by the banks, excluding the consequential servicer function undertaken by the banks which, as was common ground, did amount to a supply of a service by the banks. The assignments were, viewed separately from the rest of the scheme, in theory capable of constituting supplies, but because they were no more than the necessary pre-condition to the supply of a securitisation service to the banks, by the vehicles set up to operate that service, they were thereby deprived of the character of a supply by the banks. They therefore constituted an addition to the exceptional class of transactions which looked prima facie like a supply, but which lost that character when viewed in their context.

For the purpose of deciding whether the banks made a supply it was irrelevant that the service was provided to the banks by more than one legal person, or by a series of interlinked contracts, rather than just one. There was a close analogy between a securitisation service and the supply of credit on the security of revolving book debts. In neither of them did the assignment of the subject matter of the security (the receivables) make sense as a VAT supply (Capital One Bank (Europe) plc [2006] BVC 2,148; Decision No. 19,238 considered).

Termination of special method

Customs could not validly terminate a special method if the taxpayer was consequently required to adopt a less satisfactory method in its place. If at the moment of withdrawal there was no alternative special method agreed or directed, then a comparison with the standard method under the Value Added Tax Regulations 1995, reg. 101 and 103 had to be made. However, the application of the comparison to the business of a partially exempt trader whose residual inputs (as in this case) fell to be attributed both to incountry and out of country supplies would only produce a conclusion that the result of the termination was less fair and reasonable than the continuation of the special method, if his attribution of inputs to in- country supplies under reg. 101 was less fair and reasonable than under the special method (Banbury Vision Plus Ltd v R & C Commrs [2006] BTC 5,482; C & E Commrs v Liverpool Institute for Performing Arts [2001] BTC 5,258; and Merchant Navy Officers Pension Fund Trustees Ltd v C & E Commrs [1996] BVC 2,924; No. 14,262 considered). The application of the Merchant Navy/Banbury comparison between an existing special method and the reg. 103 requirement in relation to the attribution of inputs to out of country supplies could not lead to a conclusion that the use of reg. 103 could possibly force the taxpayer to adopt a less fair or reasonable method than the special method because, unlike the rigid formula in reg. 101, reg. 103 simply enshrined the right to a fair and reasonable method. The real dispute in this case entirely related to the taxpayer's out of country specified supplies, which fell to be dealt with under reg. 103, so that when the agreed method was terminated, that could not produce a result less fair and reasonable (although it might be less favourable).

Servicing designated customers’ accounts

The tribunal had been wrong to conclude, in accordance with the basis on which Customs had raised the disputed assessments, that the servicing of designated customers’ accounts did not use residual inputs.

There was no reason why, in circumstances where a single business activity constituted a supply of a service to two different persons who each paid separately for what they received, the inputs incurred in carrying out the single activity should be wholly attributable to the supply to one of them. The fact that the supply to one consisted of the performance of a promise to go on making a continuing supply to the other might be relevant to the fair and reasonable apportionment of the inputs as between each supply, but it did not justify the conclusion that no part of the inputs could be attributed to the supply to the promisee (C & E Commrs v Redrow Group plc [1999] BTC 5,062 considered).

To that extent, the appeal against the tribunal's decision on the assessment appeal would be allowed and remitted back to the tribunal for the determination of the fair and reasonable attribution of the taxpayer's residual inputs to the supply constituted by the servicing of the designated accounts.

Voluntary disclosure claim

The voluntary disclosure claim failed as a matter of construction of the words of the agreed special method.

Chancery Division. Judgment delivered 22 September 2006.