The issue was the liability to VAT of services supplied by the appellant to mortgage lenders in respect of re-mortgages.

The appellant took over a company called Legal Marketing Services Ltd (LMS) in 2003. LMS was a company involved in managing the provision of legal work on re-mortgages for lenders such as Abbey National, National Westminster Bank and building societies. It received instructions on new re-mortgage cases from these parties, then chose from a national panel a law firm to which it would assign the case. In July 2003, the appellant instructed its accountants to write to the commissioners seeking confirmation of the VAT treatment of these services, which were previously treated by LMS as standard-rated supplies.

The commissioners confirmed their view that the services were standard-rated.

The appellant challenged the commissioners' ruling, stating that the services consisted of negotiation services, fee payment management, panel management services and quality assurance services. It claimed that the first two of these constituted the dominant supply and were exempt financial services made under items 1 and/or 5 of Grp. 5 of Sch. 9 to VATA 1994 and/or pursuant to art. 13(B)(d)(3) of the sixth directive.

Additionally, it claimed that the other services were ancillary to those and, thus, also qualified for exemption. Alternatively, the appellant contended that the other services constitute separate standard-rated supplies.

Before the tribunal, the appellant submitted that LMS's services could properly be described as ‘administration services’ and at the same time being exempt from VAT. It cited Sparekasserenes Datacenter (SDC) v Skatteministeriet (Case C-2/95) [1997] BVC 509, C & E Commrs v FDR Ltd [2000] BVC 311 and C & E Commrs v Electronic Data Systems Ltd [2003] BVC 451, submitting that in each of these cases the taxpayer was held to qualify for exemption because it was altering the legal and financial landscape. The appellant submitted that administrators could alter the landscape in this way and be exempt if they had the ingredient of ‘legal authority’ from their principals to communicate with third parties. The appellant stated that the elements of the package provided by LMS consisted of it identifying solicitors, setting up panels and monitoring the speed of process. The principal feature of LMS's service was that of coordination, not of the quality of the conveyancing but of payment services. First, in fixing the level of debt the lenders would incur, LMS brought to them a unique negotiation function which enabled them to use hundreds of firms of solicitors, but incur only one level of debt. Secondly, it co-ordinated and made payment of the debts. Those features formed the principal commercial attraction of LMS's services to mortgage lenders. The critical thing was co-ordination on price and payment. A mortgage lender's main interest was in the price LMS could negotiate for the solicitors' services, and relief from what would otherwise be a complex payment process.

The appellant contended both that there was a central payment service by LMS for VAT purposes and that it must have been a principal aim of LMS's involvement because mortgage lenders would not have bought LMS's services without it. In reliance on the Electronic Data Systems decision, the appellant then submitted that LMS, on behalf of the mortgage lenders, performed a central billing function, paid bills and had the authority to establish the level of indebtedness which one party owed to the other.

Electronic Data Systems was the point of contact between the borrowers and the lenders just as LMS was in the present case between the solicitors and the lenders. The role of Sparekassernes Datacenter was to pass messages between banks informing them of their positions; it was thus able to alter the legal and financial position as it had legal authority from the banks to do so. LMS also did that but, in the appellant's opinion, LMS was in an even stronger position than Sparekassernes Datacenter because, like FDR, its clients operated bank accounts with real money. There was no indication in the commissioners' case as to why the elements of management and administration should predominate, rather than the payment element. In reliance on the definition of ‘negotiation’ in Electronic Data Systems, the appellant contended that either the payment element predominated or it was free-standing. The appellant next dealt with a claim by the commissioners that LMS was making a taxable service of administering taxable supplies by solicitors. It claimed the evidence showed that the numerous services provided by the solicitors were all purely financial matters constituting the negotiation and/or performance of exempt financial supplies.

The commissioners submitted that the tribunal should first decide the essential nature of the services supplied by LMS to the mortgage lenders, as suggested by relevant findings of fact, and then consider whether, when properly described, they fell within the relevant exempting provisions. The commissioners maintained that, on any view, they did not so fall. In characterising the nature of LMS's supplies, the commissioners maintained that the tribunal should have regard initially to the guidelines offered in a number of cases, particularly C & E Commrs v Lloyds TSB Group Ltd [1998] BVC 173 where it was held that one should look at the package of supplies as a whole, and, taking account of all the relevant circumstances, seek to determine the predominant character of the supply. The commissioners also relied on Card Protection Plan LtdvC&E Commrs (Case C-349/96) [1999] BVC 155 that the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer with several distinct principal services or with a single service. In that case, in the House of Lords, Lord Slynn commented on the approach to be adopted, namely that the national court's task was to have regard to the essential features of the transaction to see whether it was several distinct principal services or a single service and that what from an economic point of view was in reality a single service should not be artificially split.

The commissioners maintained that ‘negotiation’ formed no part of the services supplied by LMS. First, they contended that in relation to each re-mortgaging transaction, no element of negotiation could be identified; once LMS received instructions from a mortgage lender it allocated them to a panel firm of solicitors whose remuneration had been agreed in advance. Second, the commissioners argued that the fees payable to the solicitors, apart from being set in advance, were of no concern to the mortgage lender, which always remained liable for the same overall sum. Third, in so far as any negotiation did take place, the commissioners considered that it was undertaken by LMS on its own account in order to improve its profit margins at the expense of panel solicitors.

Essentially, LMS supplied a complete bundle of administrative, management and IT services as revealed by the contractual documentation. If the services were accepted as a single supply by LMS to the lenders, the conclusion that those services were standard-rated became inescapable, whatever the nature of the services provided by panel solicitors.

The commissioners submitted that, on any view, the essential features of the services provided by LMS were wholly alien to the exemption in art. 13(B)(d)(3) of the sixth directive and bore no relation to the financial services mentioned in that provision. The only element of the services LMS was contractually obliged to provide which could possibly qualify for exemption was the processing of payments to the solicitors, but LMS did not effect a legal and financial change and the service could never be described as anything other than, at most, an incidental and ancillary supply which should be treated in accordance with the main supply and therefore standard-rated.

The tribunal dismissed the company's appeal.

1. In the three landmark cases identified by the appellant, the taxpayer dealt with the money actually forming the supplies made, whereas in the instant case LMS dealt only with the consideration for the supplies. Whilst that difference may not be crucial, it was extremely significant. The only element of the services LMS effected that could possibly qualify for exemption was the processing of payment to the solicitors, and that did not make the changes of a legal and financial character necessary to qualify for exemption.
2. Whilst accepting that LMS had the legal authority of the mortgage lenders to communicate with panel solicitors and the obligation to pay for their conveyancing services, the tribunal did not consider that the making of those payments meant that in discharging the debts LMS was supplying an exempt service under art. 13(B)(d)(3).
3. The payment service provided for mortgage lenders was part of LMS's service, and part of the consideration paid to LMS was for that service, but it was ancillary to the principal service.
4. The appellant's submission that the principal feature of LMS's service was that of co-ordination of payment services was rejected. It was of no interest whatsoever to mortgage lenders what proportion of LMS's fees was paid to panel solicitors for their work. The lenders had agreed fees with LMS. It was for LMS separately to negotiate with the solicitors the fees they were to be paid. Consequently, the tribunal rejected the appellants' claim that a mortgage lender's main interest was in the price LMS could negotiate for the solicitors' services.
5. No evidence independent of LMS was adduced to support the appellant's claim that payment of the solicitors was a principal aim in LMS's involvement because mortgage lenders would not buy the company's services without it. The submission that the central billing service was clearly a principal aim was rejected. The tribunal also rejected the appellant's claim that negotiation formed a part of the services provided by LMS.
6. With regard to the appellant's claim that there was no indication in the commissioners' case as to why the elements of management and administration should predominate over that of payment, the view of the tribunal was that the contracts between LMS and the various mortgage lenders spoke for themselves as indicating the predominance of the management, administrative and IT provisions.
7. In characterising LMS's supplies in accordance with the entirety of the advice offered by the higher courts and taking full account of the contractual terms agreed between LMS and the various mortgage lenders, the tribunal concluded that the dominant purpose of the mortgage lenders was that of obtaining a bundle of services, all of which contributed to the conveyancing process provided by panel so licitors. LMS played a central and indispensable role in delivering a complete conveyancing solution to the mortgage lenders, and the essential features of its services were those of marketing the services of panel solicitors, and arranging, managing and administering the conveyancing process.
8. The services provided by LMS for mortgage lenders constituted a single composite supply of management, administration, auditing and IT services.

Any other aspect of its services was ancillary thereto.

Taking account of the observations of the European Court in Card Protection Plan, the tribunal decided that LMS made single composite supplies which were standard-rated.

No. 19,854