The High Court held that the VAT and Duties Tribunal ([2008] BVC 2,023) was right to conclude that the principal service provided by the taxpayer in return for a monthly fee was an exempt payment handling service of collecting monthly Denplan fees from patients and passing them on to dentists. Some of the other services also provided were ancillary to that principal service, while others were separate services which did not qualify for exemption, so that an apportionment was required.

Facts

The taxpayer was the representative member of a VAT group which included Denplan Ltd, a company set up to enable subscribers to pay a fixed monthly fee to cover private dental treatment. Dentists who wished to participate in one of the taxpayer's plans were required to pay a one-off membership fee to register with the taxpayer and a further fee to set up a registration facility. They would then enter into contracts with patients wishing to use the facility and enrol them in the most appropriate treatment plan. There was no contract between the taxpayer and the patient. The monthly fee and insurance premium were retained by the taxpayer from moneys collected by direct debit from patients and the balance was passed to the dentist.

Customs contended that the membership fee, the registration fee and the monthly ‘payment handling’ fee constituted consideration for a single supply of standard-rated administration services. Alternatively, they contended that the latter two did so. Customs distinguished the service in this case from the services in Sparekassernes Datacenter (SDC) v Skatteministeriet (Case C-2/95) [1997] BTC 5,395; [1997] ECR I-3017, C&E Commrs v FDR Ltd [2000] BTC 5,277 and Bookit Ltd v R&C Commrs [2006] BTC 5,535, all of which concerned tasks which constituted a specific essential function forming part of a broader financial service being provided by banks, which would otherwise have been performed by the banks themselves. The taxpayer's services did not fall within the exemption in VATA 1994, Sch. 9, Grp. 5 which incorporated into UK law the directly effective provisions of art. 13B(d)(3) of Council Directive 77/388 (‘the sixth directive’).

The taxpayer submitted that the principles established in SDC and other cases led to two questions in determining whether exemption applied to the services provided: (1) whether the supply resulted in a transfer of funds; and (2) whether it led inexorably to a change in the legal and financial situation. In the taxpayer's view, the dentist needed and received a financial service. The service it provided was a transaction concerning the transfer of payments, the effect of which was to secure payment for the dentist and which entailed a change in the legal and financial position of the dentist and patient. The taxpayer acted as an intermediary between the banks and the dentists and patients to ensure, on behalf of the dentists, that due payment was received. That was a separate and distinct supply of payment handling services and, in the opinion of the taxpayer, was exempt from VAT.

The tribunal allowed the taxpayer's appeal in part, holding that the monthly fee should be apportioned between services that were payment handling or ancillary services, which were exempt from VAT, and other services which were not ([2008] BVC 2,023; Decision No. 20,342). Customs appealed and the taxpayer cross-appealed.

Issues

Whether the monthly fees charged by the taxpayer fell within the exemption for the provision of financial services in VATA 1994, Sch, 9, Grp. 5; and whether the services provided by the taxpayer in return for the monthly fees constituted a composite or multiple supply.

Decision

Henderson J (dismissing the appeal and cross-appeal) said that Customs' argument for a narrow interpretation of the exemption in art. 13B(d)(3), which would confine its ambit, in cases where the supplier of the service in question was not itself a bank or other institution, to a person which supplied services analogous to those supplied by a bank or financial institution, was too narrow and was not warranted by the authorities.

The SDC case established that a transfer was the execution of an order for the transfer of a sum of money from one bank account to another; it involved a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks; there was no requirement for the supplier to be a bank; and there was no requirement for a direct contractual link between the person executing the transfer and the ultimate customer of the bank.

Furthermore, the test whether a transaction constituted a transfer for the purposes of the sixth directive was a functional one, which asked whether the transaction in question was one which had effected the movement of money and changed the legal and financial situation of the parties. The cause of the transaction was not in itself a relevant consideration.

Although it was foreseeable that some of the patients would not make their payments through the direct debit system which had been set up, the arrangements were nevertheless put in place on the footing that the monthly payments would be made by direct debit, and in sending the appropriate instructions to BACS the taxpayer was doing all that it could to implement those arrangements. The fact that payment would not be made in a small and unpredictable, but still significant, minority of cases did not detract from the fact that, where payment was made by that method, it was made as an automatic result of the instructions given by the taxpayer. That conclusion recognised the direct causal nexus between the taxpayer's input to BACS and the payments which were actually made.

Looking at the matter objectively, from the point of view of a typical dentist who participated in a plan, the central and essential element of the transaction, as between the taxpayer and the dentist, was the provision of a service which enabled the dentist to provide his services to patients at a specified level in return for fixed monthly payments, instead of providing his services on an irregular basis and in return for separate fees of an unpredictable amount on each occasion. The basic reason why the taxpayer existed was to enable dentists to offer a facility of that sort to patients, and to provide the necessary administrative framework for its operation. The core of the administrative services and support supplied by the taxpayer was directed towards achieving that purpose, and at the heart of those core services were the services relating to the collection, processing and onward payment to dentists of the monthly payments by patients, or in other words the payment handling service. That was the essential machinery which enabled dentists to offer monthly payment plans to patients, and that, in large measure, was what the monthly fee paid by dentists to the taxpayer was paid for.

The taxpayer's essential purpose was not to provide a seamless administrative service, and to relieve dentists of tasks which they would otherwise have to perform themselves. However, those services were among those for which the monthly fee was paid. They were not ancillary to the exempt payment handling service, because they were not a means of better enjoying that service, and they were services which a dentist was likely to make use of for their own sake. Accordingly they were separate, standard-rated supplies.

Further, although making reports of payments and non-payments, and chasing up non-payments, were ancillary to the principal service, ‘goodwill transfers’ did not fall into that category. The provision of guidance on the buying and selling of goodwill was a separate and independent supply, on a par with the guidance offered by the taxpayer in the setting of fees by dentists. The sale or purchase of a dentist's practice was in itself nothing to do with the existence or otherwise of payment plans.

However, the recording of changes of patients' addresses, which the tribunal included in their second (non-exempt) category, should be regarded as ancillary to the principal service. The efficient operation of the payment handling service by the taxpayer had to depend on having up to date details of patients' addresses, if only so that it could chase up nonpayments. Accordingly the recording of changes of address was a means of better enjoying the principal service. In all the circumstances, the tribunal came to the right conclusion for substantially the right reasons.

Chancery Division.

Judgment delivered 22 May 2008.