VAT – meaning of “financial services”

Introduction

In recent years, several cases have explored the meaning of “financial services” for VAT purposes. The case of HBOS plc v R&C Commissioners, heard in the Scottish Court of Appeal, examines an arrangement involving the outsourcing of debt collection by a major financial institution.

The Issue

The key issue is whether the debt collection services provided should be regarded as exempt financial services within the terms of the VAT Directives.

The Facts

HBOS's main contention was that the services provided by its service provider were not merely debt collection (specifically not exempt under the VAT Directive) but also debt negotiation which can be an exempt service. HBOS had offered evidence as to the nature of their arrangement with their agents, who usually acted on a commission basis and had the scope to negotiate settlements. In only very few cases would settlements on outstanding debts be arrived at in full.

The Decision

In their judgement, the judges seem to have placed heavy reliance on the Card Protection Plan case, and its emphasis on “the essential features of the transaction”.

While HBOS argued that their agents provided debt negotiation services, the judges concurred with the earlier findings of the VAT Tribunal that HBOS's principal objective, using their agents’ skills, is to recover as much of the debt as possible. The techniques used by the agents – negotiation, threats and cajolery – were means to arrive at the objective of debt collection, and were not ends in themselves.

Accordingly the supplies of services by HBOS's agents were not exempt.

The judgment is available online at http://www.bailii.org/scot/cases/ScotCS/2008/CSIH_69.html.