This brief explains the HM Revenue & Customs (HMRC) position following the ECJ judgment in AXA UK plc (case ref C-175/09). The case concerned the application of the VAT exemption in Article 135(1)(d) of the EU VAT Directive for:

• ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection’
• the Court found that the services in AXA were specifically excluded from the exemption as ‘debt collection’ and were therefore liable to VAT at the standard rate

Background

AXA UK plc (AXA) is the representative member of a VAT group which includes a company Denplan Limited (Denplan). Denplan operates payment plans on behalf of dentists which offer patients the facility of paying for dental treatment by way of a fixed monthly charge. It was the VAT status of one of the supplies made by Denplan to the dentists in connection with the operation of this plan, ie collecting the payments using the Direct Debit payment method from the patients' bank accounts and accounting to the dentist for any payments received, that was the subject of the ECJ referral.

Both the VAT Tribunal and High Court agreed with AXA and found that there was a separate exempt supply of payment services falling within A135(1)(d). The Court of Appeal, however, decided the issue was not clear in current law and referred the case to the ECJ for a preliminary ruling.

The Court of Appeal asked a number of questions of the ECJ, all focussing in particular on the earlier ECJ judgment in SDC (case ref C-2/95) and the specific functions a business had to be carrying out to bring it within the VAT exemption.

The ECJ released its judgment in AXA on 28 October 2010 and, rather than answering each question individually, decided to consider all the questions together. The Court found that the supply AXA made to the dentists (which it summarised as the collection, processing and onward payment of sums of money due from third parties to the dentists) was specifically excluded from the A135(1)(d) exemption as ‘debt collection’.

The HMRC Position

The ECJ judgment in AXA now specifically defines what ‘debt collection’ means for the purposes of the exclusions to the VAT exemption. The ECJ says in paragraph 34 of its judgment that:

• ‘…it is irrelevant that such service is supplied at the time when the debts concerned become due…’
• it then goes onto say that the words ‘debt collection’ in Article 135(1)(d)
• ‘…cover the collection of debts of any nature, without limiting their application to debts which were not paid on their due date.’ and also cover ‘…debts which have not yet become due and which will be paid on the due date.’

Following the AXA judgment, therefore, ‘debt collection’ cannot be seen as applying solely to the service of chasing and recovering overdue payments on behalf of the creditor and all services principally concerned with collecting payments from the person owing them for the benefit of the entity to which those payments are owed (regardless of whether those payments are received before, on, or after their due date) fall within the exclusion to the exemption and are consequently liable to VAT at the standard rate.

Supplies which involve the collection of payments as a minor or ancillary function but which are principally concerned with other payment related transactions that fall within the Article 135(1) exemptions, for example the movement and settlement of payments between bank accounts, will not be affected by the AXA judgment and will continue to fall within the VAT exemption.

What this Means for Businesses

All payment related services falling within the definition of ‘debt collection’ as outlined by the ECJ in the AXA judgment are now liable to VAT at the standard rate. If this applies to payment related services supplied by your business and your business has previously received a ruling from HMRC that those services fall within the VAT exemption (or it has previously been treating its services as exempt in line with HMRC's published policy in this area) then VAT must be applied to those services from the date of this brief.

Further Information

Details of how to make any adjustments relating to previous VAT Return periods can be found in VAT Notice 700/45 How to correct VAT errors and make adjustments or claim and from the VAT Helpline on Tel 0845 010 9000.

Source: HMRC www.hmrc.gov.uk