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VAT Exemption and Payment Services

By October 13, 2023VAT news

The Supreme Court has released its decision in the Target case which concerns the VAT exemption for payment related services: Click to see the case.

This was the final stage in long running VAT litigation about a common area of difficulty in relation to an area of the financial services VAT exemption, namely what is meant by ‘transactions concerning payments, transfers, debts…’.   This is the area that concerns the often complex set of transactions taking place when a payment is made by one party to another.  In the Target case, the underlying transactions related to individuals making mortgage payments to a bank.  Target had been contracted by the bank to administer the mortgage loan accounts and instigate and process payments due from borrowers.  The key question in this case (and in various earlier CJEU cases focused on the same area of the legislation), concerned the scope of the legislation in this area – is there a narrow meaning, resulting in only the party in the chain actually effecting the payment/transfer being able to apply VAT exemption, or is there a wider exemption extending to those such as Target involved in giving instructions for payment.

The Supreme Court decision usefully sets out the salient facts and findings from earlier cases of relevance such as SDC, FDR, and DPAS, finding these also applied to Target:

  • the VAT exemption for ‘transactions concerning payments/transfers…’ is to be interpreted narrowly;
  • it is essential for exemption to apply that the transfer or payment is actually executed by the business seeking to apply exemption
  • it is not sufficient to simply give instructions to trigger a transfer or payment

The commercial background in the Target case is relatively simple compared to many others using the same area of the VAT legislation where there can be multiple parties in a chain.  This complexity can make it difficult to identify which parties the VAT exemption applies to.

The key message emerging remains that businesses involved in any way in transactions involving financial payments/transfers should carefully consider whether their services are at the heart of the ‘execution’ process or whether they instead precede this, by simply approving a transfer which is actually executed by someone else in the chain.  The reason this is particularly critical is that there will typically be a financial institution or similar as the principal in the transactions, and given they will be partly exempt and have limited VAT recovery, they tend to insist on VAT inclusive pricing in contracts.  This means a business such as Target within the supply chain would bear the cost of the VAT in the chain, not the financial institution.  Therefore treating the transactions as VAT exempt when pricing is agreed and later finding out they are subject to VAT can have a serious impact on profitability.

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