HM Commissioners of Customs and Excise v F D R Ltd

For VAT purposes, a transfer is effected by corresponding credit and debit entries which change the legal and financial position of the parties. The transfer need not involve physical movement of money or a separate act beyond those entries. Automated clearing instructions may therefore effect exempt transfers where the clearing process is automatic and produces that change. Netting-off mutual liabilities may likewise constitute transfers. In assessing multiple services, the court must identify the true and substantial nature of the consideration, determine whether the services form a single core supply, and then assess the constituent elements where the core is an integral bundle. Services outsourced to a data-handling centre may qualify for the financial-services exemption where they fulfil the specific and essential functions of the exempt transaction.

The Commissioners appealed directly from a decision of the VAT and Duties Tribunal, which had allowed FDR Ltd’s appeal against a VAT assessment of £3,651,263. FDR provided outsourced credit-card processing and settlement services to issuing and acquiring banks.

The Tribunal found that FDR’s principal service comprised processing card transactions and settling the banks’ liabilities and claims. It treated elements including BACS payments, netting-off and account operation as falling within Article 13B(d)(3) of the Sixth VAT Directive. The central issues were whether FDR made transfers, whether its activities constituted a single core supply, and whether that supply was exempt.

1. Appeal dismissed. FDR’s supplies were exempt under Article 13B(d)(3) of the Sixth VAT Directive.
2. A transfer of money does not require physical movement or an additional, elusive event. It consists of corresponding credit and debit entries which change the legal and financial position of the parties. This understanding was consistent with Sparekassernes Datacenter (SDC) v Skatteministeriet [1997] ECR I-3017.
3. FDR made transfers through BACS. BACS acted automatically once FDR supplied the relevant instructions, and the resulting entries redistributed the rights and obligations of payors and payees. FDR could not avoid responsibility for the transfers merely because BACS performed the mechanical clearing process.
4. The daily netting-off process also effected transfers. It produced the same legal and financial result as individual credits and debits between the parties. Greater efficiency did not alter the substance of the transaction.
5. The cardholder and Merchant accounts did not need to be characterised as current accounts. FDR’s transfers were effected through CHAPS and BACS; the account postings were ancillary to that analysis.
6. The Tribunal was entitled to find a single table-top or core supply comprising integral services. The proper approach was first to identify the true and substantial nature of the consideration, then to identify ancillary services. Where the core was an integral bundle, its elements had to be examined to determine whether taxable or exempt elements predominated. The approach was consistent with Card Protection Plan Ltd v CCE [1999] STC 270 and Customs and Excise Commissioners v Madgett and Baldwin [1998] STC 1189.
7. Transfers were at the centre of FDR’s core supply. The Commissioners’ appeal was dismissed with costs and leave to appeal was refused. Lord Justice Ward and Mr Justice Bell agreed with Laws LJ.

• Court of Appeal (Civil Division): dismissed the Commissioners’ appeal from the VAT and Duties Tribunal, with costs.
• VAT and Duties Tribunal: allowed FDR Ltd’s appeal against the VAT assessment and treated its principal card-processing and settlement services as exempt.