Commissioners of Customs & Excise v BAA Plc

For VAT purposes, the negotiation of credit includes a distinct act of mediation or introduction which is preliminary to, and directly connected with, the grant of credit. The negotiator need not be able to alter the terms of the credit or act as an agent of either contracting party. The exemption excludes services performed by a party to the credit transaction, its subcontractor, or services typically supplied by such a party. It also excludes purely clerical, promotional, marketing, market-research and similar services. The overall character of a composite supply must be assessed. An endorser of a co-branded credit card may therefore provide exempt negotiation or intermediary services where it introduces qualifying customers to a credit provider, performs preparatory screening and is remunerated by commission.

BAA Enterprises plc supplied services to Bank of Scotland under an arrangement for co-branded credit cards. The services included customer introduction, screening, promotion and additional card benefits. The VAT and Duties Tribunal and Etherton J held that the services were exempt under Article 13B(d)(1) of the Sixth Directive and VAT Act 1994 Schedule 9 Group 5 item 5.

In a related appeal, the Institute of Directors challenged a Tribunal decision holding that comparable services supplied to Beneficial Bank plc were taxable. The common issue was whether the services of a non-bank card endorser constituted the negotiation of credit or intermediary services, rather than excluded marketing, promotional or clerical activities.

The appeals were determined unanimously. The appeal by Customs & Excise in the BAA case was dismissed. The Institute of Directors’ appeal was allowed. No reference was made to the Court of Justice in either appeal.

1. Meaning of negotiation. The Court held that Customs & Excise v Civil Service Motoring Association Ltd [1998] STC 111 was not inconsistent with CSC Financial Services Ltd v Customs & Excise [2002] STC 57. Both treated negotiation as an activity preliminary to and connected with the relevant credit transaction. CSC added that the activity must be a distinct act of mediation and must not consist of services typically performed by a party or subcontractor.
2. The negotiator need not be able to affect the terms of the credit. Independence is assessed by the services rendered, not merely by the contractual relationship between the negotiator and the credit provider.
3. BAAE’s services were composite but their essential character included exempt negotiation of credit. BAAE introduced selected customers to an agreed source of credit, performed screening and preparatory work, and received an introduction fee and usage-based commission. It was neither a party nor a subcontractor and did not perform services typical of the grantor or recipient of credit.
4. The same analysis applied to IoD. Its introduction of members and encouragement to apply for the card constituted intermediary services, notwithstanding that additional benefits formed part of the product and were apparently supplied at the bank’s expense.
5. The domestic provisions in VAT Act 1994 Schedule 9 Group 5 had to be construed, so far as possible, consistently with Article 13B(d)(1). The services fell within both exemptions and were not excluded management, promotional or clerical services.
6. The Court of Justice had supplied sufficient guidance in CSC. Applying that guidance to the facts was the function of the national court, so a reference under Article 234 was unnecessary.

• VAT and Duties Tribunal: BAA’s services were held exempt; IoD’s comparable services were held taxable.
• Chancery Division: Etherton J upheld the BAA Tribunal decision: [2002] STC 327.
• Court of Appeal (Civil Division): Customs & Excise’s appeal was dismissed and IoD’s appeal was allowed.