MBNA Europe Bank Ltd v HM Revenue & Customs

For VAT purposes, the assignment of receivables must be analysed by reference to the transaction’s essential character and commercial purpose, viewed in its contractual and economic context. An assignment which is a necessary precondition to a securitisation service supplied to the transferor may lack the character of a supply by the transferor, even though it appears to involve a transfer for consideration. The analysis must not assume that the only alternatives are an outright sale or security for a loan. Where an agreed special method for attributing residual input tax is withdrawn, the alternative statutory method must be compared with the existing method to ensure that the taxpayer is not required to adopt a less fair and reasonable method. A single servicing activity supplied to two persons for separate consideration may require attribution of residual inputs to both supplies.

MBNA appealed from the Manchester VAT and Duties Tribunal’s decision dismissing its appeals concerning VAT arising from securitisation programmes involving credit-card receivables. The issues concerned whether assignments of receivables were supplies, the place and consideration of any such supplies, withdrawal of an agreed method for attributing residual input tax, the attribution of inputs to servicing activities, and the construction of the agreed method’s timing provision.

The Tribunal had followed the reasoning in the earlier Capital One Bank (Europe) Plc v HM Revenue & Customs decision. The central questions were whether the assignments were supplies for VAT purposes and whether the Commissioners had lawfully withdrawn the agreed attribution method.

1. Assignments of receivables. The appeal succeeded in part. The assignments were not supplies by MBNA. The Tribunal’s reasoning was erroneous insofar as it treated the securitisation scheme globally as a loan or treated the assignments as assignments by way of security. There was a critical distinction between assigning property by way of security and assigning property so that the transferee could use it as security for its own borrowing.

2. The assignments were capable in theory of appearing to be supplies, but they were necessary preconditions to the supply of a securitisation service by the special purpose vehicles to MBNA. The receivables were transferred as a revolving class so that they could be used as security and as the means of servicing the SPVs’ borrowings. In that context, the assignments lacked the character of supplies by MBNA.

3. The alternative segmented analysis was also insufficient. Although the trust structure could be analysed as adjustments of beneficial interests followed by partial encashment, that technical analysis did not answer the VAT question. The transaction had to be understood in its full context without collapsing the chain of transactions.

4. The hypothetical place-of-supply issue was decided in MBNA’s favour. Any supply constituted by the assignments would have been made in Jersey. MBNA’s servicing activity in Chester did not make Chester a fixed establishment of CCSE, and servicing receivables was not the same as using them.

5. Withdrawal of the agreed method. The Tribunal had erred in law by failing fully to apply the comparison required by Merchant Navy Officers Pension Fund Trustees Ltd v Commissioners of Customs and Excise and Banbury Visionplus Ltd v HM Revenue and Customs. The error was immaterial. Regulation 103 required a fair and reasonable attribution for specified supplies, while regulation 101 supplied the relevant rigid formula for in-country supplies. Withdrawal did not require MBNA to adopt a less fair and reasonable method. The Commissioners had therefore validly withdrawn the 1999 Agreed Method.

6. Servicing and residual inputs. The Tribunal was wrong to conclude that no residual inputs could be attributed to the servicing supply merely because MBNA was already performing substantially the same activity for its cardholders. The matter was remitted to the Tribunal to determine the fair and reasonable attribution of residual inputs to the servicing supply.

7. Voluntary disclosure. The agreed method referred to sums becoming receivable, not received. That was a plain and commercially sensible choice. The appeal on construction was dismissed, and the limitation issue did not arise.

The judgment describes an appeal from the Manchester VAT and Duties Tribunal, whose decision was originally issued on 5 January 2006 and reissued on 3 March 2006. The High Court allowed the appeal concerning attribution of residual inputs to the servicing supply and remitted that issue to the Tribunal. The remaining challenges were dismissed.