HM Revenue & Customs v Axa UK PLC

For VAT exemption under Article 13B(d)(3) of the Sixth Directive, a service need not be supplied by a bank or directly to an end customer. The question is functional and causal: whether the service forms a distinct whole, performs the specific and essential functions of a transfer, and brings about a transfer of funds with the resulting change in the parties’ legal and financial positions. An automatic BACS instruction may satisfy that test even though payment can fail in some cases. For composite supplies, the court must identify the objective economic reality. Services which are ancillary to an exempt principal service share its treatment, but independent services must be apportioned separately. An appellate court should show circumspection before interfering with a tribunal’s fact-and-degree assessment.

Denplan, a subsidiary within the Axa group, operated dental payment plans. It collected monthly payments from patients by direct debit through BACS, deducted its fees and insurance premium, and paid the balance to dentists. The monthly fees were charged to dentists.

Axa UK appealed HMRC’s refusal of a VAT repayment claim and VAT assessments. The VAT and Duties Tribunal held that the payment-handling service would be exempt if supplied separately, but that the monthly fee covered several supplies. It treated payment handling as principal, some services as ancillary, and required apportionment. HMRC appealed on exemption and characterisation. Axa cross-appealed against apportionment.

1. First issue: payment-handling exemption. The appeal was dismissed on the exemption issue. The relevant wording of Article 13B(d)(3) of the Sixth Directive and Group 5 of Schedule 9 to the Value Added Tax Act 1994 was materially the same.

2. Following Sparekassernes Data Center (SDC) v Skatterministeriet [1997] STC 932, the test was functional. The supplier’s identity and the absence of a direct contractual relationship with the ultimate customer were not decisive. The service had to form a distinct whole and fulfil the specific and essential functions of a transfer.

3. The causal test was satisfied where Denplan’s instructions to BACS automatically brought about a payment. The possibility that a direct debit might be cancelled, refused for insufficient funds, or otherwise fail did not prevent the service from effecting transfers in cases where payment was made. Customs & Excise Commissioners v FDR Ltd [2000] STC 672 supported that conclusion. The two stages—patient to Denplan and Denplan to dentist—were treated alike. The agency relationship did not alter the VAT analysis.

4. The court rejected an attempt to confine the exemption to banking functions. Bookit Ltd v Revenue & Customs Commissioners [2006] EWCA Civ 550 showed that an external supplier could effect a transfer by supplying information which, within the contractual framework, inevitably caused the bank to make it.

5. Second issue: composite supply. The cross-appeal was dismissed. The monthly fee was consideration for all services supplied to dentists with registered plan patients. Payment handling was the principal service. Reports of payments and non-payments, chasing non-payments, block re-registration, and updating patient addresses were ancillary. Use of the member-only website, use of the trademark, guidance on buying and selling goodwill, and other independent support services were not ancillary and required apportionment.

6. The court accepted the Tribunal’s conclusion subject to those minor points of detail. The agreed apportionment therefore stood. If the parties could not agree a revised apportionment, the matter would be remitted to the Tribunal.

• VAT and Duties Tribunal: The Tribunal decided that the payment-handling service would be exempt if supplied separately, treated payment handling as the principal service, and directed apportionment of the monthly fees.
• High Court (Chancery Division): The appeal and cross-appeal were dismissed. The Tribunal’s conclusion was upheld subject to specified points of detail.