Target Group Limited v The Commissioners for HMRC

A loan account is not a current account merely because it records debits and credits or operates as a running account. A current account permits deposits and withdrawals in varying amounts and, unlike a deposit account, permits payments to third parties. A loan account recording repayment of a fixed loan does not have those features.

A service is a transaction concerning payments or transfers under Principal VAT Directive article 135(1)(d) only if the supplier itself effects the legal and financial changes characteristic of a transfer. Giving BACS instructions, however essential and automated, is administrative where the banks effect the transfers. Ledger entries which record payments made elsewhere likewise do not effect transfers.

Target Group Limited supplied Shawbrook Bank Ltd with outsourced loan-administration services. It operated borrowers’ loan accounts, calculated and collected repayments, generated BACS direct-debit instructions, dealt with arrears, and recorded payments and charges.

HMRC ruled that the composite supply was taxable. The First-tier Tribunal dismissed Target’s appeal, holding that the supply was debt collection and therefore excluded from exemption: [2018] UKFTT 0226 (TC). Target appealed to the Upper Tribunal.

The principal issues were whether the loan accounts were current accounts and whether Target’s services were transactions concerning payments or transfers under article 135(1)(d) of the Principal VAT Directive.

1. Appeal dismissed. The services were standard-rated and did not fall within article 135(1)(d) of the Principal VAT Directive.

2. The borrowers’ accounts were loan accounts, not current accounts. A running account simply records the parties’ mutual debit and credit position. It is not thereby a current account. The essential features of deposit and current accounts include the customer’s ability to deposit and withdraw varying sums. A current account also enables payments to third parties. The borrowers could pay only the sums permitted by their loan agreements, could not withdraw those sums, and could not pay third parties from the accounts.

3. The different treatment of a lender’s own management of a loan account did not create an inconsistency. Management of credit is exempt under article 135(1)(b) only when supplied by the person granting the credit. That exemption did not extend to Target’s outsourced services.

4. Following [2018] STC 1615, a supplier does not effect a payment or transfer merely by instructing BACS or another financial institution. The relevant legal and financial changes occur when the borrower’s bank debits, and Shawbrook’s bank credits, the relevant accounts. Automation and the indispensability of Target’s instructions did not alter that conclusion.

5. Target’s entries in the loan ledgers also did not effect transfers. They recorded the consequences of payments effected between bank accounts elsewhere. It was therefore unnecessary to determine whether the services would additionally have been excluded from exemption as debt collection.

6. Any costs application had to be made under rule 10 of the Tribunal Procedure (Upper Tribunal) Rules 2008.

• Upper Tribunal (Tax and Chancery Chamber): dismissed Target’s appeal and upheld the taxable treatment of its services: [2019] UKUT 340 (TCC) .

• First-tier Tribunal (Tax Chamber): dismissed Target’s appeal against HMRC’s ruling. It held that the composite supply was debt collection and was excluded from exemption: [2018] UKFTT 0226 (TC).