Target Group Ltd v Commissioners for His Majesty's Revenue and Customs

The VAT exemption for transactions concerning payments or transfers applies only where the supplied services themselves execute the transfer of funds and produce the characteristic change in the parties’ legal and financial positions. Giving instructions which automatically and inevitably trigger payment is insufficient. Causation, necessity and indispensability do not replace functional participation in execution.

Accounting entries may effect an exempt transfer when they themselves establish or transform legal rights. Entries which merely record expected payments, remain reversible or reflect transfers effected by others do not qualify. The identity of the supplier or recipient and the electronic or automated manner of performance do not determine exemption under article 135(1)(d) of the Council Directive 2006/112/EC.

Target administered mortgages and loans made by Shawbrook Bank Limited. Its services included maintaining loan accounts, generating BACS direct-debit instructions, processing payments and arrears, and recording debits and credits. Target claimed that its services were exempt from VAT as transactions concerning payments, transfers or debts under article 135(1)(d) of the Council Directive 2006/112/EC.

The First-tier Tribunal held that the supply included transactions concerning payments or transfers, but was taxable because its predominant nature was debt collection: [2018] UKFTT 226 (TC). The Upper Tribunal instead held that merely instructing financial institutions did not fall within the exemption and that the loan-account entries did not alter legal or financial positions: [2019] UKUT 340 (TCC). The Court of Appeal dismissed Target’s appeal: [2021] EWCA Civ 1043.

The principal issue before the Supreme Court was whether automatically effective payment instructions or entries in borrowers’ loan accounts constituted transactions concerning payments, transfers or debts. Questions concerning debt collection and management of credit arose only if Target succeeded on that issue.

1. Appeal dismissed. Lord Hamblen, giving the unanimous judgment of the court, held that Target’s services did not fall within article 135(1)(d) of the Council Directive 2006/112/EC. The questions concerning debt collection and management of credit therefore did not arise.

2. The governing law remained that stated in SDC, as clarified by the later CJEU decisions, especially Bookit II, NEC and DPAS. A service must itself execute or materialise the payment or transfer. Viewed broadly as a distinct whole, it must have the effect of transferring funds and changing the relevant legal and financial positions. It must perform the specific and essential functions of the financial transaction.

3. Necessity and causation are insufficient. A service does not qualify merely because it supplies an indispensable instruction, triggers an automatic process or inevitably leads to payment. Functional participation and performance in the execution of the transfer are required. This narrow interpretation accords with the strict but fair construction of VAT exemptions and with the exemption’s concern with financial transactions.

4. The wider causation-based interpretation adopted in FDR was wrong. Domestic law had taken a wrong turn, and the conclusion in paragraph 42 of that judgment was overruled. No material distinction depended on whether payment-related services were supplied to a bank, a financial institution or a retailer. The functional nature of the service remained decisive.

5. Target generated BACS files and passed the information needed for instructions to reach the borrowers’ and Shawbrook’s banks. It thereby triggered the chain leading to payment, but did not itself execute the transfer, alter the parties’ legal and financial positions or assume responsibility for achieving payment. Its role was functionally indistinguishable from that considered in DPAS and remained a prior administrative step.

6. Accounting entries can, in principle, effect an exempt transfer. ATP illustrated this where entries themselves transformed a worker’s claim against an employer into rights against a pension fund. Target’s entries were different. They provisionally recorded expected payments, were reversed when payment failed and merely reflected transfers effected by others. They neither transferred ownership of funds nor changed any party’s rights. Momm, concerning completed transfers between customers of one bank, was materially distinguishable.

1. United Kingdom Supreme Court: The court unanimously dismissed Target’s appeal and affirmed that its services were outside the article 135(1)(d) exemption: [2023] UKSC 35.
2. Court of Appeal: The court dismissed Target’s appeal and upheld the Upper Tribunal’s conclusion on the principal exemption issue: [2021] EWCA Civ 1043.
3. Upper Tribunal: The tribunal held that Target’s payment instructions and loan-account entries did not qualify for exemption and that its supplies were standard-rated: [2019] UKUT 340 (TCC), [2020] STC 1.
4. First-tier Tribunal: The tribunal held that the supply included transactions concerning payments or transfers, but that its predominant nature was excluded debt collection: [2018] UKFTT 226 (TC).