Mr Justice Henderson :
Introduction
- Denplan Limited ("Denplan") is a company which provides a range of administrative and support services to dentists, including payment handling services in respect of payment plans under which a patient agrees to pay his or her dentist a fixed monthly sum in return for a specified level of dental care each year. Denplan agrees with the dentist to collect the payment from the patient by direct debit and, after paying an insurance premium to a group company to cover emergency treatment and deducting its own fee, transfers the balance to the dentist. The payments by the patients to Denplan and by Denplan to the dentist are both made through the BACS system. Denplan charges the dentist a fee amounting on average to 71p for each monthly payment that is actually made by the patient and received by Denplan. It is the treatment of these fees for VAT purposes which is in dispute in the present case.
- Denplan is a subsidiary of Axa PPP Healthcare Group Plc, and is a member of a VAT group of which Axa UK Plc ("Axa UK") is the representative member. Accordingly it is Axa UK which is a party to these proceedings. However, it is often convenient to refer to Denplan as if it were the appellant, and that is the course which the VAT and Duties Tribunal ("the Tribunal") followed in their decision ("the Decision") which they released on 12 September 2007 after a hearing on 16 and 17 August 2007 at the London Tribunal Centre. The Tribunal was chaired by Dr John Avery Jones CBE. The other member was Ruth Watts Davies MHCIMA, FCIPD.
- The matter came before the Tribunal by way of an appeal by Axa UK against (1) a decision issued on 21 June 2006 by HMRC, refusing a claim for overpaid VAT for the quarterly periods 03/02 to 12/04, and (2) assessments made by HMRC on 27 September 2006 in respect of the periods 03/05 to 03/06. Both the decision and the assessments related to the same underlying dispute, and for present purposes nothing turns on their details. The representation of the parties before the Tribunal was the same as it has been before me, with Jonathan Peacock QC appearing for Axa UK and Rupert Anderson QC and Alan Bates of counsel appearing for HMRC.
- There were two main issues on the appeal to the Tribunal. The first was whether the monthly fees charged by Denplan fall within the exemption for the provision of financial services contained in Group 5 of Schedule 9 to the Value Added Tax Act 1994 ("VATA 1994"), and in particular within item 1 (which exempts "The … transfer or receipt of, or any dealing with money") or item 5 (which exempts the provision of "intermediary services" in relation to item 1 transactions by a person "acting in an intermediary capacity"). These exemptions reflect, and incorporate into UK domestic law, directly effective provisions of EU law which at the relevant times were contained in Article 13B(d) of Council Directive 77/388/EEC on the harmonisation of the laws of the member states relating to turnover taxes ("the Sixth Directive"), paragraph 3 of which exempts:
"transaction[s], including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring."
It is common ground, incidentally, that although paragraph 3 of the English text uses the word "transaction" in the singular, this is a typographical error and the word should be read as if it were in the plural.
- The second main issue was whether the services provided by Denplan in return for the monthly fees constituted a composite or multiple supply, and if the former whether the composite supply was taxable or exempt.
- The Tribunal decided on the first issue that if the payment handling service provided by Denplan stood on its own it would be exempt. On the second issue, they held that Denplan's services were not a single composite supply but a number of separate supplies of which payment handling was the principal one. They held that the other supplies could not all properly be regarded as ancillary to the principal supply, with the consequence that it was necessary to apportion the monthly fees. They adjourned the hearing to enable the parties to discuss the appropriate apportionment, with liberty to apply for a resumed hearing if the discussions did not produce agreement.
- On the footing that the Tribunal's decision is correct, the parties have been able to agree an apportionment such that 90.18% of the fees would be exempt and 9.82% taxable. However, neither side considers that the Tribunal's decision is correct. HMRC appeal on both issues, contending (in outline) that (a) the payment handling service, viewed in isolation, is not exempt, and (b) even if any of the supplies provided by Denplan do fall within the exemption, they are merely ancillary to the other taxable supplies provided by Denplan in return for the monthly fees, with the result that they form part of a single composite taxable supply. By a Respondent's Notice dated 21 November 2007, Axa UK cross-appeals on the second issue, contending that the Tribunal was wrong to direct an apportionment, and the monthly charge relates wholly to payment handling services which are exempt.
- I should add that I have described Axa UK's contention as a cross-appeal, because it seems to me that in substance that is what it is. Axa UK are not merely asking the appeal court to uphold the decision of the Tribunal on different or additional grounds, although that is what the Respondent's Notice says, because they do not in fact agree that the fees should be apportioned, and they are therefore contending that the Tribunal's decision was (to that extent) wrong.
Facts
- The primary facts found by the Tribunal are set out in 16 numbered sub-paragraphs of paragraph 3 of the Decision. The Tribunal heard oral evidence from Mr Steve Cross, the finance director of Denplan, and were provided with four binders of documents. For convenience, I will now set out their main findings:
"(1) The background is that in the last ten years the number of dentists prepared to treat patients for the NHS scale of fees has reduced and dentists have moved to treating patients privately. The result is that the dentist sees fewer patients at a higher rate enabling him to spend longer with each patient. [Denplan] was formed in 1986 and assists this change by enabling patients to pay a fixed monthly fee for their private treatment. [Denplan] was taken over in 1993 by the Private Patients Plan Limited and is now a subsidiary of Axa PPP Healthcare Group Plc.
(2) The current split of dental patients is that 61% pay under the NHS system, 24% pay privately per visit, 10% pay under a plan covering preventative care only, and 6% by a plan covering all treatment.
(3) A dentist whose patients wish to participate in one of [Denplan's] plans must first register with [Denplan] as a member for a one-off fee of £60 (£50 if the dentist is a member of certain bodies). The dentist must submit a self-assessment of his practice (dealing with such matters as disabled access, equipment and facilities, infection control and sterilisation procedures, patient records, management of collapse, radiography, practice management and practice administration) with the application, which must be approved by [Denplan] before he can register. Having registered there is no obligation on the dentist to take any further services from [Denplan].
(4) The next step is for the dentist to set up a registration facility, for which he pays a one-off fee of £35. At this stage this merely records the dentist's details including bank details and forms the basis for registration of patients who take out plans. Again, there is no obligation on the dentist member with a registration facility to take any further services from [Denplan].
(5) Thirdly, the dentist may enter into contracts with patients and register patients on a plan (to whom we shall refer as "plan patients"). The available plans are Denplan Care (its core product), covering all treatment and including an insurance element to cover emergencies; Denplan Essentials covering only routine care and also insurance for emergencies; and Denplan Essentials for Children (enabling children to be registered separately from their parents; the other plans enable children to be included in a family plan). The patient contracts with the dentist for one of these plans for a year for a monthly charge set by the dentist. For Denplan Care there are five categories depending on the patient's dental condition each with different fees. There is no contract between [Denplan] and the patient. The patient also contracts to pay the annual charge by monthly payments plus an additional month's charge for his registration with [Denplan], which includes his name, address, dental records and other details. Alternatively a patient can pay an annual amount in advance by direct debit, in which case instalments are paid monthly to the dentist and meanwhile [Denplan] holds the money on the terms of an express declaration of trust in favour of the dentist.
(6) The monthly charge for [Denplan's] services paid by the dentist to [Denplan] varies according to the number of patients registered with plans. In 2003 this varied between 21p (2000 or more patients in plans per dentist) to £1.63 (up to 25 patients) with an overall average per patient of 71p. The insurance cost is a fixed £1.26. The fee and insurance premium is taken by [Denplan] out of money collected from patients before accounting to the dentist. Accordingly, if no payment is made by the patient, for example because there was no money in his bank account out of which to take the direct debit, no fee would be paid by the dentist to [Denplan].
(7) [Examples are given of the income derived by Denplan in 2003 from various sources, including membership fees, registration fees, monthly fees and insurance, and insurance commission].
(8) The mechanism of payment is that the patient completes a direct debit mandate at the same time as joining a plan, which [Denplan] enters on its computer and lodges the bank account details with the patients' banks. [Denplan] creates a BACS file (day 1) and sends it to BACS to instruct it to collect fees from patients. If payment is not received it receives a report of unpaid amounts (day 5) and writes to patients requesting payment. Upon receipt of the direct debit payments (day 3) it reconciles the payments received with payments to be made to dentists (day 10). It creates a BACS file for the payments to dentists and sends this to BACS (day 14). It sends out a report of payments and unpaid amounts to the dentists (day 15) and the dentist receives payment (day 16). The monthly report of payments and non-payments also analyses total patient registrations, a breakdown of Denplan Care patients into each of the five categories and the fees, percentage and number of patients in each, a list of new registrations, a list of implants rebate payments, change[s] of address, and a full patient list showing for each patient the fees collected that month, [Denplan's] fees and the net amount due to the dentist.
(9) [Denplan] provides other services to dentists who are members, including Denplan Excel Quality for which the dentist pays a separate joining fee and monthly fee. The dentist is required to comply with items not included in the quality assurance programme. Patients are given a score out of 100 for their oral health. This enables better communication between the dentist and the patient through a patient questionnaire mailed to the patients every 24 months. [Denplan] also provides courses on practice care for member dentists [for] which fees are charged, and bespoke courses are also arranged.
(10) Denplan Enhance is a plan available to non-members under which the dentist can offer a payment plan for expensive treatment by a third-party finance house offering an interest-free loan for periods up to 36 months for which [Denplan] receives a commission for acting as an intermediary. The patient pays off the loan by monthly instalments. The dentist receives a discounted figure for his full fee depending on the period of the loan [details of the discount are then given].
(11) Not all dentists solely becoming members or becoming members plus setting up a registration facility have plan patients. Currently 15% … are members with no registration; and 2% … have membership and a registration facility but no plan patients. The remaining 83% … are members with registration and have plan patients. About 50 dentists who have registered or set up a registrations facility but without any plan patients will be in process of setting up patients' plans. No analysis of the rest has been made but some will be still practising and presumably expecting to sign patients with plans, and some will be retired since membership is for a one-off payment and continues when the dentist retires.
(12) The relationship between the dentist and [Denplan] is governed by the Rules of Denplan of which there are 2003 and 2006 versions. The Denplan rules provide:
(a) Membership requires the completion of an application form and a Self-Administered Practice Assessment and payment of the membership fee.
(b) A registration facility is a facility for registering contracts with the dentist's patients for which a registration charge is made. A dentist may have separate registrations for different locations or for different assistants.
(c) [Rule 6.1 of the 2003 Rules is here set out in full].
(d) The 2006 Rules are in more modern language but are essentially the same except that for financial services reasons insurance is now dealt with under a separate heading …
(e) When [Denplan] collects charges and fees and gives notices of changes in fees and other administrative matters it acts as the member's agent and is deemed to have all necessary authority for that purpose.
(f) Members may change their fee rates for plan patients on 1 January only.
(g) [Denplan] provides complaint handling and arbitration services for the resolution of disputes arising from care and treatment provided to registered patients.
(h) Fees collected by [Denplan] from patients are held on behalf of members but they are permitted to deduct any amounts due to [Denplan].
…
(13) Although not included in the Rules, [Denplan] provides a survey to assist members in setting fees by collecting information from members and providing averages broken down by postcodes. The guide to setting your fees in 2007 sets out other services provided by [Denplan]: provision of a dedicated practice support team; access to regional and key client consultants; access to the Denplan patient team; contribution to the Denplan quality programme; receipt of the Update magazines; access to the Denplan's risk management service; marketing support; and invitations to Denplan events (clinical, hospitality or networking) for some of which separate charges are made.
(14) Also not mentioned in the Rules is a buying club available to members in which suppliers offer discounts on mainly, though not exclusively, dental products. The member's details are also advertised on [Denplan's] website, and the member has access to the members-only part of the website, which includes a forum.
(15) Associated with the goodwill transfer service is the provision by [Denplan] of guidance to the buying and selling of goodwill.
(16) The relationship between the dentist and the patient in a plan is governed by the Denplan Contract and the Care Agreement. There are different contracts for Denplan Care and Denplan Essentials. [Denplan] describes its role as being "to provide administrative services to support the contract between you and your dentist. This includes passing your payments on to your dentist on a regular basis." The contract provides for the treatment included in the plan, what is covered by the insurance policy, the initial registration charge and the monthly payment, which is reviewable on 1 January in every year. Included with the registration form is a direct debit instruction to the patient's bank."
- Rule 2 of the 2003 Denplan Rules sets out the objectives of Denplan in the following terms:
"The objectives of Denplan are: to encourage and facilitate the carrying out of private general dental practice; to promote among members the best standards of their profession and the provision by them of preventive dental care and dental treatment of the highest standard to the benefit of all their patients and to enhance generally the reputation and goodwill of Denplan and its members."
- Rule 6.1, which the Tribunal cite in paragraph 3(12)(c) of the Decision, reads as follows:
"Subject to the payment of Denplan's charges, in respect of contracts registered under a registration facility allocated to him or her, a member is entitled to receive the following services from Denplan:
(a) maintenance of a database containing details of the member's registered patients;
(b) collection from registered patients on the member's behalf of initial registration charges and capitation fees;
(c) provision of regular monthly reports detailing registrations and capitation transactions carried out on the member's behalf;
(d) remittance of money held by Denplan due to the member;
(e) giving of notices on the member's behalf to registered patients concerning changes in capitation fees and other administrative matters arising; and
(f) maintenance of insurance (on such terms as Denplan considers appropriate) for the benefit of his of her registered patients against the cost of emergency care and treatment for dental injury."
The Tribunal explain in paragraph 3(12)(c) that the reference to "capitation fees" is a reference to the additional monthly fee paid by the patient for registration with Denplan.
- Rule 8.1 of the 2003 Rules provides that Denplan's fees and charges are published by Denplan from time to time, and that Denplan will give at least three months' notice of any change.
- In the 2006 Rules, Rule 5(a) says that:
"The following payment handling services are administered by Denplan",
and then lists five services in terms which are materially identical to paragraphs (a) to (e) of Rule 6.1 in the 2003 Rules. The Rule no longer says that provision of the services is subject to the payment of Denplan's charges. Insurance is now dealt with in Rule 6, and Rule 6(a) corresponds with the former Rule 6.1(f). Rule 2(e) provides that continued membership is subject to the payment of Denplan's charges in respect of contracts under a registration facility allocated to the member, and Rule 5(e) provides that Denplan will give at least three months' notice of any change to its published fees and charges.
- In his witness statement Mr Steve Cross describes the history of Denplan, and says (paragraph 22) that it operates a range of services for dentists, all of which are designed to support the operation of their practice. The most significant service offered is the operation of payment plans for dental practices:
"The concept of this service is to create a system that simplifies administration and allows dentists to spend more time with their patients and less time on paperwork."
He goes on to say that Denplan fulfils these objectives by providing a variety of goods and services to dentists once they have signed up to be a member of Denplan. Denplan's products and services are only provided to dentists who have successfully completed the membership process, details of which he then sets out.
- Mr Cross goes on to describe the registration facility which Denplan undertakes to provide in return for a one-off registration fee of £35:
"36. There is a one-off charge to the dentist of £35 for the setting up and administration of the registration facility. Although the acquisition of a registration facility will usually indicate that, at some point, a dentist would have made a strong commitment to one of the three products mentioned [i.e. Denplan Care, Denplan Essentials or Plans for Children], there is still some work for the dentist to do in signing up a patient and in some cases no patients are signed up.
…
37. In exchange for this registration fee, Denplan undertakes to provide the patient registration facility. This is the service of registering patients in a dentist's name and administering contracts of dental care between the dentist and the patient. Denplan maintains a comprehensive database of all dentists' patients and provides information from the list as and when requested by the dentists. Denplan also assists in recording the patient's name, address, dental records and other necessary details in a database and keeping these up to date with amendments as and when they arise.
…
39. Once a dentist member has paid for the establishment of a patient registration database, he/she can register patients. This, in turn, can lead to a dental payment plan to be managed by Denplan. There are three payment plans available … "
- After describing the various plans, Mr Cross refers to the fees charged by Denplan in paragraph 48 of his statement:
"If patients are signed up to one of the payment plans provided by Denplan as described above, Denplan will, on behalf of dentists, handle the process of collecting the fees from patients and paying these fees on to the dentist. A typical fee for this service (and the amount used by way of example in correspondence with HMRC) is 71p per month."
- The Tribunal record in paragraph 4 of the Decision that there was a disagreement between the parties about the relationship between the services provided by Denplan and the three types of fee charged, namely the one-off membership fee, the one-off registration facility fee, and the monthly fee. It was contended on behalf of Denplan that the monthly fee was paid solely as consideration for the monthly money transfers between the patients and Denplan and between Denplan and the dentist. The contention for HMRC, on the other hand, was that the monthly fee was paid in consideration of the total package of administration services supplied by Denplan to the dentist, including but not limited to the payment handling services. The Tribunal pointed out in paragraph 4 that, if Denplan's contention was correct, Denplan was obliged to supply a considerable number of services (which they listed) other than the money transfer services in consideration of the one-off membership fee of £35, including several services which could only be needed once a dentist had plan patients. They evidently thought, and I would agree, that such a construction of the arrangements makes little commercial sense.
- In paragraph 6 of the Decision the Tribunal stated their findings on this point as follows:
"Our finding of facts is that, even though the 2003 Rules tie the monthly fee to the money transfers, one must consider this in the context that patients cannot be registered unless the dentist is a member and has a registration facility. Where all three exist there is no reason to attribute to the membership fee facilities that are available only where there are plan patients. It is more realistic to attribute to the membership fee only those facilities that relate to members without plan patients, such as the use of the member-only section of the website and use of the trademark. We are unable to understand why a member should have a registration facility but no plan patients registered, particularly as the number in this category (214) exceeds the 50 who are likely to be in course of setting up patient plans. We suspect that they are likely to include some members who hoped to, but have failed to, persuade any patients to join a plan, and some retired dentists since the registration facility is for a one-off fee and would not terminate on retirement. Accordingly our finding of fact is that viewed realistically it is not the case that the monthly fee is solely the consideration for the money transfers. The monthly fee is consideration for all services provided to members with a registration facility and registered plan patients."
- This finding was attacked by counsel for Denplan, but in my judgment it was well open to the Tribunal to make it in the absence of any clear written contractual provision which ties the monthly fee exclusively and unambiguously to the provision of the payment services. It is a finding which seems to me to reflect the commercial reality of the matter once a payment plan has been set up and payment of the monthly fees commences. In particular, I do not read Mr Cross' evidence as saying that the £35 is paid for anything more than the initial setting up and the subsequent administration of the registration facility itself.
The first issue
- Although it might in some ways be more logical to consider first whether there was a single composite supply, and if so how it should be characterised, I am content to adopt the approach of the Tribunal and the parties and to begin with the question whether the payment handling services would be exempt on the assumption that they constituted a separate supply.
- To narrow down the issue still further, the dispute at this stage of the argument is not, as I understand it, about the VAT treatment of all of the services set out in Rule 5(a) of the 2006 Rules and there described as payment handling services (which equate to the services in Rule 6.1(a) to (e) of the 2003 Rules), but rather about the treatment of the services provided by Denplan in operating the collection of monthly payments from plan patients, processing them, and then paying the balance due to the dentist, as described in paragraph 3(8) of the Decision. In particular, the closest focus is upon the operation of the direct debit mandate set up by the patient on joining the plan, and the use of the BACS system by Denplan both to collect the monthly payments from patients and to transmit the balance due to the dentist at the end of the process.
- The completion of a direct debit mandate by a customer does not, of course, guarantee that payment will be made to the supplier of goods or services in whose favour it is made out. It is always open to the customer to cancel the mandate unilaterally, by giving notice to the bank, before a request for payment is made by the supplier. Furthermore, even if a request is made while the mandate is still in place, the bank will be entitled to refuse payment if there are insufficient funds in the customer's account. There was therefore no certainty that all of the monthly payments which plan patients had contracted to make, and in respect of which they had completed direct debit forms, would in fact be made. This familiar fact of commercial life was reflected in the provision made, as part of the arrangements between Denplan and the dentist, for Denplan to receive a report of unpaid amounts on day 5, and to write to the defaulting patients requesting payment. Details of the non-payments were also included in the monthly report sent by Denplan to the dentist.
- How the BACS system operates was not the subject of any expert evidence before the Tribunal, as both sides were understandably content to proceed on the basis of the description given by the Court of Appeal in Customs & Excise Commissioners v FDR Ltd [2000] STC 672 ("FDR") in paragraphs 23 – 25 of the judgment of Laws LJ (with whom Ward LJ and Bell J agreed). The relevant passage is quoted by the Tribunal in paragraph 15 of the Decision, and I will not repeat it. The essential point is that, as its name suggests (BACS is an acronym for Bankers Automated Clearing System), it is a fully automated system which operates over a three day cycle. As Laws LJ said at 682b:
"I do not understand it to be in controversy that once the input data are supplied by the appropriate means, the process thereafter is wholly automatic, and results in an actual transfer of money between accounts."
- The first issue turns on the proper application to the facts of the principles to be derived from four leading cases, two in the European Court of Justice ("the ECJ") and two in the Court of Appeal. The cases are, in chronological order:
(a) Case C-2/95, Sparekassernes Data Center (SDC) v Skatterministeriet [1997] STC 932 ("SDC");
(b) FDR;
(c) Case C235/00, CSC Financial Services Ltd v Customs & Excise Commissioners [2002] STC 57 ("CSC Financial Services"); and
(d) Bookit Ltd v Revenue & Customs Commissioners [2006] EWCA Civ 550, [2006] STC 1367 ("Bookit").
- Before I come on to the cases, I would make two preliminary points.
- First, it was common ground that there is no material difference between the meaning of the wording of the exemption in Article 13B(d)3 of the Sixth Directive and in paragraph 1 of Group 5 of Schedule 9 to VATA 1994, despite the considerable difference in the terminology employed. I will therefore concentrate on the wording of the Sixth Directive, not least because that is the wording which was considered by the ECJ in SDC and CSC Financial Services.
- Secondly, it was also common ground that exemptions must be construed strictly, because they "constitute exceptions to the general principle that turnover tax is to be levied on all services supplied for consideration by a taxable person": see SDC at paragraph 20 of the judgment of the ECJ. The exceptions also "constitute independent concepts of Community law which must be placed in the general context of the common system of VAT introduced by the directive": ibid. at paragraph 21. However, it does not follow from the principle of strict construction that the court is required to give to the relevant words the most restricted, or narrow, meaning which they could bear. As Chadwick LJ said in Expert Witness Institute v Customs & Excise Commissioners [2001] EWCA Civ 1881, [2002] STC 42 at paragraph 17, a "strict" construction is not to be equated, in this context, with a restricted construction:
"The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption, so that if the court is left in doubt whether a fair interpretation of the words of the exemption covers the supplies in question, the claim to the exemption must be rejected. But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question."
He went on to say in paragraph 19 that:
"The task of the court is to give the exempting words a meaning which they can fairly and properly bear in the context in which they are used."
SDC
- SDC was an association of Danish banks which provided various financial services to its members, including the execution of transfers of funds. It also provided the services to other non-member customers who were connected to its data-handling network. SDC performed its services only at the request of the member banks, their customers and other authorised persons. It undertook no legal obligation to the customers, and received all its remuneration from the banks. The issue before the ECJ was whether SDC was liable to VAT in respect of one of its four spheres of activity, namely the transfer of funds: see the opinion of the Advocate General (Colomer) at paragraphs 17 and 18, [1997] STC 932 at 937. Exemption was claimed under Article 13B(d)3 and 13B(d)5 of the Sixth Directive.
- One of the questions referred to the ECJ by the national court was whether the exemptions in question were subject to the condition that the entire service had to be performed by an institution which had a relation with the bank's end customer: see paragraph 39 of the judgment of the court, [1997] STC at 952. The court answered this question in the negative: see paragraph 59, [1997] STC at 954. In the course of discussing this question, the ECJ gave important guidance on the meaning of "transfer" in Article 13B(d)3 and the potential scope of the exemption in cases where there is no direct legal relationship between the provider of the service (SDC) and the "end customer":
"53. On this point, it must be noted first of all that a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. It is characterised in particular by the fact that it involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks and, in some cases, between the banks. Moreover, the transaction which produces this change is solely the transfer of funds between accounts, irrespective of its cause. Thus, a transfer being only a means of transmitting funds, the functional aspects are decisive for the purpose of determining whether a transaction constitutes a transfer for the purposes of the Sixth Directive.
54. In cases where the customer effects a transfer or causes a transfer to be effected without any action by the bank, the specific facts which constitute the transfer are carried out either by the data-handling centre and the customer or by the data-handling centre and a third party, the latter acting at the customer's request, or by the data-handling centre acting alone pursuant to a standing order from the customer.
55. The contractual links between the bank and the customer do not diminish the role of the data-handling centre. It is from those links that the customer derives the right to have transactions effected, even if they are invoiced as services provided to the bank and also alter the bank's financial situation.
56. Moreover, if point (3) of art 13B(d) of the Sixth Directive covered only the service which a financial institution provides to the end customer, only certain acts concerning transfer transactions could be exempt. Such an interpretation would restrict the exemption in a way which is not supported by the wording of the provision in question. That wording does not restrict the exemption to that relation and it is sufficiently broad to include services provided by operators other than banks to persons other than their end customers."
- Having quoted the above passage in paragraph 13 of the Decision the Tribunal said that SDC establishes the following propositions:
(1) A transfer is the execution of an order for the transfer of a sum of money from one bank account to another;
(2) It involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks;
(3) There is no requirement for the supplier to be a bank; and
(4) There is no requirement for a direct contractual link between the person executing the transfer and the ultimate customer of the bank.
I agree that SDC does establish those propositions, to which I would add:
(5) The test whether a transaction constitutes a transfer for the purposes of the Sixth Directive is a functional one, which asks whether the transaction in question is one which has effected the movement of money and changed the legal and financial situation of the parties. The cause of the transaction is not in itself a relevant consideration.
- The next question referred to the ECJ by the national court was whether the exemption must be granted where a person either performs only part of a complete service or carries out only some of the operations necessary for the supply of a complete exempt financial service: see paragraph 60, [1997] STC at 954. SDC submitted that this question should be answered affirmatively, but the ECJ disagreed:
"64. Given this difference of view, it must be noted first of all that the wording of point (3) of art 13B(d) of the Sixth Directive does not in principle preclude a transfer from being broken down into separate services which then constitute "transactions concerning transfers" within the meaning of that provision and which are invoiced by specifying the elements of those services. The invoicing is irrelevant for the application of the exemption in question, provided that the actions necessary for effecting the exempt transaction can be identified in relation to the other services.
65. However, since point (3) of art 13B(d) of the Sixth Directive must be interpreted strictly, the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt. The interpretation put forward by SDC cannot therefore be accepted.
66. In order to be characterised as exempt transactions for the purposes of point (3) and (5) of art 13B, the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points. For "a transaction concerning transfers", the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation. A service exempt under the directive must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank. In this regard, the national court must examine in particular the extent of the data-handling centre's responsibility vis-a-vis the banks, in particular the question whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions.
…
68. In view of all foregoing considerations the reply to be given … must be that this provision is to be interpreted as meaning that transactions concerning transfers and payments include operations carried out by a data-handling centre if those operations are distinct in character and are specific to, and essential for, the exempt transactions."
- It follows from the above reasoning, in my judgment, that a transaction can only fall within the relevant exemptions if (a) viewed broadly, it forms a distinct whole, and (b) it fulfils all the essential functions of an exempted service. Thus in the case of a "transaction … concerning … transfers" the transaction must satisfy the essential features of a transfer identified in paragraph 53 of the ECJ's judgment, or in other words it must not only have the effect of transferring funds, it must also bring about a change in the legal and financial situation of the parties.
FDR
- The basic issue in FDR was whether the exemption in Article 13B(d)3 applied to certain credit card services supplied by FDR to banks. As the Tribunal say in paragraph 15 of the Decision, the case is of particular relevance to the present case because it involves the application of the law laid down by the ECJ in SDC to the UK system where transfers are made by BACS following debit and credit card transactions.
- The facts of FDR were complex. They are very clearly and fully set out in paragraphs 3 – 22 of the judgment of Laws LJ, while a compressed summary is given by the Tribunal in paragraph 15 of the Decision. I will take the intermediate course of quoting from the headnote at [2000] STC 672:
"FDR Ltd was a company which supplied credit card services to banks. Its clients were either "issuers" (banks who issued credit cards to cardholders), "acquirers" (banks who paid merchants, normally retailers, in exchange for vouchers accepted by those merchants in payments for goods or services), or banks who acted in both capacities. In a typical credit card transaction, not involving FDR, a cardholder would hand his credit card to the merchant who then recorded the transaction [either manually or electronically]. Before the transaction was finalised, the merchant could be required to obtain the issuer's authorisation. The merchant would subsequently be paid by the acquirer, the acquirer would be paid by the issuer, and the issuer would be paid by the cardholder on presentation of a monthly account. Some banks "outsourced" their obligations in respect of such transactions to FDR. FDR maintained two accounts, the cardholder account and the merchant account. On being notified that a credit card transaction had occurred, FDR, after, if necessary, authorising the transaction, posted a credit to the merchant account and then made an entry on a magnetic tape which was supplied on a daily basis to BACS … instructing it to effect a credit in the merchant's own bank account and to create a corresponding debit in the acquirer's central accounts. FDR reconciled the accounts between issuers and acquirers on a daily basis by establishing the net position of each client bank and the net amount which needed to be transferred from or to that bank (the netting-off procedure). FDR made a payment out of its own funds to each client bank which was a net claimant and received (later the same day) a payment from each bank which was a net debtor. Those payments were made through the banking system using the CHAPS mechanism. FDR also posted a debit to the cardholder account (to which it also posted credit entries when the cardholder paid his or her monthly bill). If the cardholder had arranged to pay his bill by direct debit, FDR also provided for BACS to debit the cardholder's ordinary bank account, and credit the issuer's account, with the relevant sum."
- The first question considered by the Court of Appeal was whether FDR made transfers within Article 13B(d)3, and if so by what transactions such transfers were constituted. After reviewing SDC, and referring with general approval to a submission for the Commissioners that the concept of a "transfer" in Article 13B(d) needs to be kept within narrow bounds, Laws LJ addressed the fundamental question of what is meant by a transfer of money. Having referred to two English authorities, he said this:
"37. The value of these statements (which have, according to counsel's researches, never been doubted) is that they show that, if one leaves aside transfers in specie (of coin, goods or other property), a transfer of money means no more nor less than the entry of a credit in the payee's account and the entry of a corresponding debit in the payor's account. There may be – will be – problems in cases of error or fraud in the posting of entries to the accounts. But however those may fall to be resolved, there is no further, elusive, event by which the money is really transferred: no Platonic form, of which day-to-day transfers are only shadows. The pro and con entries constitute the transfer. There is nothing else.
…
38. If this reasoning is right it is, I think, very significant for a sensible and intelligent understanding of SDC. It demonstrates that what the Sixth Directive imports by the term "transfer" inheres in the notion of a "change in the legal and financial situation" – an expression used in both paras 53 and 66 - where that is a reference to the effects of the corresponding credit and debit entries in the accounts of the paying and receiving parties."
- Laws LJ then considered whether FDR made transfers by means of BACS, and concluded that it did. Having identified the stages (a maximum of four) in FDR's activities where BACS might be deployed, and having referred to the holding of the tribunal that the issue of instructions by FDR to BACS to notify direct debits to cardholders' banks in order to cover the amounts due to the card account was a transfer, he continued in an important passage as follows:
"42. On this aspect of the case, it is in my judgment of the first importance to recognise that BACS for its own part exercises no judgment or discretion whatever. Once the relevant tape is prepared (and that is admittedly done by FDR) and delivered to BACS, the process is, as I have said, automatic. Moreover the inevitable outcome is a redistribution of the rights and obligations of payor and payee – a "change in the legal and financial situation" – the very circumstances which in my judgment constitute a transfer of funds for the purposes of art 13B(d)(3). As far as I can see that result would only not be arrived at if the BACS hardware or software were to break down, or if (assuming this were possible) FDR were to countermand its instructions during the BACS payment cycle. In those circumstances BACS is in my judgment merely the agency by which FDR effects transfers, in the four situations I have identified. Any other conclusion would be contrary to the good sense of the general law. Qui facit per alium facit per se (he who does a thing through another does it himself). And I cannot in this see the least affront to the reasoning in SDC: quite the contrary: it is a conclusion which conforms to the letter and spirit of art 13B(d) as it was explained in that case."
- The Tribunal comment, at the end of paragraph 16 of the Decision, that the reason why FDR's instruction to BACS was, in the words of the ECJ in SDC, "the execution of an order for the transfer of a sum of money from one bank account to another" was because BACS automatically carried out the instruction and so by giving the instruction FDR was effectively executing the order itself. I agree, and would add that the Court of Appeal in FDR were not deterred from reaching this conclusion by the possibility that the BACS system might suffer a mechanical breakdown, or (assuming this to be possible) if FDR were to countermand its instructions during the BACS payment cycle. In other words, what matters is that BACS is a purely automatic agency, and where it performs its function without interruption the inevitable outcome will be a redistribution of the rights and obligations of payor and payee, and therefore a transfer within the meaning of SDC. The essential point, as I understand it, is that BACS is a system which simply does as it is told, and makes no independent input into the transaction. Thus a person who uses BACS to make a payment makes a transfer for the purposes of Article 13B(d)3 no less than a person who makes the payment in a different way. Moreover, because the inevitable result of a completed BACS cycle is a change in the legal and financial situation of payor and payee, it follows in my judgment that there will be a transfer within the meaning of Article 13B(d)3 in any case where a payment is successfully made by BACS.
CSC Financial Services
- CSC was a company which provided a call centre service for financial institutions, including Sun Alliance. For present purposes the detailed facts of the case do not matter. Sun Alliance had entrusted to CSC all communications and contacts with the public concerning a particular investment product under which investment was made by means of units in a unit trust. CSC claimed exemption for its services in respect of this investment product under Article 13B(d)5 of the Sixth Directive, which exempts "transactions, including negotiation … in shares … and other securities".
- The ECJ rejected the claim, holding that on a proper construction of Article 13B(d)5 "transactions in securities" means transactions liable to create, alter or extinguish parties' rights and obligations in respect of securities, and that "negotiation in securities" does not cover services limited to providing information about a financial product and the receiving and processing of applications for subscription, without actually issuing the securities: see paragraph 41 of the Court's judgment, [2002] STC 57 at 72.
- In reaching this conclusion, the ECJ gave guidance on the meaning of "negotiation" in the context of Article 13B(d)5:
"37. Article 13(B)(d)(5) of the Sixth Directive does not define the meaning of "negotiation in securities" for the purposes of that provision.
38. Clearly, the words "including negotiation" are not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation.
39. It is not necessary to consider the precise meaning of the word "negotiation", which also appears in other provisions of the Sixth Directive, in particular, art 13B(d)(1)-(4), in order to hold that, in the context of art 13B(d)(5), it refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product, and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other thing, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side. The purpose of negotiation is therefore to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of the contract.
40. On the other hand, it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject-matter of the contract. In such a case, the sub-contractor occupies the same position as the party selling the financial product and is not therefore an intermediary who does not occupy the position of one of the parties to the contract, within the meaning of the provision in question."
Bookit
- Bookit is another case with complicated facts. The following outline summary is based on the headnote to the report of the judgment of Sir Andrew Morritt V-C at first instance (Bookit Ltd v Revenue & Customs Commissioners [2005] EWHC 1689 (Ch), [2005] STC 1481). Bookit was a subsidiary of Odeon Ltd which owned almost 100 cinemas. It operated a call centre providing a service whereby a customer could reserve a seat for a future performance at a specified cinema and pay for it by the use of a credit or debit card. For the service it provided to the customer Bookit charged a handling charge of 50p. There were four parties to a typical transaction, namely (1) the customer, (2) Girobank Plc, (3) Bookit and (4) Odeon. The transaction involved the following steps: giving information to the customer as to availability of seats, cost of tickets, times of performances etc; taking details of customers' cards; verifying validity of cards; transmitting information to Girobank; processing payment for the seats by means of the credit or debit cards; crediting Bookit with the total amount of the price for the seats and the handling charge; and confirming the booking and payment to the customer. Bookit would pay the price of the seat to Odeon and retain the handling charge for itself. HMRC decided that the supply of services by Bookit to the customer was liable for VAT at the standard rate. Bookit appealed, contending before the tribunal that the supply was exempt as the provision of intermediary services within item 5 of Group 5 of Schedule 9 to VATA 1994. This claim was rejected by the Tribunal after two hearings, at the second of which the parties were permitted to adduce further evidence. The further findings of fact made by the Tribunal were set out in paragraphs 2 – 9 of their second decision, reproduced in paragraph 26 of the judgment of the Vice- Chancellor at [2005] STC 1490-1.
- In the Court of Appeal the leading judgment was given by Chadwick LJ, with whom Sedley and Arden LJJ agreed.
- In paragraph 35 of his judgment, [2006] STC 1367 at 1384, Chadwick LJ said it was clear, reading the first and second decisions together, that the tribunal found that the supply by Bookit to the customer included the following components:
(i) obtaining the card information with the necessary security information from the customer;
(ii) transmitting that information to the card issuers;
(iii) receiving the authorisation codes from the card issuers; and
(iv) transmitting the card information with the necessary security information and the card issuers' authorisation codes to Girobank.
- Chadwick LJ then continued in paragraph 36 of his judgment:
"The Vice-Chancellor pointed out that the effect of the supply by Bookit to the customer of services having the fourth of the components identified by the tribunal – the transmission of the card information, the security information and the card issuers' authorisation codes to Girobank – was that the price of the ticket and the card handling fee was transferred from the customer (in the case of a debit card transaction), or from the card issuer (in the case of a credit card transaction), to Bookit's account with Girobank. That is what clause 3.1.1 of the MSA [the Merchant Services Agreement entered into between Girobank, Odeon and Bookit] required Girobank to do on receipt of the card transaction data."
It was the tribunal's failure to appreciate that this was a necessary incident of the supply of services by Bookit to the customer which had led the Vice-Chancellor to observe in paragraph 53 of his judgment that "having admitted further evidence, [the tribunal] did not sufficiently revisit their earlier conclusion".
- On its appeal to the High Court, Bookit widened the scope of its contentions and based its primary case on Article 13B(d)3, "transactions concerning … payments, transfers …". That is of course the same wording that Denplan primarily relies upon in the present case. Having reviewed the main authorities, including in particular SDC, FDR, and CSC Financial Services, the Vice-Chancellor accepted this submission and allowed the appeal. He based his reasoning on the arrangements made for the payment or transfer of the price of the ticket and the card handling fee from the customer (or its card issuer in the case of a credit card) to the account of Bookit with Girobank, pursuant to clause 1.1 of the MSA, and the contrast between that payment on the one hand and the subsequent payment or transfer of the ticket price from Bookit's account with Girobank to the account of Odeon pursuant to clause 2.1.2 of the MSA. In paragraph 51 of his judgment, [2005] STC at 1498, he said this:
"Applying these principles I would reject the claim of Bookit insofar as it is based on the second payment to which I have referred … The payment by Bookit to Odeon was the necessary consequence of the fact that it was the agent of Odeon for the purpose of selling the cinema tickets. But the same cannot be said of the first payment. As is emphasised in para 3.2 of the MSA that payment was made to Bookit for and on its own account. It was a payment for and on behalf of the Customer. It did alter the legal and financial situation. The card handling services provided by Bookit to the Customer were more than technical or electronic assistance but were the essential preliminaries to any remote payment by the Customer being effected. They were not rendered as a party to the contract between the Customer and Odeon, nor as the sub-contractor of either of them. They were separately remunerated by the card handling fee paid by the Customer. They constituted activities distinct from those of any other party."
- The Court of Appeal upheld the decision of the Vice-Chancellor for essentially the same reasons. They rejected the submission that the Vice-Chancellor had trespassed upon the fact finding role of the tribunal, and agreed with him that the inclusion of the fourth component of the service supplied by Bookit to the customer (i.e. the transmission of the card information, the security information and the card issuers' authorisation codes to Girobank) led inevitably to the conclusion that the services supplied by Bookit "did have the effect of transferring funds, and did entail changes in the legal and financial situation": see paragraph 44 of the judgment of Chadwick LJ. He then continued:
"45. It was because the fourth component of the service supplied by Bookit to the customer does have the effect that funds are transferred to Bookit's account with Girobank – in accordance with the obligations of Girobank under clause 3.1.1 of the MSA – that the Vice-Chancellor reached the conclusion that the exemption for which art 13B(d)(3) provides was available in the present case. In my view he was correct to do so.
46. It was submitted on behalf of the Commissioners that the transfer of funds to the credit of Bookit's account with Girobank was a matter of no importance to the customer; and, in particular, that the customer was unlikely to be aware of – and would probably be indifferent to – whatever arrangements or obligations might exist between Bookit and Girobank under the MSA. I accept that the machinery by which payment would be effected is unlikely to have been in the mind of the customer when he requested and accepted services from Bookit. But, as it seems to me, there can be no doubt that, in requesting and accepting Bookit's services, the customer contemplated and intended that some payment would be made which would enable him, on his attendance at the cinema of his choice, to collect the tickets which he needed; and intended that Bookit would arrange for that. The services which Bookit supplied – as identified by the tribunal – did have the effect which the customer contemplated and intended that they would have. The fact that the customer was indifferent to the machinery by which that effect was achieved seems to me irrelevant. The relevant questions are (i) what services were supplied by Bookit to the customer, and (ii) did those services attract the exemption for which art 13B(d)(3) provides. As I have said, I am of the view that the answers which the Vice-Chancellor gave to those questions were correct."
The reasoning of the Tribunal on the first issue
- It is clear from paragraphs 17 and 18 of the Decision that the Tribunal regarded Bookit as an important authority in the context of the present dispute for at least two reasons. First, it confirmed that the exemption in Article 13B(d)3 may be available to an external body which does not itself operate within the banking sphere. Secondly, they saw the availability of the exemption as turning on the fact that Girobank was required to effect a transfer (within the meaning of SDC) once the authorisation codes and card details had been supplied to it by Bookit. In this respect they considered Bookit to be on all fours with FDR as they said at the end of paragraph 17:
"Accordingly, just as in FDR sending the file to BACS effected the transfer, here sending the file containing the card details and the issuers' authorisation codes to Girobank effected the transfer because Girobank was required to act on the information by crediting Bookit's account."
To similar effect, they said at the end of paragraph 18:
"Bookit therefore establishes that by passing the card information together with the card authorisation codes to Girobank, the acquirer bank, Bookit, an outsider to the banking system, made the transfer. Bookit's role was somewhat similar to FDR's."
I would only add that the decision in Bookit does not in my judgment depend on Bookit itself having actually "made" the transfer. It is enough that the information and other material transmitted by Bookit to Girobank had the effect of causing a transfer to be made by Girobank to Bookit in accordance with the provisions of the MSA.
- In paragraph 19 the Tribunal noted that, on the basis of the facts found in Bookit, the payment made by Girobank to the credit of Bookit's account might subsequently be reversed if the customer's bank did not pay. They pointed out that this possibility appeared to relate to debit card transactions only, because with a credit card payment the initial debit by Girobank would be made to the card issuer and not to the customer. They commented that "this potential reversal of payments did not mean that Bookit had not made the transfer". In my view that comment is plainly correct, subject to the point that it would in my view be more accurate to say that Bookit had effected or brought about rather than made the transfer. However, it needs to be remembered that there is a distinction (which may or may not be relevant) between cases where a transfer is subsequently reversed by another transfer and cases where no transfer is made in the first place, for example where a direct debit mandate has been cancelled before a request is made for payment pursuant to the mandate, or where there are insufficient funds in the customer's account when the request is made. Unlike the present case, Bookit was not concerned with the direct debit system.
- In paragraph 21 the Tribunal summarised the principles which they derived from the authorities as follows:
"Accordingly the authorities establish that an outsider to the banking system who gives an instruction to a party within the banking system, such as BACS, which is bound to carry it out automatically, is itself effecting the transfer and is making an exempt supply."
This principle was disputed by counsel for HMRC, but as I shall explain I consider that it is established by the authorities to which I have referred.
- The Tribunal then went on to consider, and reject, HMRC's contention that the facts of the present case do not fall within that principle. It will be simplest if I set out this part of the Decision in full:
"22. Mr Anderson contends that the facts of this appeal do not fit that conclusion. He says that payment is automatic only if the patient has not cancelled the direct debit with the patient's bank, and if there are funds in the patient's account. The position in Bookit was different because the authorisation code was binding. However, it seems from paragraph 19 above that in Bookit although payment was initially made it might be reversed. FDR is closer factually because FDR was initiating direct debits by BACS, but Mr Anderson contends that FDR's position was different from [Denplan's] because it was supplying its services to the banks, not to customers of the banks.
23. On the facts of this case [Denplan] initiated the BACS payment which resulted in receipt by [Denplan] on day 3 of the cycle. If payment is not made by the customer [Denplan] receives a report of unpaid amounts on day 5. Once the file is sent to BACS payment is automatic in the sense that BACS does not have any discretion about payment. Unlike Bookit, here there is not initial payment and then reversal if the customer's bank does not pay. By the beginning of day 3 of a BACS payment cycle one knows whether the customer's bank will pay and so [Denplan] either receives payment on day 3 or a report of amounts unpaid on day 5.
24. We do not consider that the position can be different depending on whether payment is initially made and then reversed, or if it is not made in the first place. The BACS cycle takes three days and the transaction is not complete until then. The essential point is that, leaving aside cases where something goes wrong, the action of [Denplan] in sending the file to BACS causes the payment to be made automatically from the patients' banks to [Denplan's] bank by day 3. In those cases where something goes wrong and there is no payment by the patient to [Denplan], no fee is charged by [Denplan] to the dentist, and so there is no supply for VAT, and this is something that can be ignored.
25. Does it make any difference, as Mr Anderson contends, that [Denplan] is initiating the transfer on behalf of the dentists, for whom it receives the money as agent, and is therefore providing a service to the dentists, rather than, as in FDR, to the banks? In SDC, as in FDR, the company was supplying a service to the banks which had the effect, as the result of the contractual position between the customer and his bank, of making a transfer that affected the legal and financial position of the bank's customer. In Bookit the company was supplying services to the cardholder for which the cardholder paid an additional fee, so this is a case of supplies otherwise than to a bank.
26. We consider that [Denplan's] making the supply to the bank's customer, the dentist, strengthens the case for exemption rather than weakening it. The Danish Ministry's argument in SDC at [52] was that the supply was to the bank and not to the end customer ("provided to the customer in the bank's name," which we understand to mean that the contractual relationship was with the bank only), about which the Court concluded at [57] that "an interpretation restricting application of the exemption provided for by point (3) of art 13B(d) to services provided directly to an end customer is unfounded." If the service had been supplied directly to the end customer and had the result of affecting the customer's legal and financial situation, there is no doubt that the exemption would have applied. Here [Denplan] is supplying services to the customer, the dentist, for whom it receives the money as agent.
27. We do not consider that this agency relationship affects the position. It is factually different from Bookit, in which Girobank had no obligation to Odeon although Odeon was also a party to the Merchant Services Agreement. Here BACS' obligation is to [Denplan] and BACS does not know that [Denplan] will hold the money as agent for the dentists after taking its charges. The net result is similar and what the recipient does with the money is of no concern to Girobank or BACS respectively. It would be an extremely odd result if, as Mr Anderson contends, the agency relationship meant that the transfer was complete when [Denplan] receives the funds and the transfer to the dentists is outside any exemption. That transfer is effected in exactly the same way as the transfer from the patients to [Denplan] by sending a BACS file for processing.
28. Accordingly, we conclude that the transfer is within the principal of SDC as forming "a distinct whole, fulfilling in effect the specific, essential functions of a service described" in the exemption for transfers, and having "the effect of transferring funds and entail[ing] changes in the legal and financial situation." We consider that factually our case is one where the transfer is made jointly by [Denplan] and BACS, which is a data-handling centre, rather than BACS acting on a standing order from [Denplan] because there is no existing instruction by [Denplan] to BACS; it is [Denplan's] instruction to BACS that initiates the transfer. If the payment handling service stood on its own it would be exempt."
HMRC's submissions on issue 1
- In their skeleton argument counsel for HMRC submit that the fundamental question in this appeal is whether or not the calling for money by one trader ("trader A") on behalf of another trader ("trader B"), from trader B's customers' bank accounts pursuant to a direct debit mandate which those customers have signed, constitutes the provision by trader A to trader B of a service which has "the effect of transferring funds and entails changes in the legal and financial situation". The Tribunal answered that question affirmatively, but in HMRC's submission their answer was wrong. The calling for funds under a direct debit mandate does not in itself effect a transfer. Rather, it is the making of a request to the debtor's bank, via the BACS computer system, for the funds in question to be so transferred. The request will not necessarily lead to funds being transferred, because the debtor's bank may refuse the request for any one of a number of reasons (e.g cancellation of the mandate, closure of the account, or insufficiency of funds).
- Accordingly, it was submitted, the making of the request for a transfer does not effect a transfer of funds. Any transfer which takes place in response to the request is effected by entities carrying out functions within the banking system; in particular, by the debtor's bank and BACS Ltd (the company owned by the major UK banks which provides the BACS computer system), as well as by any companies to which those parties have subcontracted specific elements comprised in the overall financial service of effecting the transfer.
- Many traders (such as utility and telecoms companies, clubs, charities, and other collectors of regular payments) now accept payments by direct debit, as well as by other methods (such as cheque or credit card). It cannot be the case, HMRC submit, that all of these traders are themselves effecting transfers and thus performing the acts comprised in an exempt financial service. On the contrary, such traders are outside the banking system, and make requests via the banking system for transfers which the banks (through their automated systems) decide whether or not to grant. Several days after making a request, the trader requesting the transfer will typically carry out certain administrative tasks to establish whether or not the transfer has been received into its bank account, and will update its records accordingly, or if payment has not been received will contact the customer and ask him to make payment by an alternative method. None of these administrative tasks amount to effecting a transfer.
- There is no reason, say HMRC, why the situation should be any different where the request for a transfer of funds, and the administrative tasks associated with the request, are sub-contracted by trader B to a service provider, trader A. Trader A is simply carrying out the work which trader B would otherwise have to do for itself in order to receive payments from customers by direct debit. The essential characteristics of the relevant tasks remain unchanged whether trader B performs those tasks itself or arranges for them to be performed on its behalf by trader A. Those tasks do not amount to the provision of a service of effecting transfers that change the legal and financial situation. The fact that trader A is receiving those payments as agent for trader B, rather than on its own behalf, does not, therefore, lead to a conclusion that, in doing the administrative acts necessary to receive and record such payments, trader B is itself effecting payments for transfers.
- With regard to the Tribunal's reasoning, HMRC first submit that the authorities do not support the proposition distilled from them by the Tribunal in paragraph 21 of the Decision. The only authority which did not involve a party which was clearly within the banking sphere was Bookit, but Bookit was a case that turned on its own special facts. Girobank had outsourced certain of its own functions to Bookit (namely, the functions of obtaining, in respect of each transaction, an authorisation code from the relevant card issuer bank). Accordingly, Bookit was not simply giving instructions to Girobank, but had effectively stepped into the banking system by performing tasks that would normally have been carried out within that system. In consideration for performing those tasks, Bookit received a discount on its merchant acquirer fees.
- Secondly, it was submitted that the Tribunal erred in taking the view that a customer's instruction to his bank constitutes his effecting a transfer, rather than his making a request for a transfer to be effected by the bank.
- Thirdly, reliance was placed on the fact that Denplan's requests for a transfer might fail, for any of the reasons already mentioned. It was submitted that the Tribunal erroneously reasoned backwards from the fact that Denplan's fee was only deducted from payments that were actually collected, to the conclusion that the service which Denplan was performing must lead automatically to the transfer of funds. Such reasoning was illogical, and the relevant question is whether the tasks performed by Denplan led inevitably to transfers of funds, which plainly they did not. The fact that Denplan only charged a fee when its requests for funds proved successful is irrelevant.
- Finally, the Tribunal were wrong to be influenced by the possibility in Bookit that authorised payments might be reversed, because there is a fundamental difference between a situation where a transfer of funds has actually taken place, and can therefore be reversed, and a situation where no transfer of funds has taken place at all.
Denplan's submissions on issue 1
- Mr Peacock QC relied on SDC and FDR as authority for the proposition that a person who effects transfers of money in discharge of chains of contractual rights and obligations, created for example by a direct debit transaction, provides exempt services within Article 13B(d)3. He pointed out that in SDC the ECJ contemplated three situations in which the exemption could apply: (a) a customer can effect a payment himself, or cause it to be made; (b) the transfer can be carried out by a data-handling centre (i.e. a party that is neither a customer nor a bank) and a customer; and (c) the transfer can be carried out by a data-handling centre and another party acting at the customer's request. It follows that the exemption is not limited to those services which are provided by a bank to the end customer, e.g. the final debit or credit in a chain of transactions.
- SDC also establishes that if the provision of a service is to qualify for exemption it is not enough that it is merely an essential element for completing an exempt transaction. It must "have the effect of transferring funds and entail changes in the legal and financial situation" (SDC paragraph 66, emphasis added). A mere physical or technical supply, such as making a data-handling system available, will not be exempt. In considering whether a particular supply "concerns" a transfer within the meaning of Article 13B(d)3 it is necessary to look to the effect of the supply (does it result in a transfer of funds?) and what it entails (does it lead inexorably to a change in the legal and financial situation?).
- In approaching the application of the exemption to Denplan, it is important to bear in mind that: (a) it is the nature of the supply, not the identity of the supplier, that is important; (b) the supply can be performed by electronic means; (c) the supply can be to the provider of a "financial service" or to another person; and (d) for the purposes of issue 1, Denplan should be treated as making a separate payment handling supply to the dentist. What the dentist wants is a financial service, i.e. an effective payment for his services under the relevant plan, because without that financial service the patient's contractual obligations to pay under the plan would not be discharged. This financial service is provided to the dentist through Denplan's handling of the patient's payment.
- Mr Peacock went on to submit that Denplan's role as payment handler meant that it provided "transactions … concerning … transfers" because it facilitated the completion of payment by electronic means. Denplan's actions concern payments and transfers of money because their effect is to secure payment to the dentist for the services provided under the plan, and they entail a change in the legal and financial position both of the dentist and of the patient. Just as Bookit's obtaining of authorisation codes from issuing banks and the transmission of those codes to Girobank for it to process effected payment in that case, so Denplan's obtaining authorisation from the patient to make payment, instructing the banks to make payments, receiving those funds and then transmitting them on to the dentist effects payment by the patient to the dentist.
- The Tribunal was correct to conclude that the supply made by Denplan in return for the 71p average monthly fee was, in principle, exempt. The Tribunal correctly identified the relevant principles to be drawn from SDC, FDR and Bookit, and correctly applied those principles to the facts of the case. They were right to reject HMRC's contention that the analysis of cases where payment is effected and a charge is made by Denplan should be influenced by cases where no payment is made and no charge is made by Denplan.
- Mr Peacock submitted that there is no warrant for limiting the exemption to services commonly provided by banks or entities within the banking system, or to services analogous to such services. What matters is not the identity or business of the supplier, nor how many persons play a role in the transaction or chain of transactions, nor where in such a chain a particular person may appear, but rather the nature of the transaction itself: see especially SDC at paragraphs 53-56 and 66.
- It is equally wrong, submits Mr Peacock, to characterise what Denplan does in sending electronic files to BACS requiring payment as merely "calling for monies". Such a characterisation is inconsistent with, and does not do justice to, the Tribunal's detailed findings of fact and how the BACS system operates. Once instructions are sent to BACS by Denplan, the process by which a transfer takes place is automatic and does not depend on any further exercise of discretion by any person as to whether payment should, or should not, be made. This is not a case of trader A (Denplan) simply calling for monies on behalf of trader B (the dentists), but of trader A supplying a service to trader B of instructing the banks of C (customers) to make payment to A for onward transmission to B and then of instructing its own bank to make payment to trader B thereby ensuring a valid payment by C to B. The preparation and delivery of two sets of electronic instructions to BACS to make payments so as to discharge the contractual obligations of the customers to the dentists is an exempt financial service provided by Denplan to the dentists.
- This conclusion is not undermined, says Mr Peacock, if payment is not in fact made, for two reasons. First, it is not appropriate to test the VAT analysis of any supply of services for a fee by looking to the case where there is no supply of services for a fee: what matters is the nature of the supplies that are in fact made. Secondly, and in any event, where there is a transfer it is necessary to identify whether a particular party (here Denplan) provided a service that concerned such a transfer. In the present case, the Tribunal found that Denplan did provide such a service. It may or may not be the case that a trader who calls for payment to himself by way of direct debit so as to discharge the payer's obligation to himself provides an exempt financial service. However, there is no valid analogy between cases of that nature and the present case, because Denplan is here providing a separate service to dentists and it is the nature of that service (and not any other activity) which is in issue.
- It is equally inappropriate, submits Mr Peacock, to characterise what Denplan does as no more than the convenient, but merely administrative, reconciliation of payments made. Such reconciliation is only part of the service provided by Denplan to dentists.
- Mr Peacock submitted that the conclusion reached by the Tribunal in paragraph 21 of the Decision was correct. In particular, it is wrong to portray Bookit as a case where a non-bank entity had "stepped into the banking system" to perform tasks that would normally have been carried out within that system. The reason why Bookit made an exempt supply of financial services to Odeon's customers was because it transmitted card and transaction details, including authorisation codes, to Girobank and thereby effected payment by customers to Odeon. No part of the analysis of the Court of Appeal in Bookit refers to, or relies upon, an analysis of what banks "normally" do, nor was there any evidence to make good the proposition that Bookit was merely fulfilling functions which would otherwise have been performed by Girobank: there was no evidence in Bookit as to who would have performed those tasks if Bookit had not.
Issue 1: conclusions
- HMRC argue for a narrow interpretation of the exemption in Article 13B(d)3 which would confine its ambit, in cases where the supplier of the service in question is not itself a bank or other institution, to a person which supplies services analogous to those supplied by a bank or financial institution. In my judgment, however, this approach is too narrow and is not warranted by the authorities. In particular, it does not do justice to the potential width of the reasoning of the ECJ in SDC, or to the decisions of the High Court and the Court of Appeal in Bookit.
- I have already set out (see paragraph 30 above) some of the main principles which are in my view established by SDC. One of those principles is that it does not matter who provides the service, and paragraph 54 of the judgment provides three examples of cases where a transfer is effected (or caused to be effected) without any direct involvement of a bank at all. Another of those principles is that the test of what constitutes a transfer is a functional one, the crucial ingredient being that a transfer consists of the execution of an order for the transfer of a sum of money from one bank account to another (paragraph 53 of the judgment). Execution of such an order will entail a change in the legal and financial situation existing between the person giving the order and the recipient, and between those parties and their respective banks (ibid).
- It is important to remember at this point that the exemption under Article 13B(d)3 is not confined to transactions which themselves constitute transfers or payments of money. On the contrary, the exemption extends to transactions "concerning" transfers or payments. The degree of connection which must exist between the transaction for which exemption is claimed and the underlying transfer or payment was explored in paragraphs 61 and following of the judgment of the ECJ in SDC, and the answer given in paragraph 66 was that the services provided must "form a distinct whole" which fulfils "the specific, essential functions" of a transfer. Thus to qualify as a transaction concerning transfers, the service provided must "have the effect of transferring funds and entail changes in the legal and financial situation". Whether the services in any particular case have such an effect is in my judgment essentially a question of causation. In the interests of clarity, I would stress that the question is not what has caused the transaction which effects the transfer, which is irrelevant (see paragraph 53 of the judgment, "irrespective of its cause"), but whether the transaction carried out by the service provider has truly effected, in the sense of brought about, a transfer. The causal nature of the test is brought out both by the use of the verb "effect", which has a strong causal connotation, and by the reference in paragraph 54 to cases where a customer "causes a transfer to be effected" (my emphasis).
- Bookit seems to me to be a good example of a case where the causal test was applied and answered in the taxpayer's favour, even though the taxpayer operated wholly outside the banking system, and even though it was not the taxpayer itself which actually made the transfer. What mattered was that the information supplied by Bookit to Girobank inevitably brought about (although it did not itself constitute) a transfer of sums of money from Girobank to Bookit. The person who actually made the transfer was Girobank, pursuant to its obligations under the MSA. It did not make the transfer as agent or on behalf of Bookit. Nevertheless, Bookit effected the transfer, because within the contractual framework established by the parties the information transmitted by Bookit to Girobank was all that was needed to trigger the making of the transfer by Girobank to Bookit.
- I agree with Mr Peacock QC that Bookit cannot sensibly be distinguished on the basis that Bookit was performing an "outsourced" banking function (I confess that I share the dislike of Laws LJ for that "barbarous expression" – see FDR at paragraph 11 – useful though it may be as shorthand for procuring from an outside source). Not only is clear evidence for this outside procurement lacking, but any attempt to marginalise Bookit on this basis as a case turning on its own particular facts would in my view be an unprincipled exercise in damage limitation.
- FDR is in my judgment an important case in the present context, both for the Court of Appeal's analysis of how the BACS system operates and for the reasoning in paragraph 42 which led the court to the conclusion that FDR did indeed make transfers by means of BACS. The crucial point was that BACS is purely automatic in its operation, and was merely the means by which FDR effected transfers. It is clear that there did not have to be absolute certainty that a transfer would in fact take place once FDR had given its instructions to BACS, because Laws LJ expressly envisaged at least one, and possibly two, circumstances in which a transfer might not take place at all, namely mechanical breakdown (a risk which should never be under-estimated in any computer system) and the countermanding by FDR of its instructions during the BACS cycle.
- In the light of these principles, can it be sensibly be said to make all the difference in the present case that Denplan was not in a position to ensure payment by the patients pursuant to the instructions which it gave to BACS on day 1, quite apart from any risk of mechanical breakdown? In agreement with the Tribunal, I consider that the answer to this question must be No. Although it was foreseeable that some of the patients would not make their payments through the direct debit system which had been set up, the arrangements were nevertheless put in place on the footing that the monthly payments would be made by direct debit, and in sending the appropriate instructions to BACS Denplan was doing all that it could to implement those arrangements. Denplan itself had no discretion in the matter once the instructions had been sent, and in every case where the direct debit was honoured it was an automatic result of the instructions given by Denplan in the context of the contractual framework agreed between the various parties. In these circumstances it seems clear to me that the causal test is satisfied in respect of all those cases (the vast majority) where the direct debit payment is in fact made pursuant to the instructions given to BACS by Denplan. The fact that payment will not be made in a small and unpredictable, but still significant, minority of cases does not in my judgment detract from the fact that, where payment is made by that method, it is made as an automatic result of the instructions given by Denplan. To reach this conclusion does not involve reasoning backwards, or illogically, from the end result, but rather recognising the direct causal nexus between Denplan's input to BACS and the payments which are actually made.
- There is, however, one minor respect in which I find myself unable to agree with the reasoning of the Tribunal. In paragraph 24 of the Decision they say that the cases in which no payment is made by the patient to Denplan can be ignored, because in those cases no fee is charged by Denplan to the dentist and there is therefore no supply for VAT purposes. In my respectful opinion this reasoning is incompatible with the Tribunal's findings of fact in paragraph 6 of the Decision, where they found that the monthly fee is consideration for all the services provided by Denplan to dentists with a registration facility and registered plan patients. Accordingly, the fees, although quantified by reference to the payments which are actually made, are paid in respect of the services provided by Denplan relating to paying and non-paying patients alike. The result of this, as I see it, is that the fees cannot be regarded as paid solely for the exempt payment handling service, and the non-payers cannot therefore be disregarded on the basis that the fees paid by the dentist to Denplan are nothing to do with them. However, none of this detracts in any way from my conclusion, which is (in agreement with the Tribunal) that the payment handling service provided by Denplan in respect of those patients who do in fact pay by direct debit would, viewed in isolation, be an exempt supply within Article 13B(d)3.
- I would add that in relation to those (paying) patients I also see no good reason to differentiate between the arrangements made by Denplan for payment to be made by the patients to itself, via BACS, on the one hand (stage 1) and for payment to be made by itself to the dentists, again via BACS, on the other hand (stage 2). The instructions given by Denplan to BACS at stage 2 will again have the effect of transferring money from one party (Denplan) to another (the dentists), and of changing their respective legal and financial positions. Before the stage 2 transfers, Denplan is in the position of an agent which holds money on trust for (or at least subject to a fiduciary obligation to account to) its principals. After the stage 2 transfers have been made, Denplan no longer holds the money, and its obligation to account has been performed. The position of the dentists is the mirror image of Denplan's. If and in so far as this conclusion is at odds with the view taken by the Vice-Chancellor of the second payment in Bookit (whereby Bookit accounted to Odeon for money held by it as agent for Odeon: see paragraph 45 above), I can only say that, with the greatest of respect, I take a different view. I agree with the submission of Mr Peacock that the correct treatment of such a payment for the purposes of VAT, which is fundamentally a question of Community law, should not depend on the principles of the English law of agency. I also agree with the view expressed by the Tribunal in paragraph 27 of the Decision that it would be a very odd result if the transfer of funds by Denplan to the dentists was outside the exemption, when it is effected in exactly the same way as the exempt transfer from the patients to Denplan.
- In view of the conclusion which I have reached, it is unnecessary for me to deal with Denplan's alternative contention that the payment handling services qualify for exemption under the heading of negotiation concerning payments or transfers within Article 13B(d)3. It is enough for me to say that I am very doubtful whether the activities of Denplan could properly be characterised as negotiation within the meaning of the guidance given by the ECJ in CSC Financial Services. In particular, it seems to me that Denplan does not have a merely intermediary role, but provides a distinct financial service of its own to dentists.
Issue 2
- The second issue is how to characterise the services actually supplied by Denplan to a dentist in return for the monthly fee.
- The relevant legal principles were not in dispute, and much of the most important guidance on the subject, which now starts with the seminal decision of the ECJ in Case C-349/66, Card Protection Plan Ltd v Customs and Excise Commissioners [1999] 2 AC 601, [1999] STC 270 ("Card Protection Plan"), is set out by the Tribunal in paragraphs 34 – 36 of the Decision. Apart from Card Protection Plan itself, the other cases from which the Tribunal cite are the decisions of the House of Lords in Dr Beynon and Partners v Customs and Excise Commissioners [2004] UKHL 53, [2005] 1 WLR 86, [2005] STC 55 ("Dr Beynon") and in College of Estate Management v Customs and Excise Commissioners [2005] UKHL 62, [2005] 1 WLR 3351, [2005] STC 1597 ("College of Estate Management"). Although it is not immediately apparent from the Decision, the citation from the speech of Lord Walker of Gestingthorpe in paragraph 36 is from College of Estate Management.
- I have myself recently summarised the guiding principles in Birkdale School, Sheffield v HMRC [2008] EWHC 409 (Ch) ("Birkdale School") at paragraphs 26 – 35. Both sides were content to adopt that summary as correct. I will not repeat it here, but I would draw attention (because the Tribunal do not mention it) to the recent decision of the ECJ in the case of Levob (Case C-41/04, Levob Verzekeringen BV v Staatssecretaris van Financien [2006] STC 766), where the court further developed the point already made by Lord Walker in College of Estate Management at paragraph 30 to the effect that not every composite transaction will yield to an analysis in terms of what is principal and what is ancillary.
- In Levob the ECJ said with reference to its earlier decision in Card Protection Plan:
"21. In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal supply whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply …
22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single indivisible economic supply, which it would be artificial to split."
It follows (as I said in paragraph 34 of my judgment in Birkdale School) that
"there may be cases where one element of the transaction is not ancillary, and may even be of central and indispensable importance, but it is nevertheless so closely linked with one or more other elements that, regarded objectively, they form "a single, indivisible economic supply, which it would be artificial to split". The character of this single supply may be that of one or other of the constituent elements, but it may also have a unique character enjoyed by none of the constituent elements."
- Another important principle, at an appellate level, is that the question of how to classify a supply is a question of law: see Dr Beynon at paragraph 27, per Lord Hoffmann. However, Lord Hoffmann went on to say, "the question is one of fact and degree, taking account of all the circumstances", and
"In such cases it is customary for an appellate court to show some circumspection before interfering with the decision of the tribunal merely because it would have put the case on the other side of the line."
Lord Hoffmann's call for "circumspection" before interfering with the decision of the tribunal on a question of this nature was repeated by the House of Lords in College of Estate Management: see the speech of Lord Walker at paragraphs 35 and 36.
- I have already summarised the Tribunal's conclusions on the second issue in paragraph 6 above. Their reasoning is contained in paragraphs 37 and 38 of the Decision, which read as follows:
"37. In this case we have found that the monthly fee paid by the dentist to [Denplan] is the consideration for all the supplies made by [Denplan]. Mr Peacock categorises this as predominantly a supply of payment handling services, and Mr Anderson as a supply of administrative services. It is possible for us to find that the principal supply is the taxable element, the exempt element or that it should be apportioned. The total supplies made by [Denplan] are: payment handling, making reports to the dentists of payments and non-payments; goodwill transfers; support in setting fees; Denplan product training; use of Denplan brand name and logos; advertising the member's practice on [Denplan's] website; access to the member-only section of the website which includes a forum; quality audits; complaints handling, and arbitration. We can put on one side those services that are provided to members and dentists with a registration facility but no plan patients, which are the use of the member-only section of the website and use of the trademark. Of the remainder, they break down into first, services that are indirectly connected to payment handling, such as reports of payments and non-payments, chasing up non-payments, and goodwill transfers (which are really effecting changes in the dentist to whom payments are made). Secondly, there are services that have no (or a more distant) relation to payments, such as recording changes of patients' addresses, support in setting fees (which are entirely something for the dentist to decide), Denplan product training and advertising the member's practice on [Denplan's] website (both of which may lead to the sale of more plans), quality audits, complaints handling and arbitration.
38. Is this a single bundle of services when considered on a level of generality which corresponds with social and economic reality? We consider that [Denplan's] services are not a single service but a number of services of which payment handling is the principal one. It involves large sums of money, and spreading payment to dentists into monthly payments is the reason for [Denplan's] existence. Are some of the other services ancillary to payment handling? [They then quote from paragraph 30 of Card Protection Plan on the meaning of "ancillary"]. We consider that the supplies listed under "first" in the previous paragraph are subservient to payment handling. If payments are made (or not made) one needs a record of them, and if the circumstances change so that the payments needs to be made to a different dentist, assisting that change is subservient to making the payments. On the other hand, the supplies listed under "secondly" in the previous paragraph are not subservient to payment handling, they are not a means of better enjoying the payment handling service, and they do constitute an aim in themselves for the dentist. The dentist would regard such things as information that assists him in setting fees, complaints handling and arbitration as something desirable in their own right and unconnected with making transfers. Accordingly they cannot be classed as ancillary to payment handling. We consider that the monthly fee should be apportioned."
- As I have already said, neither side accepts the Tribunal's conclusion that the monthly fee should be apportioned, although that is each side's fallback position. HMRC's primary submission is that Denplan provides a unified administration service which is standard-rated. On the other hand, Denplan's primary submission is that there is a single supply of the payment handling service, which is exempt.
- In support of their primary submission, HMRC submit that the Tribunal fell into the trap of "over-zealous dissection" of transactions of which the ECJ and the House of Lords have now repeatedly warned. Denplan's essential purpose, according to HMRC, is to provide a seamless administration service by which it (a) designs dental plan products, (b) allows dentists to market those products to their patients under the Denplan brand, (c) provides literature and standard forms to support those products, (d) keeps records of patients' contact details, (e) calls for payments pursuant to direct debit mandates, (f) reconciles payments received with the payment records of individual patients, and (g) chases up non-received payments. This package of services forms a coherent and unified administration service which relieves dentists of the burden of themselves having to administer their relationships with patients who wish to sign up to a monthly payment plan. In so far as Denplan effects transfers as part of the provision of that service, its doing so does not constitute an end in itself or the predominant element of the supply. Rather, Denplan is performing a task which forms part of the overall process of relieving dentists from administrative burdens. The effecting of transfers is merely ancillary to the overall administration service.
- In support of Denplan's primary submission, Mr Peacock QC begins by noting that dentists can purchase membership, registration, payment handling and other services from Denplan separately, and are not required, either contractually or commercially, to purchase all such services together. Registration can be (and is) purchased separately from membership, and payment handling can be (and is) purchased separately from registration. The other services can also be purchased separately from each of the other services: see the Decision at paragraphs 3(3), (4) and (9) to (11). Each service is provided for a separately identified fee, is separate in nature, and cannot be seen as an artificially split element of a greater whole. In particular, the payment handling service is a valuable service in its own right and cannot be seen as merely a better way of enjoying membership and/or registration.
- Mr Peacock goes on to submit that the Tribunal erred in ignoring its own findings of fact as to what elements of the services provided by Denplan were provided to which category of dentists, and he attacks the Tribunal's findings of fact in paragraph 6 of the Decision, which he says ignore the contractual position and involve a "re-allocation" of services from one fee to another which has no foundation in VAT law. He also submits that it is not always clear from the Decision precisely which services the Tribunal were attributing to what fees.
- Finally, Mr Peacock contends that even if the monthly fee does on a proper analysis pay for more than the payment handling service, the exempt payment handling element is nevertheless the predominant element in the supply to which the other services are merely ancillary, being in each case better means of enjoying the exempt service.
Issue 2: conclusions
- As I have already indicated (see paragraph 19 above) I am unable to accept Denplan's submission that the Tribunal's findings of fact in paragraph 6 of the Decision involve any error of law. I do not read their references to "attribution" of services to the one-off membership fee as anything more than their interpretation of the contractual position in the two situations where a dentist (a) does have plan patients and pays the monthly fee, and (b) does not have plan patients and therefore does not pay the monthly fee. I cannot detect any error of law in this analysis, and I must therefore accept the Tribunal's finding of fact that the monthly fee "is consideration for all services provided to members with a registration facility and registered plan patients".
- The next important point, in my judgment, is that I am only directly concerned with the package of services supplied to dentists who have in fact signed up to one or more of Denplan's plans and become liable to pay the monthly fees, because it is only the VAT treatment of such fees which is in issue. The fact that dentists may purchase registration and membership separately, and without having plan patients, therefore seems to me to be largely irrelevant.
- Looking at the matter objectively, from the point of view of a typical dentist who participates in a plan, it seems to me that the central and essential element of the transaction, as between Denplan and the dentist, is the provision by Denplan of a service which enables the dentist to provide his services to patients at a specified level in return for fixed monthly payments, instead of providing his services on an irregular basis and in return for separate fees of an unpredictable amount on each occasion. The basic reason why Denplan exists is to enable dentists to offer a facility of this sort to patients, and to provide the necessary administrative framework for its operation. The core of the administrative services and support supplied by Denplan is directed towards achieving this purpose, and at the heart of those core services are the services relating to the collection, processing and onward payment to dentists of the monthly payments by patients, or in other words the payment handling service. That is the essential machinery which enables dentists to offer monthly payment plans to patients, and that, in large measure, is what the monthly fee paid by dentists to Denplan is paid for.
- I cannot accept HMRC's submission that Denplan's essential purpose is to provide a seamless administrative service, and to relieve dentists of tasks which they would otherwise have to perform themselves. That might be the apt way to characterise a service of general administrative support offered to dentists, but in my judgment it ignores the crucial fact that in the present case the most important service offered by Denplan is the provision and operation of payment plans, which is a service of an essentially financial nature.
- I therefore think the Tribunal were right to conclude that the payment handling service is the principal service provided by Denplan in return for the monthly fee. I think they were also right to take the view that some of the other services so provided are ancillary to that principal service, while others are separate services which do not qualify for exemption, with the consequence that an apportionment is required.
- There are, however, some very minor points of detail where I find myself, with the greatest respect, unable to accept the Tribunal's analysis. They are as follows:
(1) First, the Tribunal were in my judgment wrong to disregard those services which are provided to dentists with a registration facility but no plan patients, namely use of the member-only section of the website and use of the trademark. On the basis of the Tribunal's own findings of fact in paragraph 6 of the Decision, these services are among those for which the monthly fee is paid. They therefore cannot be disregarded. In my view they are not ancillary to the exempt payment handling service, because they are not a means of better enjoying that service, and they are services which a dentist is likely to make use of for their own sake. Accordingly they are separate, standard-rated supplies.
(2) Secondly, although I agree that making reports of payments and non-payments, and chasing up non-payments, are ancillary to the principal service, I cannot agree that "goodwill transfers" also fall into this category, at any rate if the Tribunal intended to include in that description the provision to dentists of guidance relating to the buying and selling of goodwill (paragraph 3(15) of the Decision) as well as the block re-registration service offered when a member relinquishes or acquires goodwill of plan patients when selling or buying a practice (paragraph 3(12)(i)). The provision of guidance on the buying and selling of goodwill is in my view a separate and independent supply, on a par with the guidance offered by Denplan in the setting of fees by dentists. The sale or purchase of a dentist's practice is in itself nothing to do with the existence or otherwise of Denplan payment plans. On the other hand, provision of the block re-registration service may reasonably be regarded as ancillary to the principal service, because it only arises where a patient plan with dentist A is already in place and merely enables it to continue with dentist B.
(3) Thirdly, the recording of changes of patients' addresses, which the Tribunal included in their second (non-exempt) category, should in my view be regarded as ancillary to the principal service. The efficient operation of the payment handling service by Denplan must depend on their having up to date details of patients' addresses, if only so that they can chase up non-payments. Accordingly the recording of changes of address is a means of better enjoying the principal service.
Overall conclusion
- Subject to the points of detail noted in the previous paragraph, I consider that the Tribunal came to the right conclusion for substantially the right reasons. The appeal and the cross-appeal will therefore be dismissed. I assume that the points of detail to which I have referred will not cause the parties to wish to re-negotiate the apportionment which they have already agreed, but if I am wrong in that assumption, and if they are unable to agree a fresh apportionment, the matter will have to be remitted to the Tribunal so that a revised apportionment can be determined.
