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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Barclays Bank Plc v Revenue & Customs [2008] UKVAT V20528 (09 January 2008) URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20528.html Cite as: [2008] UKVAT V20528

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20528

EXEMPTION – negotiation with credit card customers in arrears – whether excluded from exemption as debt collection in art.13B(d)(3) of the Sixth Directive – yes – whether exempt under Group 5 of Sch 9 VAT Act 1994 – no

LONDON TRIBUNAL CENTRE

BARCLAYS BANK PLC Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

ROY JENNINGS FCA FTII

Sitting in public in London on 24 and 25 October 2007

Andrew Hitchmough and Jonathan Bremner, counsel, instructed by Lovells, for the Appellant

Julian Ghosh QC and Elizabeth Wilson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

1. Barclays Bank plc appeals against a decision in a letter from Customs of 23 August 2005, upheld on a review on 26 September 2005, that certain supplies made to it by D, a South African company, were a single supply of debt collection services so that the Appellant was liable to a reverse charge under s 8 of the VAT Act 1994. Mr Andrew Hitchmough and Mr Jonathan Bremner appeared for the Appellant, and Mr Julian Ghosh QC and Miss Elizabeth Wilson for Customs.
2. Article 13B of the Sixth VAT Directive exempts:

(d)     the following transactions:

1     the granting and the negotiation of credit and the management of credit by the person granting it;

…

3     transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

Article 135(1)(b) and (d) of the recast VAT directive exempts the same items except that the words "and factoring" and not included in the latter (which is not material since it appears from MKG, Case C-305/01, they occurred only in the English and Swedish versions of the Sixth Directive, and factoring was held to be within debt collection).

3. The issue in this appeal is whether the services supplied by D to the Appellant in relation to customers with overdue Barclaycard accounts are exempt as "transactions, including negotiation, concerning…payments, debts" or as "the negotiation of credit" or whether they are taxable as being within the exception for debt collection. Alternatively the same issue arises under UK legislation where the exemptions for financial transactions do not exclude debt collecting. It is common ground that there is a single supply of services.
4. There was an agreed statement of facts as follows:

(1) The Appellant is the representative member of a VAT Group registered for value added tax with effect from 1 April 1973 (VAT number 243 85 22 62), whose registered office is at 54 Lombard Street London EC3P 3AH.

Background

(2) Pursuant to the Services Agreement dated 22 December 2004, ("the Agreement"), D supplies services ("the Services") to Barclays' Credit Card division ("Barclaycard") whereby D operatives (working in South Africa) make telephone calls to Barclaycard customers (in the UK) ("Customers") who have overdue interest and principal payments owing on their Barclaycard accounts.

The Services

(3) Under the terms of the Agreement, D provides the Services from 1 April 2005 to Barclaycard whereby Customers failing to make minimum payments in accordance with the terms of their agreements with Barclaycard have their accounts placed into a delinquency cycle. This commences with cycle 1, following which, if the Customer fails to pay the requisite amount within the allotted time, the Customer's account is placed in cycle 2, cycle 3 etc, the cycles being used to classify the Customer's account by reference to the amount of time which it has been in default^[1].

(4) The Services are defined in Clause 1.2 Schedule 1 of the Agreement as follows: (in relation to Customers whose accounts are in delinquency cycles 2, 3, or 4):

"…[D] engaging in outbound telephone negotiations with Customers whose accounts are delinquent with the objective of securing a Full Payment or Minimum Payment in accordance with the Customer's agreement with [Barclaycard], or the promise of a Full Payment or Part Payment as outlined in this schedule and described in more detail in the Training Modules."

(a) In providing the Services, the personnel ("Negotiators") supplied by D sign on to Barclaycard's systems and make telephone calls to Customers in the delinquency system.

(5) Under clause 4 of Schedule 1 the Negotiators can also request letters to be sent out (the letters to be issued by Barclaycard) and must handle customer complaints (although at a certain level of escalation these too are referred back to Barclaycard).

Correspondence with Customs

(6) On 8 April 2005, Steve Trojanowski of Barclaycard wrote a letter to Karen Pittis of HM Revenue & Customs ("Customs"), regarding the VAT treatment of the Services. In the letter, Barclaycard set out its view that the Services were exempt from VAT under the Directive. This was on the basis that the Services were:

(a) the negotiation of credit (exempt under Article 13(B)(d)(1) of the Directive); and

(b) the negotiation of debt (exempt under Article 13(B)(d)(3) of the Directive).

(7) On 23 August 2005, John Lucas of Customs' Large Business Services wrote to Barclaycard stating that Customs did not agree with Barclaycard's view. Customs' letter stated that:

(a) the Services were a single supply of debt collection services, which if made in the UK would be taxable at the standard rate of VAT; and

(b) as the Services were supplied by D in South Africa, the Services were liable to the reverse charge under section 8 of the VATA 94.

(8) By a letter written by David Dunlop and dated 26 September 2005, Barclaycard requested reconsideration of Customs' decision on the grounds that Customs had misdirected itself and that the VAT treatment of a particular supply is determined by the nature of the supply and not the aim of that supply. The result of the reconsideration was communicated to Barclaycard by a letter from Customs dated 24 January 2006 whereby Appeals Review Officer Bill Beedie upheld John Lucas's original decision.

(9) The Appellant appealed the reconsideration to the Tribunal by way of a Notice of Appeal dated 10 February 2006.

5. In more detail the Agreement contains the following provisions:

(1) The description of the Services is as quoted in paragraph 4(4) above.

(2) The job title of those working under the Agreement is that of Negotiator. The competencies required by Negotiators include the ability to deal with and act upon the needs of the Customer; being persuasive and possessing good negotiating skills to ensure the commitment from the cardholder to return the account to order; to operate in a results-driven environment and achieve personal targets; have the ability to understand the feelings and needs of others and adapt their own style readily to demonstrate this.

(3) The Procedure for negotiations includes telephoning Customers selected by the Appellant and complying with the following:

(a) If the person answering the call says that the Customer is not available, asking questions to ensure that the person is not the Customer trying to be evasive;

(b) If they cannot contact the customer obtaining another telephone number or leaving a message using their first name and a telephone number supplied by the Appellant.

(c) The key aim of the Negotiator is to secure a full payment or minimum payment by taking the payment immediately using details of a debit card or another bank's credit card; trying to secure a promise of payment before the end of that month, failing which before the next billing day (promises are monitored and telephone numbers of Customers with failed promises are passed to D for following-up); if a single payment does not correct the delinquency negotiating a payment plan over a number of months which may include reducing future interest charges); during negotiations advising the Customer that their credit reference agency rating will be adversely affected and additional charges may be debited to their account. In some cases, such as where there is a dispute over items on the account the matter may be referred back to the Appellant.

(4) Customers are put into cycles depending on the time payments are in arrears.

(5) The Appellant provides D with a target outstanding value D's task is to reduce the outstanding value to or below the target.

(6) Calls are monitored and on average must meet a fixed percentage of targets based on legal and regulatory procedure and policy, and telephone technique. Legitimate customer complaints as substantiated by the Appellant must be lower than a particular percentage of customer contact. Reports of performance are made to the Appellant.

(7) Payment is a fixed amount per full time equivalent number of employees requested by the Appellant and is subject to increase or decrease according to the percentage by which the outstanding value is less than or greater than the target outstanding value in each cycle.

6. We had a bundle of documents and heard evidence from Mrs Elaine Manning of the Appellant who trained the employees of D, and (by video link) Miss Zivia Khatib, team manager with D dealing with cycles 1 and 2, and Miss Candice Oliver, team manager dealing with cycles 3 and 4. We find the following facts:

(1) All the witnesses agreed that the key aim of their work was as set out in the Agreement.

(2) Once the payments are in arrears the card cannot be used until this is corrected. Accordingly the promise of the ability to use the card again is something which the Negotiator can offer. Once a particular cycle is reached the card is withdraw permanently.

(3) In cycles 1 and 2 Negotiators identify themselves as calling on behalf of Barclaycard. In cycle 3 and above they identify themselves as calling on behalf of a debt collection agency. In cycle 4 accounts might be passed to an external debt collection agency, and as part of the negotiation customers will be told that this might happen.

(4) A majority of customers in cycles 1 and 2 make the minimum payment by debit card or another bank's credit card over the telephone which is processed immediately by the Negotiator on being advised that further charges will be incurred if they do not. These cycles will include customers who have forgotten to pay.

(5) In cycle 3 and above 90 per cent of Customers cannot make the minimum payment and the Negotiator has to negotiate something different with the emphasis being on agreeing affordable payments with the Customer. One of the witnesses pointed to the difference between this and another firm for which she had worked where the emphasis was more on demanding payment. A number of tools are available to the negotiator to achieve their objectives. As a recent change, a Negotiator will deal with all the negotiations with a particular Customer. Negotiation or renegotiation is possible where a Customer's circumstances have changed, such as becoming unemployed. Customers may be invited to seek assistance from the Citizens' Advice Bureau or the Consumer Credit Council if the Negotiator cannot do anything for them. The adviser will put forward a payment plan for D's consideration.

(6) D try to negotiate a solution and focus on helping the Customers to help themselves. Education is part of the aim, for example in showing Customers that there are options other than payment in cash at a branch of the Appellant.

(7) Negotiators have a target set by the Appellant made up of the number of cardholders contacted, the amount of cash collected, the units of payment made and the score achieved on the call monitoring. They can earn a bonus based on these targets.

7. We expressly do not make any finding of fact, as Mr Ghosh invited us to do, that it was not part of D's task to retain the Customer for the Appellant. While we accept that D and its Negotiators will not know whether the Customer is retained, and its remuneration does not depend on this, we do not see that this shows that the Appellant is indifferent to what D does in relation to keeping its Customers. It is merely that D's priority is to put the account back in order, and unless the card is permanently stopped one of the benefits of putting the account in order is that the card can be used again, which is part of the negotiation. That priority does not mean D is indifferent to the Customer's retention. For example, a very low level of legitimate customer complaints is required otherwise D is in breach of the Agreement. Obviously the Appellant wants to retain those of its Customers who are capable of paying and make more profits from their continued use of Barclaycards.
8. Mr Hitchmough and Mr Bremner, for the Appellant, contend in outline:

(1) This is not the type of case where it is possible to identify a principal supply and others ancillary to it. In particular, negotiation is part of the supply, not an ancillary part of it. In any event the cost to D of providing the negotiation services is not "a marginal proportion of the package price compared to the principal service" (see the Advocate General's Opinion in Madgett and Baldwin, Joined Cases C-308/96 and C-94/97 at [36] approved by the Court at [48]).

(2) It is a case of supplies that are integral to each other or indissociable (the table-top model mentioned by Laws LJ in Customs and Excise Commissioners v FDR Limited [2000] STC 672 at [53]). The exempt elements of the supply predominate.

(3) The supplies comprise the granting and the negotiation of credit when a repayment plan is agreed or the debt is re-aged. It does not matter that the credit is an indulgence within the context of an existing relationship. Negotiation of credit is not ancillary but is of the essence of the supply by D. There is no exception for debt collection in this heading.

(4) The focus of negotiations is to secure the continuing relationship with the customer.

(5) D's reward is for successful negotiation, not for obtaining payments from customers.

(6) Alternatively, the Service involves transactions, including negotiation, concerning debts. The Negotiators conduct negotiations in relation to debts. Negotiation cannot be ancillary to a supply of debt collection services.

(7) Alternatively, the Service involves a transaction concerning payments in that the Negotiator hopes to obtain and process an immediate payment by taking debit card details and processing them immediately, in a similar way to those in Bookit Ltd v HMRC [2006] STC 1367. If no payment can be obtained a promise of payment is obtained. All of these are exempt; the process of debt collection does not start until negotiations are unsuccessful and is concerned with enforcement.

(8) In relation to debt collection, the position cannot be different for services supplied to a debtor (as in Debt Management Associates Ltd (2002) VAT Decision 17880 where negotiation services were held to be exempt) and those supplied to a creditor. As the ECJ said in SDC, Case C-2/95 at [32]: "The transactions exempted under points (3) and (5) of art 13B(d) are defined according to the nature of the services provided and not according to the person supplying or receiving the services." The ECJ said in MKG, Case C-305/01, "debt collection refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemptions set out in the first part of art 13B(d)(3) of the Sixth Directive." Therefore not all transactions designed to obtain payment of a debt are included within debt collection, only those clearly circumscribed and different in nature from the previously-mentioned exempt transactions. Here the Services are not different in nature from the listed exempt services and do not fall within the clearly circumscribed exception for debt collection because debt collection is solely concerned with the recovery and enforcement of the debt. Here the focus is on maintaining an on-going relationship with the customer. All D does is negotiate, not taking any action to enforce payment of the debt.

(9) If a transaction is by its nature exempt it cannot fall within the exception for debt collection. Although an exception to an exemption is construed broadly it cannot be construed so as to restrict the scope of the exemption beyond its fair meaning.

(10) HBOS v HMRC (2006) VAT Decision 20118 involved a later stage in the cycles than here. There, 90 per cent of cases had been dealt with in-house. The Tribunal ignored the ECJ's definition of debt collecting in MKG. Its finding that almost all the work consisted of debt negotiation services is inconsistent with its conclusion that they constituted debt collection services.

(11) The OFT regulatory code relied on by Customs is irrelevant because debt collection has a Community meaning; consumer protection legislation is necessarily drafted in wide terms; and the statutory purpose is different.

9. Mr Ghosh QC and Miss Wilson, for Customs, contend in outline:

(1) D is rewarded by the bonus for outstanding value being below the target. It is not rewarded for the time taken in negotiations, or for moving accounts up the cycles.

(2) In accordance with the Agreement D works in accordance with UK regulatory codes. This includes the OFT Guidance Notes on debt collection, which covers the type of work carried out by D.

(3) D's Negotiators are rewarded by bonuses for maximum debt recovery using the most suitable debt recovery strategies.

(4) Debt recovery is an enforcement service rather than a financial service and is accordingly excluded for the exemption for financial services. Even where extra time is granted to pay a debt this is not about the exempt grant of new credit but is merely an efficient way to recover debt.

(5) In MKG the essential aim of the services was the obtaining of payment of the debts and so constituted debt collection. A supply of services with the primary objective of debt recovery, where the negotiation is simply a means to an end, is debt collection.

(6) Here the key aim and objective of the Negotiators is debt recovery. Everything done by the negotiators is designed for, and perform a material role in, enforcing payment of debt owed to Barclaycard. Debt collection is wider than recovery and includes anything done to collect money in relation to a completed transaction. The witnesses used the expression "collection" to describe their role, such as this being to move Customers out of "collection."

(7) Essentially the situation here is the same as in HBOS.

(8) The Appellant is not buying services of negotiation concerning debts or transactions concerning payments but of debt collection. Debt collection is not the grant and negotiation of credit, which does not need to be excluded. The Services are not about grants of credit and D does not negotiate credit but may give extra time to pay with the object of reducing the debt as part of debt collection. Even if there are separate supplies of other services they are ancillary to debt collection.

(9) With regard to the Appellant's contentions

(a) On the table-top model point each element is designed for the recovery of the debt owed to the Appellant and has this as its essential aim. It is therefore debt collection.

(b) The primary aim of the Negotiators is not to conduct negotiations but to bring money in.

(c) Debt Management Associates Limited does not assist the Appellant because there negotiation on behalf of debtors was an end in itself. Here the end is debt collection.

Reasons for our decision: the Directive

10. The ECJ gave the following guidance on the construction of art 13B(d)3 of the Sixth Directive in MKG:

The national court asks, more specifically, whether true factoring is subject to VAT or falls within one of the activities exempted from VAT pursuant to art 13B(d) of the Sixth Directive, activities which may, however, be taxed where, as in the main proceedings, the member state concerned has allowed taxpayers a right of option for taxation and the undertaking in question has expressly waived exemption of the transactions carried out by it relating to true factoring.

In answering this question, it should be remembered that the exemptions provided for in art 13 of the Sixth Directive constitute independent concepts of Community law which are intended to avoid divergences in the application of the VAT system as between one member state and another and must be placed in the general context of the common system of VAT (see, in particular, Re Försäkringsaktiebolaget Skandia (publ) (Case C-240/99) [2001] STC 754, [2001] ECR I-1951, para 23).

In addition, it is settled case law that the terms used to specify the exemptions provided for by art 13 of the Sixth Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see, inter alia, Customs and Excise Comrs v Mirror Group plc (Case C-409/98) [2001] STC 1453, [2002] QB 546, para 30).

It should also be noted that the transactions exempted by virtue of art 13B(d)(3) of the Sixth Directive are defined solely in terms of the nature of the services listed, since no reference is made to the status of the persons supplying or receiving them. Furthermore, it is clear from the court's case law that, given the objectives pursued by the common system of VAT of ensuring legal certainty and the correct and straightforward application of the exemptions provided for in art 13 of the Sixth Directive, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question (see, inter alia, Customs and Excise Comrs v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, [2001] ECR I-7257, para 33).

It has already been found, in response to the first question, that a business such as that at issue in the main proceedings, which engages in true factoring, supplies to clients services for consideration which fall within the field of application of the Sixth Directive and are therefore taxable unless there is an exemption provided for by a specific provision of that directive.

Article 13B(d)(3) of the Sixth Directive lists, by way of such exemptions, 'transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments'.

It is, however, apparent from the final clause of that provision that the Sixth Directive expressly excludes 'debt collection' from the list of exemptions.

In addition, the English and Swedish versions of the provision place factoring on the same footing as debt collection, by expressly referring to it, alongside the latter, as a transaction not included in the list of exemptions.

While that circumstance constitutes some evidence that factoring is excluded from the exemption laid down by art 13B(d)(3) of the Sixth Directive, the fact remains that the other language versions of this provision do not contain an express indication to that effect.

It is therefore necessary to view the final clause of art 13B(d)(3) in its context and to interpret it in the light of the spirit of the provision in question and, more generally, of the scheme of the Sixth Directive.

As derogations from the general application of VAT, the exemptions envisaged in art 13B(d)(3) of the Sixth Directive must be interpreted in a manner which limits their scope to what is strictly necessary for safeguarding the interests whose protection those derogations allow (see, to that effect, para 63 of this judgment).

By contrast, as already stated in para 58 of this judgment, exceptions to a rule derogating from the general application of VAT must be interpreted broadly.

Under all the language versions, debt collection is an exception to the exemptions listed in art 13B(d)(3) of the Sixth Directive.

The English and Swedish versions of that provision also refer in this respect, on an equal footing with debt collection, to factoring.

In view of the requirement to interpret broadly those exceptions to a derogating provision—whose effect is to render the transactions covered by them subject to tax in accordance with the fundamental rule forming the basis of the Sixth Directive—first, factoring as referred to in the final clause of art 13B(d)(3) in the English and Swedish versions of that directive must be understood as covering both true factoring and quasi-factoring.

As already found in para 54 of this judgment, there is no justification for treating those two categories of factoring differently from the point of view of VAT.

Second, in the other language versions, the term 'debt collection' must be interpreted as encompassing all forms of factoring. In accordance with its objective character, the essential aim of factoring is the recovery and collection of debts owed to a third party. Therefore, factoring must be regarded as constituting merely a variant of the more general concept of debt collection, whatever the manner in which it is carried out.

Moreover, the term 'debt collection' refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemptions set out in the first part of art 13B(d)(3) of the Sixth Directive.

It follows that the language versions other than the Swedish and English versions are in no way incompatible with an interpretation under which factoring, including true factoring, is among the exceptions to the exemptions provided for in art 13B(d)(3) of the Sixth Directive.

The answer to the second question submitted for a preliminary ruling must accordingly be that an economic activity by which a business purchases debts, assuming the risk of the debtors' default, and, in return, invoices its clients in respect of commission, constitutes 'debt collection and factoring' within the meaning of the final clause of art 13B(d)(3) of the Sixth Directive and is therefore excluded from the exemption laid down by that provision.

11. It is not in dispute that while the exemption must be construed strictly, this does not apply to the exception for debt collection, which must be construed broadly but in the light of the spirit of the exemption. It is common ground that the exemptions are concepts of community law which are intended to avoid differences between member states.
12. The way the Court reached its decision in MKG was to find that, in accordance with its objective character, the essential aim of factoring was the recovery and collection of debts owed to a third party, and therefore it constituted part of the more general concept of debt collection. We understand the reason why the Court said that debt collection transactions are clearly different in nature from the transactions set out in the first part art 13B(d)(3) to be that those transactions are designed (or have the essential aim) of carrying out the exempt transaction itself. Thus the simple assignment of a debt for consideration is exempt as a transaction concerning debt, but the same transaction in the course of factoring is not because (viewed objectively) it has a different essential aim. We accept that debt collection should not be construed so widely that there is no scope left for the listed exempt transactions in art 13B(d)(3), but on our interpretation there is plenty of scope left for the exempt transactions. Accordingly, we consider that we should ask ourselves whether, in accordance with its objective character, the essential aim of what D does is the recovery and collection of debts, or whether, so viewed, its essential aim is the carrying out of the listed exempt transactions. We do not therefore agree with Mr Hitchmough's persuasively argued approach that if something falls squarely within the listed exempt transactions it cannot also fall within debt collection.
13. Debt collection refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt. The Court included factoring, which takes place even before the debt is due, within the general concept of debt collection. It follows that debt collection cannot therefore have the narrow meaning of enforcement of debts, for example through the courts, occurring at a later stage than the Services supplied by D, as contended for by Mr Hitchmough.
14. The Edinburgh Tribunal has considered another case which has at least some similarities to this one in HBOS v HMRC (2006) VAT Decision 20118. There, another bank managed to recover debts, whether credit card or on loans, in about 90 per cent of cases using its in-house facilities (this may roughly correspond with the 90 per cent of cases that are settled in cycles 1 and 2 here). For the remaining cases they engaged agents to provide telephone and letter debt negotiation services and also field debt negotiation services (although there is a finding that they rarely visited a customer). Debt negotiation services were defined in the agreement as:

"the management and action of impaired balances, where the purpose is to negotiate clearance of the outstanding amounts due for customers whose accounts are still open or have been closed by Halifax. The supplier will typically renegotiate the terms on which credit is granted with a view to maximizing recoveries by Halifax. This will usually be in the form of extending the terms of the existing loan including lengthening the repayment term thereby reducing monthly repayments, within the limits of authority delegated by Halifax to the Supplier.

The Tribunal did not consider it helpful to consider the essential aim derived from MKG at [77] because factoring was not anything like the transaction in issue. It found that the dominant purpose of the entire economic transaction was the recovery of money due to the appellants. Negotiation was not an aim in itself but was ancillary to the dominant purpose of debt recovery. The service was a single supply of debt recovery.

15. Mr Hitchmough pointed out the difference that what D did in the earlier cycles was done in-house in HBOS but what the agents did there seems comparable to cycles 3 and above in this appeal. We do not think that the distinction is material. Because of the different view we take of the relationship between the list of exempt transactions and debt collection, we do not agree with Mr Hitchmough that the decision is inconsistent in finding that almost all the work was negotiation but that the service was still debt collection. We therefore agree with the approach of the Tribunal in that case, although we would respectfully agree with him that the Tribunal did not seem to have followed the guidance in MKG.
16. Negotiations carried out on behalf of a debtor were held by the Tribunal to be within the exemption in Debt Management Associates Limited v Customs and Excise Commissioners (2002) VAT Decision 17880. There was some disagreement between the parties about the application of the decision in a case, such as this appeal, where negotiations are carried out for the creditor rather than the debtor. Mr Hitchmough drew attention to [64] of the passage quoted above from MKG that the transactions exempted are defined solely in terms of the nature of the services listed, since no reference is made to the status of the persons supplying or receiving them. Mr Ghosh pointed out that debt collection necessarily had regard to the person receiving the service. We do not consider that the passage from MKG can be taken to mean that it does not matter whether negotiations are carried on for the debtor or creditor. Debt collection by its nature can only be performed for the creditor and so no question of the exclusion of debt collection can arise for negotiations carried out for the debtor. Debt Management Associates supports Mr Hitchmough's contention that the Services fall within the listed exemptions considered on their own, but tells us nothing about whether they are excluded as debt collection since that question did not arise in that case.
17. Our answer to the question whether, in accordance with its objective character, the essential aim of what D does is the recovery and collection of debts, or whether, so viewed, its essential aim is the carrying out of the listed exempt transactions, is that it is clearly the former. The description of the Services in the Agreement is to engage in telephone negotiations with customers with the objective of securing a full or the minimum payment, or the promise of such payments, and the key aim of the negotiator is to secure either a full or the minimum payment. We consider that this amounts to debt collection. While we do not place much weight on this, it is interesting that the witnesses used the expression "collection" to describe their work. We have no difficulty in accepting that D does carry out transactions within the list of exempt transitions if considered in isolation; what they do is primarily negotiation and the negotiation concerns debts, payments are made either immediately or as a result of promises, and in the course of doing so further credit may be negotiated. But whether the transactions are exempt or taxable as debt collection depends on their essential aim viewed objectively, which in our view is debt collection.
18. While there is no exclusion for debt collection from art 13B(d)(1) or the new art 135(1)(b), we do not consider that there needs to be. If D gives a customer more time to pay this is done as part of the process of recovering the debt; it is not a transaction whose essential aim is to grant credit to the customer. In MKG the factor also made a grant of credit to the creditor but this did not prevent the supply being one of debt collection.
19. Accordingly our conclusion on this part is that the Services supplied by D to the Appellant are of debt collection and are accordingly excluded from the exemption in art 13B(d)(1) or (3) of the Sixth Directive or the new art 135(1)(b) and (c).

UK law

20. Mr Hitchmough put forward an alternative argument based on UK domestic law. Group 5 of Sch 9 to the VAT Act 1994 contains the following exemptions:

The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.

The making of any advance or the granting of any credit.

…

The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity.

Notes

(5) For the purposes of item 5 "intermediary services" consist of bringing together, with a view to the provision of financial services?

(a)     persons who are or may be seeking to receive financial services, and

(b)     persons who provide financial services,

together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities.

(5A) For the purposes of item 5 a person is "acting in an intermediary capacity" wherever he is acting as an intermediary, or one of the intermediaries, between?

(a)     a person who provides financial services, and

(b)     a person who is or may be seeking to receive financial services ...

(5B) For the purposes of notes 5 and 5A "financial services" means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6.

21. Mr Hitchmough points to the absence of any exclusion for debt collection as there is in the Directive. Mr Ghosh contends that the exempt items are not an apt description of what D does. He also contends that D does not bring together persons seeking and providing financial services because the Appellant and the customer have already been brought together and it does not provide services in relation to transactions within these items.
22. We consider that the reason why debt collection is not specifically excluded is that domestic law is differently worded from the Directive. Instead of the general words "transactions concerning debts" etc in the Directive, the exemption is for such items as "the issue, transfer or receipt of, or any dealing with, money" etc, which is narrower and could not include debt collection where the transfer of money is not the end in itself but the outcome of the debt collection service. This is essentially the same reason for our conclusion in relation to the Directive where the essential aim of the transaction viewed objectively determined whether the transaction was within the list of exempt transactions or was debt collection. In domestic law there is no specific exclusion for debt collection but the transaction must still fall within one of the items for it to be exempt for which one can have regard to why the transaction is being performed. The reason it does not fall within the exempted items is that making payments is not the purpose of the Services but something that may hopefully follow from them.
23. The Services do not involve the making of any advance or the granting of any credit.   Within their negotiations with the Customer D may modify the repayment period or the interest rate applicable to the existing debt but, in our view, this does not constitute an advance or the grant of any new credit.
24. Nor are the Services intermediary services within the scope of bringing together persons seeking and providing financial services. While it was argued that it did in the case of customers requiring further credit in that they have not previously been brought together in relation to that transaction of further credit, the purpose of the Services is not to do this for its own sake but as a necessary part of debt collecting.
25. We do not therefore consider that D's Services are exempt under UK law.
26. The result is that we dismiss the appeal both on the interpretation of the Directive and of UK law. We omitted to ask whether this was a case where Customs were asking for costs if they won. We give them leave to make an application in principle (without going into the figures) to the Tribunal within 30 days from the date of release of this decision.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 9 January 2008

LON/06/0577 (redacted)

Note 1    D acts in relation to cycles 1-4 in respect of Barclaycard customers and in relation to cycles 1-6 in respect of certain “affinity” credit cards (which are operated by Barclaycard).    [Back]