Target Group Ltd v Revenue and Customs [2023] UKSC 35

Target Group Ltd administered loans for Shawbrook Bank, including processing payments via BACS and maintaining loan accounts. The Supreme Court held that giving payment instructions which automatically trigger transfers does not qualify for VAT exemption under article 135(1)(d) PVD, as the exemption requires actual execution of transfers, not merely instructing them.

Facts

Target Group Ltd (Target) provided loan administration services to Shawbrook Bank Limited (Shawbrook), a mortgage and loan provider. Target’s services included operating individual loan accounts, generating BACS instructions for direct debit payments from borrowers, matching payments to accounts, calculating interest and repayments, and handling arrears. Target claimed these services were exempt from VAT under article 135(1)(d) of the Principal VAT Directive (PVD), which exempts transactions concerning payments, transfers, and debts.

Target’s Arguments

Target argued that its services fell within the exemption on two bases: (1) by giving instructions which automatically and inevitably resulted in payment from borrowers’ bank accounts to Shawbrook’s accounts via BACS; and (2) by inputting entries into borrowers’ loan accounts with Shawbrook.

Issues

The principal issue was whether Target carried out ‘transactions concerning payments and/or transfers and/or debts’ within the meaning of article 135(1)(d) of the PVD. This required determining whether the narrow interpretation (services must themselves effect the transfer) or the wider interpretation from FDR (services need only automatically and inevitably cause the transfer) was correct.

Judgment

The Supreme Court unanimously dismissed Target’s appeal. Lord Hamblen, delivering the judgment, held that CJEU case law, particularly DPAS, established that the narrow interpretation of SDC is correct.

The Correct Legal Test

Lord Hamblen stated:

The narrow interpretation means that the services must in themselves have the effect of transferring funds and changing the legal and financial situation. It is not enough to give instructions to do so thereby triggering a transfer or payment. It is not enough to perform a service which is essential to the carrying out of the transfer or payment, nor one which automatically and inevitably leads to transfer or payment. It is necessary to be involved in the carrying out or execution of the transfer or payment – its materialisation. This requires functional participation and performance. Causation is insufficient, however inevitable the consequences.

Overruling FDR

The Court explicitly overruled the Court of Appeal’s decision in FDR:

It is now apparent that domestic law took a wrong turn in FDR and the Court of Appeal’s conclusion as set out in para 42 of its judgment in that case must be overruled.

Application to Target’s Services

The Court held that Target’s services were functionally indistinguishable from those in DPAS. Target merely triggered the chain of steps leading to a transfer but did not itself execute or effect the legal and financial changes characteristic of a transfer of money.

The Loan Accounts Issue

Regarding the loan account entries, the Court found these were merely records of expected payments and did not effect any legal change:

The debits and credits to loan accounts made by Target did not effect any payment or transfer, and did not result in a change in the legal and financial position of the parties, but simply recorded the consequence of transfers effected by others.

Implications

This decision clarifies the scope of the VAT exemption for financial services under article 135(1)(d) PVD. It establishes that outsourced loan administration services involving payment instructions do not qualify for exemption, even where those instructions automatically trigger payments. Only services that functionally participate in executing transfers – actually effecting the legal and financial changes – qualify. This has significant implications for the financial services sector regarding the VAT treatment of outsourced administrative services and confirms that causation alone is insufficient for exemption.

Verdict: Appeal dismissed. Target’s loan administration services were not exempt from VAT under article 135(1)(d) of the Principal VAT Directive as they did not constitute transactions concerning payments or transfers.

Source: Target Group Ltd v Revenue and Customs [2023] UKSC 35