The services of a payment plan administrator in arranging for payments between dental customers and dentists was not an exempt supply of payment or transfer services but rather standard rated administrative services.
The ECJ has held that the services of a dental plan administrator in requesting, receiving and passing on payments from dental customers bank account to dentists did not fall within the exemption for “transactions concerning payments or transfers”: HMRC v DPAS (Case C-5/17). The services amounted to no more than administrative services which, whilst necessary for the payments to take place, did not effect the legal and financial changes which characterise an exempt transfer or payment.
However, the ECJ did not take the opportunity to address the question of whether a supply to a debtor could fall within the exclusion for “debt collection” or, indeed, comment on the Advocate General’s controversial remarks concerning the “economic reality” of supplies made by DPAS following the contractual restructuring carried out by it.
In 2011, the ECJ held in its AXA Denplan decision that, although supplies made by Denplan, a dental plan administrator, to dentists might “in principle” fall within the exemption for “transactions concerning payments or transfers”, they were excluded from that exemption as those services amounted to standard rated “debt collection”. The fact that Denplan collected payments as they fell due meant that they were collecting debts on behalf of the dentists concerned. In addition, the ECJ concluded that a debt did not have to be overdue for its collection to amount to standard rated “debt collection” within the exclusion to the VAT exemption.
DPAS is another company providing dental plan services. Following the AXA Denplan decision, DPAS decided to restructure its contractual arrangements to ensure that its plan administration services were provided to the dental patients rather than to dentists. As a result of this restructuring, it contended that its supplies of services to patients, for which it charged a plan fee, qualified as the exempt provision of transactions concerning payments or transfers within the Principal VAT Directive Article 135(1)(d). Its supplies to patients were, essentially, payment facilitation involving collection of direct debit payments and paying on amounts due to the dentists. In addition, since this supply was made to the debtor patients, rather than to the creditor dentists, it could not amount to excluded “debt collection”. The First-tier Tribunal (FTT) agreed with DPAS and held its services were correctly exempted from VAT.
On appeal, the Upper Tribunal referred back to the ECJ the correct interpretation of the exemption for “transactions concerning payments or transfers”. On the one hand, the tribunal noted the ECJ’s statement in the earlier AXA Denplan decision that Denplan’s services in recovering payments for dentists would “in principle” have been exempt had it not amounted to excluded debt collection. On the other hand, the tribunal noted that it was difficult to reconcile that statement with the narrow, functional analysis of the exemption adopted by the ECJ in the subsequent Bookit and National Exhibition Centre (NEC) cases. For details of the ECJ decision in those joined cases, see “VAT and payment processing services”.
Furthermore, the Upper Tribunal considered that there was “real doubt” as to the scope of the exclusion for debt collection. In particular, it was unclear whether, objectively, the same type of activities undertaken by Denplan in providing services to dentists and which constituted debt collection ceased to constitute debt collection when undertaken by DPAS in providing services to patients. HMRC contended that it is the nature of the services that is determinative, rather than the person supplying or receiving them. DPAS argued that, by its very nature, debt collection services can only be provided to the creditor. As a result, the Upper Tribunal also decided to refer to the ECJ the question of the correct construction of “debt collection” in this context.
Exempt payments or transfers
The ECJ judgment, released on 25 July 2018, agrees with the Advocate General’s opinion that the statements in the original AXA Denplan that the supplies in that case were “in principle” within the exemption, could not assist DPAS in this case. The court in AXA Denplan had not examined whether the supply of services at issue in the case met the criterion established by the Court’s previous case-law for the purpose of identifying a transaction concerning payments and transfers. As such, it could not be concluded, without any examination of the supplies, that the Court had intended to broaden the scope of the exemption in any way.
The correct approach to the scope of the exemption could be found in the Bookit and NEC cases and other case law of the ECJ. In particular, the Court made it very clear that “transactions concerning payments or transfers” must have the effect of making the legal and financial changes which are characteristic of a payment or transfer of a sum of money. That should be contrasted with the supply of a mere physical, technical or administrative service relating to the making of a payment or transfer, which would remain subject to VAT.
In the case of DPAS, it was clear that it did not effect any transfers or payments or “the materialisation in the relevant bank accounts of the sums of money”. DPAS merely carried out administrative tasks concerned in moving money between bank accounts, such as requesting the bank to make the transfers and recording what transfers had been made by others. In fact, the ECJ agreed with HMRC that the supplies by DPAS were comparable to the card handling services provided by Bookit and NEC and which were found to not fall within the exemption. The fact that the supply of services by DPAS “was, in the context of the dental plans concerned, essential to making the payments owed by the patients to their dentists, since it was through DPAS’s involvement that the patients’ intention to make the payments in question is expressed” was insufficient to bring it within the exemption. The mere fact that a service is essential for completing an exempt transaction does not warrant the conclusion that that service is to be exempted.
Ultimately, DPAS did not carry out the payment or transfer. It merely asked the relevant financial institutions to do so. The fact that DPAS obtained the authority to request the transfer of money in the name and on behalf of the patient, from the patient’s bank, did not transform such a request into a payment or transfer. These were mere preliminary technical and administrative activities. They were “merely a step prior to the transactions concerning payments and transfers”. In this regard, the ECJ highlighted that DPAS was not responsible for the failure or cancellation of a payment as a result of the direct debit as this was ultimately the liability of the patients’ and dentists’ banks.
Moreover, the Court highlighted that this case did not give rise to any of the difficulties in calculating the amount of VAT chargeable that is typical of financial transactions and the reason for the existence of the exemption - though, whilst reinforcing the conclusion in this case, this aspect does not appear to have been determinative.
Debt collection and economic reality
Having held that the services did not amount to exempt payments or transfers, the ECJ did not go on consider the question whether the restructured supplies by DPAS would amount to debt collection. This was a point, however, considered in the AG’s opinion.
The AG first noted that the literature provided by DPAS to its customers, both dentists and patients, stressed that the changes it had made were “purely administrative” and made “no practical difference to the current arrangements”. From this context, the Advocate General opined that the restructuring should be considered “irrelevant” for the purposes of applying the VAT rules, on the basis that the application of the VAT system is based on the “economic reality” of the services. As such, it was unnecessary to have recourse to the principle of abuse of rights in this context, since the correct interpretation of the arrangements was the one based on the economic reality. If the services were debt collection before the restructuring, they remained debt collection post the restructuring.
In fact, the AG was somewhat scathing as to the approach taken by DPAS, suggesting that the application of economic reality “would also preclude, in those circumstances, merely playing around with the wording of the contracts having the ability to change the categorisation of a supply of services even though the economic reality has remained unchanged”.
The decision of the ECJ on the scope of the exemption for payments or transfers comes as no surprise. Whilst the facts in DPAS were essentially on all fours with the AXA Denplan case in which the ECJ had indicated the exemption applied “in principle”, the later decisions in Bookit and NEC have clearly indicated a narrower, function-based approach to the exemption is necessary. The “in principle” approach by the ECJ in AXA Denplan belied the fact that there was no specific analysis as to the exemption’s application in that case beyond the focus on the “debt collection” exclusion.
It is now clear that an intermediary that functionally merely requests payments under the authority of a mandate does not make a payment or transfer. It is the bank that actually effects the payment or transfer.
Nevertheless, the precise borderline will always remain somewhat difficult to define. Although the functional analysis emphasises the importance of the bank (or other account holder) in the payment or transfer process, it remains true that the application of the VAT exemptions are determined by the nature of the service and not the nature of the provider. As such, it is clear, in principle at least, that a “payment or transfer” can be made by a non-financial institution. The question is, given the narrow functional analysis applied by the courts, in what circumstances may a non-financial services business actually effect a payment or transfer? The ATP case (Case C 464/12) accepted that certain services provided to a pension fund by a non-bank (consisting of the management of workers’ individual accounts and contributions paid by employers) would have fallen within the exemption, for example. In the ATP case the court said, “That interpretation does not presuppose any particular method for effecting transfers, which may be done using accounting entries. That is so in the case of transfers between customers of a single bank, or between accounts of a single individual who acts as both the person giving the order and the recipient.”
It might also be noted that the exemption for “payments or transfers” also extends, in principle, to the “negotiation” of such activities. Whilst there is no problem contemplating the concept of “negotiation” in relation to other exemptions, such as the granting of credit, it is far less obvious how it may apply to a payment or transfer.
The opinion of the AG on the question of “debt collection” and more particularly the effectiveness or otherwise of the VAT restructuring entered into by DPAS was of wider interest and, indeed, controversial, particularly since the restructuring by DPAS was not especially aggressive or complex and the UK courts have consistently held that it would breach the principle of fiscal neutrality to treat persons making identical supplies differently on the basis that one had restructured to avoid unnecessary VAT. As such, it is perhaps disappointing that the ECJ did not take the opportunity to comment on these aspects of the opinion.
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