Paymex Limited (2011) – VAT exemption for consumer IVA services
02 August 2011
The First Tier Tribunal recently considered the correct VAT treatment of supplies relating to the establishment and supervision of Individual Voluntary Arrangements (IVAs). The Tribunal concluded that such supplies can constitute debt negotiation and payment handling, and can therefore be exempt from VAT.
The appeal in this case was brought by Paymex Limited (Paymex), as representative member of a VAT group which included Blair Endersby Limited (Blair Endersby). The activities of Blair Endersby involved the arrangement and implementation of consumer IVAs, primarily through negotiating with creditors and supervising repayments. Blair Endersby was not involved in providing advice to insolvent individuals on whether an IVA was the most appropriate solution in their particular circumstances.
Blair Endersby considered that the services it provided were exempt from VAT, and on that basis it did not charge VAT on its fees. At the Tribunal, Paymex argued that Blair Endersby provided two separate services, namely debt negotiation and payment handling, both of which were exempt supplies under EU law (as a result of Council Directive 2006/112/EC, referred to as the "Principal VAT Directive"). Blair Endersby also put forward an alternative argument that it made a single supply, the predominant element of which was debt negotiation.
HMRC argued that the supplies made by Blair Endersby constituted a single supply of professional services, akin to supplies of legal or accountancy services, and that they were therefore not exempt from VAT. HMRC also argued that supplies of negotiation services were exempt from VAT only if they were made in relation to an activity or transaction which was itself exempt from VAT.
The Tribunal held that Blair Endersby was making a single supply consisting of debt negotiation and debt handling, and that this supply was exempt from VAT under the Principal VAT Directive.
This result was based on the finding that Blair Endersby supplied a single service to its customers of facilitating and implementing an IVA. Although there were a number of elements to this service, the Tribunal held that the correct approach was to examine the service as a whole in order to identify its core nature.
Rejecting the arguments put forward by HMRC, the Tribunal held that whether a supply is exempt should be determined by the nature of the supply itself, and not by the nature of the person making the supply, nor by the nature of the underlying transaction. Under the Principal VAT Directive, a negotiation concerning a debt was exempt irrespective of the context in which the negotiation took place.
The judgment of the Tribunal made clear that the conclusion in this case was based on a detailed analysis of the activities of Blair Endersby. Particularly important was the fact that Blair Endersby was not involved in providing advice to customers, and only became involved once a decision to undertake an IVA had already been made.
Nevertheless, it seems likely that the same result would apply to other businesses in the sector operating on a similar model, and it would be advisable for these businesses to review their position, and consider whether they may be able to make a claim to recover over-payments of VAT.
The decision may also be of wider importance for two reasons. First, it demonstrates a firm rejection of HMRC's approach, which has also been noted by commentators in a number of other cases, of seeking to give a particular supply a broad label (in this case "professional services") in order to bring it outside the wording of the exemptions specified in the Principal VAT Directive. The Tribunal made clear that the specific elements of the supply must be closely analysed in order to determine whether they are covered by an exemption.
Secondly, decision brings the VAT treatment of organisations supervising IVAs into line with those providing debt management services, which are also exempt. The Tribunal's judgment helps to clarify the meaning of payment handling as distinct from debt collection, holding that the latter can only be carried out by a creditor, and not by an administrator engaged by a debtor to organise and collect payments to his creditors.
HMRC have published Brief 27/11 in response to the judgment. The Revenue state in this Brief that they are not going to appeal the Tribunal's decision, and that they will repay claims for overpaid tax charged on the services of Insolvency Practitioners that fall within the findings of the decision.
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