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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> MBNA Europe Bank Ltd v HM Revenue & Customs [2006] EWHC 2326 (Ch) (22 September 2006) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2006/2326.html Cite as: [2006] EWHC 2326 (Ch) |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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MBNA EUROPE BANK LIMITED |
Appellant |
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- and - |
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THE COMMISSIONERS OF HM REVENUE AND CUSTOMS |
Respondent |
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Mr Nicholas Paines QC and Mr Peter Mantle (instructed by Solicitors for HM Revenue & Customs) for the Respondents.
Hearing dates: 17,18,19,20,21,24,25&26 July 2006
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Crown Copyright ©
Mr Justice Briggs:
Output issue 1 – did the method whereby MBNA deployed debts due from its credit card holding customers for the purpose of raising working capital involve the making of supplies by MBNA?
The meaning of "supply"
"The following shall be subject to value added tax:
1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. The importation of goods."
"1. 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.
3. …
4. The use of the word 'independently' in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.
Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person, persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links."
Pausing there, the UK has implemented that permission by regulations which, for example, provide that UK based subsidiaries of a UK taxpayer may be treated as a single taxable person or VAT group.
"Supply of goods
1. 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner."
Article 6 provides as follows:
"Supply of services
1. 'Supply of services' shall mean any transaction which does not constitute a supply of goods falling within the meaning of Article 5.
Such transactions may include inter alia: - assignments of intangible property whether or not it is the subject of a document establishing title,"
- obligations to refrain from an act or to tolerate an act or situation,
…"
"52. Although Article 6(1) of the Sixth Directive defines a supply of services as any transaction which does not constitute a supply of goods, that definition clearly cannot be taken to its literal extreme. It might be more reasonable to interpret it as intended to define a service as anything supplied which is not a good.
53. VAT is a tax on turnover and on consumption. Only supplies which form part of a taxable person's turnover and are stages in a chain normally ending in consumption by a final customer can be subject to the tax."
That was part of the reasoning in an opinion supporting the conclusion (with which the ECJ concurred) that the issue of shares by a company to a subscriber for money did not constitute a supply by the company. The ECJ based its reasoning on the similarity between such an issue and the subscription of capital to a partnership, which had by an earlier decision been held not to constitute a supply. As a result, the relevant part of the Advocate General's Opinion was not commented upon by the Court, and the decision is too recent for it to have been approved or disapproved in any later case.
"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:
…
(d) the following transactions:
(i) the granting and negotiation of credit and the management of credit by the person granting it;
(ii)…
(iii) transactions, including negation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;"
Although accepting that this provision forms no part of any intended definition of supply, Mr Cordara submitted with some force that the exemption from tax of "transactions, including negotiation, concerning… debts" carried with it the clear implication that assignments of debt were to be regarded as supplies, albeit exempt supplies. But I agree with Mr Paines' submission that the real purpose of Article 13 was to treat as exempt supplies only those transactions which were properly to be regarded as supplies in the first place.
"(a) on the supply of goods and services in the United Kingdom (including anything treated as such as a supply),"
Section 4 headed "Scope of VAT on taxable supplies" provides as follows:
"(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance carried on by him.
(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply"
Section 5, headed "Meaning of supply: alteration by Treasury Order" provides as follows:
"(1) Schedule 4 shall apply for determining what is, or is to be treated as, a supply of goods or a supply of services.
(2) Subject to any provision made by that Schedule and to Treasury Orders under subsections (3)-(6) below-
(a) 'supply' in this Act includes all forms of supply, but not anything done otherwise than for consideration;
(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."
Nothing in Schedule 4 or the remaining provisions of Section 5 have a bearing on the issues arising on this appeal.
"(1) a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9…"
"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."
"Secondly, it disregards genuine transfers of property, or supplies of services made in return for economic consideration, to focus instead on the overall result of the operation which is considered to be subject of VAT. That is incompatible with the typical feature of the common system of VAT set out in part 2 of the First and Sixth Directives according to which VAT is applied on a transaction - by - transaction basis by reference to each supply in the chain of transactions."
"In the recent case of BLP Group Plc v Custom & Excise Commissioners… the Advocate General (Lenz) discussed the general scheme contemplated by Community Legislation on VAT. It proceeds, he said … –
"… an ideal image of "chain of transactions"… intended to attach to each transaction only so much VAT liability as corresponds to the added value accruing in that transaction, so that there is to be deducted from the total amount the tax which has been occasioned by the preceeding "link in the chain"…"
"and as the court emphasised in the same case … each transaction in the chain must be examined separately to ascertain objectively what output tax is payable and want input tax is deductible."…
that decision makes it clear that for the purposes of European VAT legislation, it is not permissible to take a global view of a series of transactions in the chain of supply."
"The principle of neutrality must however co-exist with other general principles, such as the objective of legal certainty: BLP Group Plc v Customs & Excise Commissioners …moreover the principle does not go so far as to require that transactions which have the same economic or business effect should for that reason be treated alike for VAT purposes. That was made clear by the Court of Justice in Customs & Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, paras 30 -33. The Court of Justice stated in para 33:
The principle of the neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other."
In particular, the fact that a transaction has as its purpose the raising of funds for the taxpayer's main business activity, does not compel the choice of any particular VAT category as applicable to the transaction in question: see again the BLP case, at paragraph 39 of the AG's Opinion.
"27. In order to identify the key features of a contract, however, we must go beyond an abstract or purely formal analysis. It is necessary to find the contract's economic purpose, that is to say, the precise way in which the performance satisfies the interest of the parties. In other words, we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the partys' respected interests, lying at the heart of the contracts. In the case of a lease, as noted above, this consists in the transfer by one party to another of an exclusive right to enjoy immovable property for an agreed period.
28. It goes without saying that this purpose is the same for all the parties to the contract and thus determines its contents. On the other hand, it has no connection with the subjective reasons which have lead each of the parties to enter into the contract, and which obviously are not evident from its terms. I have drawn attention to this point because, failure to distinguish between the cause of the contract and the motivation of the parties as been the source of misunderstandings, even in the cases under consideration here, and has complicated the task of categorising the contracts at issue."
"[159] So what is the correct approach in the instant case? There are number of pointers in the authorities referred to in Part 3 of this judgment, under heading (a) 'Authorities as to the approach to be adopted in analysing the relevant transaction'. The more significant of such pointers in the context of the instant case seem to me to be these: 1. The resolution of the issue as to the application of para 5 in the instant case depends upon the legal effect of the Clubcard scheme, considered in relation to the words of the paragraph (see British Railways Board especially [1977] STC 221 at 223, [1977] 1 WLR 588 at 591 per Lord Denning MR: see [34] above. 2. In considering its legal effect, the entire scheme must be examined (what is the 'entire scheme' for this purpose being objectively determined by reference to the terms agreed) (see Pippa Dee especially [1981] STC 495 at 501 per Ralph Gibson J: see [33] above. 3. The terms contractually agreed may not be determinative as to the true nature and effect of the scheme (Reed, see [36] to [38] above: it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say 'the precise way in which performance satisfies the interests of the parties' (see the Advocate General's opinion in Mirror Group, see [41] above. 4. Economic purpose is not the same as economic effect, The fact that two transactions have the same economic effect does not necessarily mean that they are to be treated in the same way for VAT purposes (see Littlewoods especially at para 84 per Chadwick LJ: see [42] above. 5. Equally, the economic purpose of a contract (what the Advocate General in Mirror Group called the 'cause' of a contract: see para 27 of his opinion: at [41] above) is not to be confused with the subjective reasons which may have led the parties to enter into it (in so far as those subjective reasons are not obviously evident from its terms) (see Mirror Group para 28: at [41] above). The Advocate General went on to observe (an observation which seems to me to be particularly apt in the context of the tribunal's decision in the instant case:
'… failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings … and has complicated the task of categorising the contracts at issue.'"
The relevant facts
i) Facts about the commercial origin, background and purpose of the securitisation process of which the transfers formed part.ii) A factual summary of the relevant written contracts governing both the transfers themselves and the wider securitisation scheme of which they formed part, together with a description of the relevant characteristics of the parties to those contracts.
iii) A description of aspects of the manner in which the securitisation process actually worked, pursuant to those contracts.
"each Investor Beneficiary and the Transferor Beneficiary shall be beneficially entitled to an Undivided Interest in the Undivided Bare Trust Property in the proportions set out in this Deed or any Supplement."
Every securitisation series gives rise to a distinct cash contribution to the Receivables Trust by an Investor Beneficiary, and is regulated by a separate Supplement, itself a long and complex document running, in the relevant case to more than 150 pages. Clause 4 of the RTDSA provides for the making of one or more Contributions to the Receivables Trust pursuant, series by series, to separate Supplements. The effect of making a Contribution is to confer upon the Investor Beneficiary its own beneficial interest in the Receivables Trust.
The Tribunals' decisions on output issue 1
"If one asks, 'what was the economic purpose of COBE's assigning Receivables to Castle, as trustee?' only one answer is reasonably possible: to enable Carlisle to use them as the security for a borrowing for COBE's benefit….the economic purpose of the structure was to enable COBE to secure funds and to do so at a cost lower than it would have been required to pay had it borrowed directly from the investors. The insertion of Castle, Carlisle, the conduits and the trust between COBE and the investors was, as we accept, necessary in order to achieve the higher credit rating COBE desired and to satisfy the regulatory and accounting requirements we have described, but it does not alter the essential character of the transaction, nor its economic purpose, namely to enable COBE to borrow."
Output Issue 2 – If the assignments of receivables constitute supplies by MBNA, what was the consideration for them?
Output Issue 3 – If the assignments were supplies, where were they made?
The Input Issues
"1. The proportion deductible under the first sub-paragraph of Article 17(5) shall be made up of a fraction having:
- as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible under Article 17(2) and(3),
- as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible…
- the proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit."
"Attribution of input tax to taxable supplies
101.—(1) Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) In respect of each prescribed accounting period—
(a) goods imported or acquired by and, subject to paragraph (5) below, goods or services supplied to, the taxable person in the period shall be identified,(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.
(3) In calculating the proportion under paragraph (2)(d) above, there shall be excluded—
(a) any sum receivable by the taxable person in respect of any supply of capital goods used by him for the purposes of his business,(b) any sum receivable by the taxable person in respect of any of the following descriptions of supplies made by him, where such supplies are incidental to one or more of his business activities—(i) any supply which falls within item 1 of Group 5, or item 1 of Group 6, of Schedule 8 to the Act,(ii) any grant which falls within item 1 of Group 1 of Schedule 9 to the Act,(iii) any grant which falls within paragraph (a) of item 1 of Group 1 of Schedule 9 to the Act,(iv) any grant which would fall within item 1 of Group 1 of Schedule 9 to the Act but for an election having effect under paragraph 2 of Schedule 10 to the Act, and(v) any supply which falls within Group 5 of Schedule 9 to the Act,(c) that part of the value of any supply of goods on which output tax is not chargeable by virtue of any order made by the Treasury under section 25(7) of the Act unless the taxable person has imported, acquired or been supplied with the goods for the purpose of selling them, and(d) the value of any supply which, under or by virtue of any provision of the Act, the taxable person makes to himself.
(4) The ratio calculated for the purpose of paragraph (2)(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up to the next whole number.
Use of other methods
102.—(1) Subject to paragraph (2) below and regulation 103, the Commissioners may approve or direct the use by a taxable person of a method other than that specified in regulation 101, save that where the use of a method was allowed prior to 1st August 1989 there shall not be included in the calculation (if the method in question would otherwise allow it)—
(a) the value of any supply which, under or by virtue of any provision of the Act, the taxable person makes to himself, and(b) the input tax on such a supply.
(2) Notwithstanding any provision of any method approved or directed to be used under this regulation which purports to have the contrary effect, in calculating the proportion of any input tax on goods or services used or to be used by the taxable person in making both taxable and exempt supplies which is to be treated as attributable to taxable supplies, the value of any supply within regulation 101(3) shall be excluded.
(3) A taxable person using a method as approved or directed to be used by the Commissioners under paragraph (1) above shall continue to use that method unless the Commissioners approve or direct the termination of its use.
(4) Any direction under paragraph (1) or (3) above shall take effect from the date upon which the Commissioners give such direction or from such later date as they may specify.
Attribution of input tax to foreign and specified supplies
103.—(1) Input tax incurred by a taxable person in any prescribed accounting period on goods imported or acquired by, or goods or services supplied to, him which are used or to be used by him in whole or in part in making—
(a) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom, or(b) supplies specified in an Order under section 26(2)(c) of the Act,shall be attributed to taxable supplies to the extent that the goods or services are so used or to be used expressed as a proportion of the whole use or intended use."
"2. Your tax year begins on 1 April and ends on 31 March. With effect from 1 July 1998, you are to calculate your deductible input tax in respect of each prescribed accounting period on the following basis:
(a) Identify all the goods and services you receive which are used, or to be used, by you exclusively in making taxable supplies. The input tax thereon is deductible.(b) Identifying all goods and services which are used, or to be used, by you exclusively in making exempt supplies or in carrying on an activity other than the making of taxable supplies. The input tax thereon is not deductible.(c) The deductible proportion of any input tax incurred on goods and services which are used in making both taxable and exempt supplies shall be in the ratio that the values of taxable supplies bears to the value of taxable and exempt supplies. This proportion shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up to the next whole number.
3. In calculating the proportion under paragraph 2(c) above, there shall be excluded, in addition to all those supplies specified in regulation 101(3) of the Value Added Tax Regulations 1995, any sum receivable from-
(a) the transfer or the assignment of debts, receivables or future receivables but not the values of supplies of servicer services;(b) cardholders whose account is, at that particular time, the subject of securitisation arrangements(c) Investment income arising from amounts deposited and invested; and(d) foreign exchange transactions.
It is agreed that late and over the limit fees are consideration for supplies of services and are not to be excluded from the proportional calculations set out at paragraph (c) above.
4. Values of supplies of services which were prior to 1 January 1993 either zero rated or exempt but which are now outside the scope of UK VAT but with a right to deduct and no right to deduct respectively are to be included (unless specifically excluded as a distorting supply) in the values based proportional calculations set out at (c) above.
Please note that for the purposes of this special method, the expressions –
(a) "Taxable supplies" mean all those supplies for which there is a right to deduct under S26(2) of the Value Added Tax Act 1994, and(b) "Exempt supplies" mean all those supplies for which there is not a right to deduct under S26(2) of the Value Added Tax Act 1994.
5. At the end of each tax year you are to carry out an annual adjustment using the figures for the whole tax year. Any difference between the amount of deductible input tax recalculated at the end of the tax year and the total amount provisionally deducted during the year is an over or under deduction of tax. This amount must be entered in your VAT account for the first period after the end of the tax year.
If the recalculation shows that input tax attributable to supplies for which there is no right to deduct is below the limits set out in regulation 106 of the Value Added Tax Regulations 1995,
You are treated as being fully taxable for the tax year. Any input tax not claimed during the tax year is an under-deduction of tax.
6.The method is to be used until such time that Customs and Excise approve or direct the termination of its use."
Withdrawal of the 1999 Agreed Method.
The Assessments – Does the servicing of designated customers' accounts use residual inputs?
"The Servicer shall service and administer the Receivables and shall collect payments due in respect of the Receivables in accordance with its customary and usual servicing procedures for servicing credit card receivables comparable to the Receivables…"
The Voluntary Disclosure