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||Neutral Citation Number:  EWHC 2326 (Ch)
||Case No: CH/2006/APP/165, 325, 245, 324
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
Strand, London, WC2A 2LL
||22 September 2006
B e f o r e :
THE HONOURABLE MR JUSTICE BRIGGS
|| MBNA EUROPE BANK LIMITED
||- and -
||THE COMMISSIONERS OF HM REVENUE AND CUSTOMS
Mr Roderick Cordara QC and Mr Mark Smith (instructed by KPMG LLP) for the Appellant.
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
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Briggs:
- This is an appeal by MBNA Europe Bank Ltd ("MBNA") from a decision of the Manchester VAT and Duties Tribunal, originally issued on 5th January 2006 and later reissued on 3rd March 2006. Subject to one relatively minor point, the Tribunal dismissed MBNA's appeals from four decisions of the Commissioners on VAT issues arising from MBNA's involvement in a series of securitisation programmes by which MBNA deployed debts owing to it by its credit card holding customers on a rolling basis, for the purposes of raising working capital.
- For VAT purposes, the main business of MBNA may be described as the making of exempt supplies of credit. But since MBNA also makes other supplies, some of which are taxable rather than exempt, it is treated as a partially exempt trader.
- Central to the EU–wide operation of VAT is the concept that, by contrast with a consumer, a trader is entitled to recover and set off against tax which he is liable to collect and pay on his outputs, tax incurred by him in the acquisition of goods and services in connection with his business ("input tax"): see sections 24 and 25 of the Value Added Tax Act 1994 ("VATA").
- Where a trader's supplies are partly taxable and partly exempt he can in principle recover only that part of his input tax which is attributable to taxable supplies (or to certain supplies made outside the EU ("specified supplies")). Where the input tax can be shown to be directly attributable to taxable or specified supplies, it can be recovered in full. Where it is directly attributable to exempt supplies, it cannot be recovered at all. But traders, including in particular MBNA, may incur input tax in the acquisition of goods and services which are not directly attributable either to taxable (including specified) or exempt supplies. VATA section 26(3) and regulations made thereunder (now to be found in part XIV of the VAT Regulations 1995 ("the Regulations") contain provisions designed to secure a fair and reasonable attribution of input tax as between taxable and exempt supplies. The dispute which led to the Tribunal's decision arose in relation to the correct application of those regulations (specifically regulations 101 – 103) to MBNA's input tax burden. They may therefore be, and have during this appeal been, categorised as input tax issues.
- All the methods prescribed or provided for under regulations 101-103 for the attribution of input tax to taxable (including specified) and exempt supplies may critically depend upon a correct appreciation of what supplies a trader makes in the course of his business. During the exchanges in which the present dispute arose, it became apparent that there was a fundamental divergence of view as between MBNA and the Commissioners upon the question whether the method by which MBNA deployed the debts accruing due to it from its credit card customers for the purposes of raising working capital involved MBNA in the making of supplies. MBNA claimed that they did, whereas the Commissioners determined that they did not. Much the greatest part of the argument (both written and oral) in this court has been directed to that issue, which has been fairly characterised as an output issue.
- Further, in the event that it were to be determined that those methods did constitute the making of supplies, further issues arise, also to be categorised as output issues, namely the quantum of the consideration for those supplies and the place where those supplies were made. I shall refer to the question whether those methods constituted supplies as output issue 1, to the consideration quantum question as output issue 2 and to the place question as output issue 3.
- The Tribunal determined output issue 1 against MBNA, so that it was not necessary for it to decide either of output issues 2 or 3, and it could not do so otherwise than on the hypothetical basis it was wrong about issue 1. It does not appear that the Tribunal identified output issue 2 as a distinct issue which it was called upon to resolve. None the less the Tribunal hypothetically decided output issue 3 in favour of MBNA. It concluded that if the methods whereby MBNA made debts payable by its credit card holding customers available for the raising of working capital did constitute supplies, then those supplies were made in Jersey so as to be specified supplies within the meaning of paragraph 3 of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999, and VATA section 26 (2) (c). The relevance of that conclusion to the input tax issues will become apparent in due course.
- In resolving output tax issues 1 and 3 respectively against and in favour of MBNA, the Tribunal followed an earlier decision of a differently constituted Manchester VAT & Duties Tribunal in the case of Capital One Bank (Europe) Plc v HM Revenue & Customs (VAT Decision 19238) ("the COBE Decision"), adopting and supplementing the reasoning to be found therein. The COBE Decision also concerned a securitisation scheme involving substantially the same relevant elements, and prepared by the same firms of lawyers and accountants. MBNA's appeal necessarily and expressly involved the proposition that the reasoning of both those experienced Tribunals was wrong in law in relation to output issue 1. It had been anticipated by the parties to this appeal that it might be possible for it to be consolidated with a pending appeal by the taxpayer against the COBE decision at least for the purpose of the determination of the output tax issues which were common to both appeals. Perhaps unfortunately, the COBE appeal was withdrawn shortly before it had been due to be heard in May of this year. Nonetheless it will be necessary for me to examine the reasoning in the COBE Decision on output issue 1, incorporated as it was by reference by the Tribunal in its reasoning in this case.
- I have so far described in deliberately neutral terms the securitisation scheme as a process which involved the deployment by MBNA of receivables payable by its credit card holder customers for the purpose of raising working capital. A central question for the purposes of output issue 1 is the proper characterisation of the method by which that deployment was achieved, for the purpose of deciding whether it constituted a series of supplies for VAT purposes. In the barest outline, the Commissioners and both Tribunals concluded that the method did not constitute a supply, but amounted to no more than the granting of security for a loan. By contrast, the taxpayers in both cases contended, and MBNA contends on this appeal, that the method constituted a true sale of those debts to a third party, and necessarily, a sale for consideration, so as to fall fairly and squarely within the definition of a supply, both for UK and EU VAT purposes.
- I should add however that it is not common ground that the question whether the method constituted a supply is determined by its classification as either the grant of security or a sale. Mr Roderick Cordara QC who appeared for MBNA submitted that even if the method amounted to the grant of security for a loan it would still be properly classified as a supply for the VAT purposes, provided that it was for consideration which included something (however small) more than the making of a loan. Nor did the Commissioners concede (or the Tribunals conclude) that a finding that the method had the characteristics of an outright sale rather than the grant of a security necessarily concluded the matter in favour of the taxpayer. For example, Mr Nicholas Paines QC who appeared for the Commissioners submitted that the Tribunals were right to find that even if the method were to be categorised as involving a sale, it was a sale to a bare trustee for MBNA, and therefore a sale by MBNA to itself, so that it could not be a supply.
- As the final arbiter of issues of fact, the Tribunal made detailed findings of the relevant facts which, unless challengeable pursuant to the principles set out in Edwards v Bairstow  AC 14, cannot be and are not the subject of challenge. No useful purpose would be served by my repeating or attempting an unsatisfactory paraphrase of those facts in this judgment. I pay tribute to the detail and clarity with which they have been set out by the Tribunal. I shall set out on an issue by issue basis only those facts material to the determination of the particular issue under review.
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?
- As argued before me (and before the Tribunals) this issue involves an appreciation both of the legal definition of "supply" in the applicable VAT legislation and an understanding of the appropriate method, as developed largely by the European Court of Justice and amplified by the UK courts, for resolving questions of categorisation for VAT purposes. Commonly, categorisation questions arise in relation to transactions acknowledged to constitute supplies, so as to determine for example whether they are taxable or exempt. In this case categorisation questions are said to be determinative of the question whether the transactions under review are supplies at all. I shall therefore deal with these legal issues first.
The meaning of "supply"
- The ascertainment of the meaning of "supply" as a VAT concept is, as for other VAT concepts, to be discovered primarily by reference to the Sixth Council Directive 77/388/EEC of 17th May 1977 which was designed to create a common system of VAT within (now) the EU, and which is directly applicable in the UK. Article 2 under Title II headed "SCOPE" provides as follows:
"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."
- Article 4 under Title IV headed "Taxable Persons" provides as follows:
"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.
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.
- Article 5 under Title IV headed "Taxable Transactions" provides relevantly as follows:
"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,
- Read literally, paragraph 1 of Article 6 would appear to mean that any transaction of any kind (other than a supply of goods) constitutes a supply of services, although pursuant to Article 2 it will only be subject to VAT if effected for consideration. As will appear however, paragraph 1 of Article 6 has not been interpreted with that degree of remorseless logic. Its apparently limitless breadth is circumscribed by reference to the essential nature and purpose of VAT. This is best expressed in the following passage in the opinion of Advocate General Jacobs in Kretztechnik AG v. Finanzamt Linz (Case465/03)  STC 118.
"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.
- If "supply of services" merely means a supply which is not a supply of goods, then Article 6 (1) provides little assistance in defining the concept of supply itself. The real insight into the concept is afforded by paragraph 53 of the Opinion, since it encourages the reader to approach the question whether a particular type of transaction gives rise to a supply by asking whether an affirmative answer is consistent with the nature and purpose of VAT as a system of taxation. I do not consider that the Advocate General intended the reference to a chain to be an invariable feature of a supply. Some services (such as a barrister's opinion paid for by a solicitor) are supplied as part of a chain. Others, such as a solicitor's advice direct to his client, are not.
- Nor is it the case that a focus on turnover will invariably prove a reliable guide to the identification of a supply for VAT purposes. The jurisprudence of the ECJ has identified a series of situations where the question who is supplying what to whom, and for what consideration, has been answered in a way that links the supply, and the VAT payable in relation to it, more closely to the trader's gross profit on the transaction in issue than to turnover.
- Four types of transaction illustrate this point: gaming machines, foreign exchange, factoring and lending. Each of them were deployed by Mr Paines as illustrations of the way that the VAT jurisprudence identified the consideration for a supply (i.e. as going to output issue 2), but in my judgment they shed valuable light on the logically prior question as to the proper identification of the supply itself. In H J Glawe Spiel und Unterhaltungsgeraete Aufstellungsgesellschaft mbH & Co KG v Finanzamt Hamburg (Case C-38/93)  STC 543, the ECJ held that where a trader offered the use of a gaming machine to customers, the consideration passing to the trader was not the aggregate of the customers' bets, but the trader's gross takings after netting of the customers' winnings against their bets: i.e. the trader's gross profit from the operation of the machine.
- In Customs and Excise Commissioners v First National Bank of Chicago (Case C-172/96)  STC 850, the taxpayer FNBC dealt in foreign exchange transactions, earning its profit by the spread between bid and offer price for different currencies, rather than by taking commission. On the basis that currencies are legal tender and not tangible property, (as the ECJ held), the exchange had to be analysed as involving the supply of services rather than goods. A rigorous application of Article 6 on a turnover basis might have suggested that FNBC and its customer each made a supply to the other of a different currency, the consideration being in each case the value of the currency moving in the opposite direction. But the Court held that consideration for the supply made by FNBC was only the value of the spread, rejecting the turnover based argument of the bank. Although the case was treated as turning on the proper interpretation of Article 11 (which identifies the taxable amount by reference to the consideration for the supply), the key to the Court's conclusion lay in identifying the relevant supply as the provision of a currency exchange service by FNBC, rather then the supply by way of sale of a particular form of legal tender to the customer.
- In Finanzamt Gross Gerau v MKG Kraftfahrzeuge Factory GmbH (Case C-305/01)  STC 951, the ECJ had to analyse a factoring agreement so as to identify the factor's VAT output profile. The agreement required the factor to assume without recourse the risk of default on the debts assigned, and the burden of their recovery. A rigorous turnover-based application of Article 6 might have led to the conclusion that the trader made an outright supply of the debts to the factor for a consideration consisting of the face value of the debt less the commission and del credere fee charged by the factor. The Court held however that the true VAT analysis of the transaction was that the factor provided a supply to the trader consisting of a factoring service, for a consideration consisting of the aggregate of the commission and the del credere fee. Although the VAT output profile of the trader was not in issue, I cannot conceive that the Court would have accepted an argument that the same transaction also constituted a supply of the debts assigned by the trader to the factor. The assignment of the debts was merely the necessary step which the trader had to take in order to obtain the benefit of the factoring service. It was not a supply at all.
- Finally, it was common ground between Mr Cordara and Mr Paines that when a bank lends money to a customer, the bank makes a supply of credit (i.e. the use of the money lent) rather than the supply of the money itself. The consideration is therefore the interest (and any relevant charges) payable by the borrower, rather than the aggregate of the interest, the charges and the value of the promise to repay the principal. If the customer provides security for the loan, that is not a supply to the bank. It is merely the performance of a condition of the loan agreement. This common ground is to be found reflected in paragraph 47 of the Opinion of Advocate General Lenz in BLP Group plc v Customs and Excise Commissioners (Case C-4/94)  STC 424, at 432. That is no doubt why the argument before the Tribunal (and the COBE Tribunal) centred on the question whether the assignment of receivables by the bank as part of the securitisation process was or was not an assignment by way of security for a loan.
- That is not to say that there cannot be mutual supplies arising from the same transaction. The best example consists of a barter of goods for goods. Whether that is the correct VAT analysis of any particular transaction will depend on an economic analysis of its essential nature, set against the nature and purpose of VAT as a form of taxation.
- Article 13 under Title X headed EXEMPTIONS is not, as its heading implies, concerned with the definition of supply, but under part B headed Other Exemptions it provides as follows:
"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;
(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.
- The concept of supply, as identified but not defined in the Sixth Directive, is applied in the UK in the following sections of VATA. Section 1(1) provides that Value Added Tax shall be charged, in accordance with the provisions of the Act:
"(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.
- Section 31, headed "Exempt supplies and acquisitions" provides in subsection 1 as follows:
"(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…"
- Schedule 9 includes a large number of exemptions. Under Group 5 – Finance, item 1 consists of:
"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."
- Mr Cordara submitted that the express exemption of (inter alia) the issue of a security for money (a phrase which, correctly in my judgment, he submitted meant security for the payment or repayment of money) showed that the grant by a borrower to a lender of a security for the repayment of the money lent must in principle be a supply by the borrower. For reasons which will appear, and which flow from common ground between Mr Cordara and Mr Paines in relation to securities for the repayment of money, I disagree.
- Mr Cordara took me to a number of authorities which he submitted supported the following propositions as relevant to the question whether any particular transaction constituted a supply.
- First, supply must embody a broad and robust concept capable of being applied neutrally and uniformly across a range of different EU legal systems. This flows from the Euro wide nature of VAT and from the governing principle of neutrality enshrined in the preambles to both the First and Sixth Council Directives. An example of the independence of the concept of supply from the classification system of any particular national law is to be found in the definition of supply of goods in Article 5 (1) which, like the rest of the Sixth Directive, studiously avoids using the word sale.
- Secondly, and this is a reflection of the first principle, the question whether any particular transaction constitutes a supply falls to be determined objectively, rather than by reference to the motives of the parties to the transaction. Thus for example, the presence of an illegal or fraudulent aspect of the transaction, or to a series of transactions of which the transaction in issue forms part, is usually irrelevant: see Customs & Excise Commissioners v Oliver  STC 73 and Optigen Ltd v Commissioner of Customs & Excise (Cases C-354/03, C-355/03 and C-484/03). Again, the fact that a transaction is part of a tax driven scheme is in principle irrelevant; see Halifax Plc v Customs & Excise Commissioners (Case C- 255/02 )  STC 919, in particular at paragraphs 55 – 60 of the judgement of the ECJ.
- Thirdly, that the fact that the transaction in issue forms part of a series or chain of pre-ordained transactions does not enable it to be ignored, or to have its own essential character redefined by reference to the essential character of the chain of transactions as a whole. That this is so is well illustrated by the Opinion of Advocate General Poiares Maduro in the Halifax case, in particular at paragraphs 46 – 59. At paragraph 57, by way of comment on the contrary submission of the UK Government, the Advocate General said this:
"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."
- The same principle emerges from BLP Group Plc v Customs & Excise Commissioners (supra), and from its application by the House of Lords in Customs & Excise Commissioners v Robert Gordon's College  STC 1093, in particular in the following passages from the speech of Lord Hoffmann, at pages 1099 -1100:
"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."
- Next, it is no part of the function of the neutrality principle within the EU wide VAT legislative scheme to ensure that every different method by which parties may seek to achieve the same overall economic result must be taxed in the same way. This may be found best enunciated by Lord Walker of Gestingthorpe in Lex Services Plc v Customs & Excise Commissioners  UKHL 67 in paragraph 27 of his speech, as follows:
"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)  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.
- By way of inevitable counterpoint to those principles, the court is not hidebound by the labels which the parties have chosen to apply to their transactions, but where it is necessary, must ascertain the essential character of the transaction in issue. This well known principle of English Law (cf Street v Mountford) is equally vigorously applied within the EU wide VAT system, as is illustrated by the following passage of the opinion of Advocate General Tizzano in Customs & Excise Commissioners v Mirror Group Plc (Case- 108/99)  STC 1453, where he said this :
"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."
- The identification of the "cause" of a contractual transaction, where necessary to establish whether it constitutes a supply, and if so to categorise it as taxable, exempt or specified, may legitimately entail its interpretation by reference to the relevant matrix of background facts known to the parties of the type classically explained by Lord Hoffmann in West Bromwich  UKHL 44. Where the transaction under review forms part of a preordained chain or scheme of transactions, the other transactions in the chain and their objective purpose and effect may well be, and indeed will probably usually be, a centrally relevant part of that factual matrix. A domestic example of that process in action is to be found in Customs & Excise Commissioners v Pippa –Dee PartiesLtd  STC 495 per Ralph Gibson J., although the analysis there was more concerned with the need to examine, in parallel, all aspects of what was in truth a single transaction, rather than the ascertainment of the essential character of one transaction, by reference to its place in a chain of transactions.
- In my judgment the best summary of the combined effect of those principles, when used to perform the VAT analysis of a transaction for the purpose of answering the question who is making a supply of what to whom (and if necessary what kind of supply) is to be found in the following passage from the judgment of Jonathan Parker LJ in Tesco plc v Customs and Excise Commissioners  EWCA Civ 1367 [2003 STC 1561, at para159:
" 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  STC 221 at 223,  1 WLR 588 at 591 per Lord Denning MR: see  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  STC 495 at 501 per Ralph Gibson J: see  above. 3. The terms contractually agreed may not be determinative as to the true nature and effect of the scheme (Reed, see  to  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  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  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  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  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.'"
- As is apparent from its Decision, the Tribunal was well aware of all the above principles, and approached the legal analysis of output issue 1 conscious of the need to steer a straight course between the potentially conflicting requirements of, on the one hand, the requirement to adopt a transaction by transaction approach, and on the other hand, as they put it, "consideration of the bigger picture": (Decision paragraph 147). As I shall explain, the Tribunal attempted to do so by adopting first a "big picture" analysis, and secondly what it described as a "segmented" (i.e. transaction by transaction) analysis, and concluded that both approaches led to the same conclusion, namely that the securitisation scheme did not involve supplies of receivables by MBNA.
The relevant facts
- I must now summarise the facts about the transactions in issue, to the extent relevant to the question whether, separately or together, they constitute a supply by MBNA. The transactions in issue consist of a large number of (to use a neutral word) transfers of debts by MBNA. The Tribunal's findings of fact about those transfers may be divided broadly into three categories:
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.
- It is necessary to say something about the extent to which this court is bound by findings of fact in each of those three categories. The Tribunal's findings in category (a) were derived from the written and oral evidence, tested by cross examination, of participants in the design and operation of the securitisation scheme. They are relevant in the West Bromwich sense in assisting in the identification of the 'cause' or essential character of both the scheme and its component parts, and save in immaterial respects, have not been and could not been the subject of challenge in this court.
- The same may be said of the description of the parties to the relevant contracts. But the contracts themselves, being wholly in writing, prove themselves. The court is not therefore bound by the Tribunal's description or summary of those terms, valuable though that undoubtedly is. As to category (c), the only relevant fact is that the contracts were, and for reasons which will appear, had to be, performed strictly in accordance with their terms. Again therefore the court is not bound by the Tribunal's description of how the contracts constituting the securitisation scheme operated in practice, assisted though it undoubtedly was by the participating witnesses' evidence. Where a series of highly sophisticated contracts are operated strictly in accordance with their terms, a description of their operation is in reality no more than an analysis of how they work as a matter of true construction. In this respect, I shall have to consider whether one critical aspect of the Tribunal's description of the operation of the securitisation scheme over time was in fact a correct deduction from that process of construction.
- The background, origins and commercial purpose of the securitisation scheme is set out in detail in paragraphs 23 – 40 of the Decision, under the headings "MBNA's business" and "Securitisations". It is compulsory reading, and any departure from it in the following summary of the parts relevant to output issue 1 is my fault rather than that of the Tribunal.
- The essential features of MBNA's credit card business are that pursuant to contracts with its card holding customers, MBNA is required to finance their purchases by making funds available through the credit card and banking systems, ultimately for the benefit of retailers and other suppliers to those customers, equivalent to the cost of the goods and services required by the customer, less a charge ultimately paid by the retailer known as "interchange". MBNA also makes cash available, usually through ATM machines, when customers use their cards for the purpose of drawing cash. Again, the necessary funds are made available through the banking system. Customers using cards for the purchase of goods or services obtain interest free credit until the end of the month in which those purchases occurred. Thereafter, if they choose not to pay the full amount incurred by the end of the month, they pay interest on any balance unpaid. If their month end payments fall short of a stipulated minimum, they may also be liable to pay penalties. Customers who obtain cash by using their credit cards pay interest from the moment of withdrawal. The aggregate of interest, penalties and fees payable under the relevant credit card agreements are known as "finance charges".
- The use of the bank's money during the period between its payment and the customer's repayment constitute, in VAT terms, the bank's supply of credit to its customers. That requires the application of a large and constantly fluctuating amount of working capital by the bank, its size being proportional to the size and level of card use of its customer base. Its volatility is a consequence of the fact that customers are free to use their cards whenever and (within credit limits) as much as they wish. A well known seasonal variation is that use exceeds repayments at Christmas, the tables being turned early in the following year.
- The profitability of the bank's credit card business depends critically upon it being able to obtain the necessary working capital at a cost less than the rate which it charges its customers for the use of its credit. In a highly competitive credit card market, quite small variations in the cost to the bank of obtaining its working capital can make a critical difference between a successful and an unsuccessful business.
- The securitisation process, and in particular the type of scheme with which this appeal is concerned, was devised in the USA and has since then been widely adopted in Europe and in particular the UK during the last 10 -15 years, as a means of obtaining working capital at a highly competitive cost. Although used by almost all the UK clearing banks, it is of particular value to an entity such as MBNA, which has no credit rating of its own (its American parent's rating being only BBB). The essence of the securitisation process is that it enables the constant stream of debts owed by the bank's credit card holding customers to be bundled into a form which, offered as indirect security for commercial paper issued on the capital markets, gives that paper a higher credit rating then that of the bank itself, and in most cases the very highest (AAA) rating. In the remainder of this judgment I shall describe the debts accruing due from by the bank's credit card holding customers as "the Receivables", and the credit card issuer as "the Bank".
- The bare bones of the securitisation structure are that the Bank assigns its Receivables in such a way that they become beneficially owned by a separate legal entity which, directly or indirectly through yet further entities borrows in the capital markets using the assigned Receivables as security, passing the proceeds of the borrowings back so as, ultimately, temporarily to swell the cash flow and therefore the working capital of the bank.
- Regardless of its detailed terms, every securitisation structure of the type under review in this appeal must satisfy two essential conditions, if it is to achieve the underlying objective of the raising of working capital for the Bank at a competitive rate. The first is that the lenders obtain security which is wholly insulated from the fortunes of the Bank itself. Thus, the security must not be dependent upon any promise by the Bank to repay the lending, nor must its value be capable of being affected by the Bank's insolvency. This is, as might be expected, an invariable requirement of the rating agencies. Secondly there must be no requirement for the bank to underwrite the repayment of the lending. The Bank must not be, itself, directly or indirectly, liable as a borrower of the amount lent. This is an invariable requirement of the Bank's regulators.
- An inevitable consequence to these two requirements is that the Receivables must not be assigned by the Bank, in any sense by way of security. If they were, then this would firstly expose the ultimate lender (who does rely upon the Receivables as security) to adverse consequences arising from the insolvency of the Bank (at least to a much greater degree than would arise merely from a sale of the Receivables by the Bank), and it would also imply some obligation to pay on the part of the Bank. Furthermore, the Tribunal found that there is a regulatory ban on banks issuing floating charges on their book debts or other property, due to the consequences of the exposure of the Bank and its assets to the appointment of receivers. For these reasons, the designers of securitisation schemes of the type under review go to great lengths to structure the arrangements so as to avoid the assignment of Receivables by the Bank having the character of assignments by way of security. The assignments are not registered pursuant to Section 395 of the Companies Act 1985, and they are supported by categorical opinions from the solicitors responsible for their design and implementation to the effect that they constitute "true sales" rather than assignment by way of security .
- The Tribunal found (and this finding is not challenged on appeal) that it was also a regulatory requirement of schemes such as the present (imposed by US regulators) that the special purpose vehicles ("SPVs") created and used for the purposes of the securitisation scheme should not themselves have any discretion as to their manner of participation in the scheme. As will appear, the SPVs could neither decline to accept Receivables offered for assignment, nor choose how the cash proceeds of either the Receivables or of the borrowings obtained by their use as security should be applied. The enormously complex process whereby the scheme was administered on a daily and monthly basis was therefore entirely preordained, and ran along tramlines exhaustively defined by the extremely detailed terms of the contracts by which the scheme was regulated.
- By contrast with other schemes commonly the subject matter of tax appeals, the Tribunal found (and it is common ground) that although the schemes were fine-tuned in such a way as not unnecessarily to incur tax liabilities (for example stamp duties) the schemes were not to be regarded as tax driven in the sense that the avoidance of tax formed any part of their essential purpose. Their sole purpose was as I have already identified, the obtaining of working capital by credit card issuing banks at a highly competitive cost.
- I turn now to the contractual documents by which these schemes were constituted and regulated, and the parties to those contracts. Thus far I have described the securitisation schemes generically rather than specifically. This appeal is concerned with VAT issues arising out of the second of two securitisation structures used by MBNA. Its first, "The UK Capital Receivables Trust I" structure was used for securitisations which began in 1995 and had reached six in number by the time that MBNA commenced securitisations under the "UK Receivable Trust II" in 2001. Since then MBNA has implemented securitisations amounting in total to at least £3 billion by 2003, under the Trust II structure. All the contracts relating to each structure are expressed to be governed by English law, and I assume (although it is nowhere stated in the Decision) that the Receivables themselves, being a form of intangible property known to English law as a chose in action, are themselves the creatures of English law; i.e. that the credit card agreements pursuant to which every one of them came into existence were themselves expressed to be, or in any event were, governed by English law.
- For that reason I have no hesitation in using English law phraseology and systems of classification in describing the relevant contractual provisions, although of course the classification for VAT purposes is an issue independent from any particular member state's system of law, including English law.
- This appeal is concerned with MBNA's UK Receivables Trusts I and II, but the detailed evidence and argument has been focussed both here and before the Tribunal on Trust II, it not being suggested that the terms of Trust 1 are materially different for VAT purposes. Trust II was governed by a series of documents originally made on 26 September 2001 and amended and re-stated on 26 October 2001. These were framework documents, designed to accommodate a number of individual securitisations ("series"), and to provide a comprehensive common framework for the operation of each. Any particular securitisation is effected by a Supplement containing provisions peculiar to that series alone. Even the framework documents have their own separate Master Framework Agreement, but that has no operative provisions, being limited to setting out the abbreviations and definitions common to the operative deeds. The Tribunal's Decision sets out at paragraphs 41-79 a comprehensive description of the provisions of the contractual structure relevant to all the issues which the Tribunal had to determine. The summary which I provide below contains reference only to those provisions relevant to output issue 1. In particular I omit any detailed reference to the servicing arrangements by which provision was made for the continuing servicing by MBNA of the accounts of those card holders whose debts were assigned pursuant to the scheme. I shall have to return to them when dealing with the input issues, below. I have not found it necessary to set out the terms of the relevant contracts in as much detail as that adopted by the Tribunal. By that I imply no criticism, either of the Tribunal's descent into greater detail, or of the accuracy of those details which they have described.
- For my purposes it is necessary to focus principally on two main documents which are entitled respectively the Receivables Securitisation Deed ("RSD") and the Receivables Trust Deed & Servicing Agreement ("RTDSA"). Neither is comprehensible without reference to the other. Broadly, the RSD provides for the assignment by MBNA of receivables to the corporate trustee of a Receivables Trust, while the RTDSA sets out the constitution and provisions for daily and monthly operation of the Receivables Trust, for the benefit of its beneficiaries, one of which is MBNA itself .
- The RSD is made between MBNA as "Transferor and Offeror" and Credit Card Securitisation Europe Ltd. ("CCSE") as "Receivables Trustee". CCSE is registered in Jersey. It is an SPV having no function other than the performance of its obligations under the UK Receivables Trust II Scheme ("the Scheme"). Its issued share capital is beneficially owned by a Jersey charitable trust and at all material times the management of its affairs has been vested in Jersey domiciled and resident directors.
- The recitals to the RSD refer to the Transferor and Receivables Trustee (MBNA and CCSE respectively) having agreed that for the purposes of facilitating a possible securitisation, the Transferor may from time to time offer to assign all Receivables (existing and future) arising on such accounts of its credit card customers as are nominated to become Designated Accounts. It is acknowledged that upon acceptance of such an offer to assign by the Receivables Trustee, the Receivables will be assigned by way of equitable assignment only unless notice of assignment should later be given. It is also expressly contemplated by the recitals that the Receivables Trustee will appoint the Operating Party for the purpose of giving instructions in relation to any available discretion capable of being exercised by the Receivables Trustee upon the terms of a separate agreement described as the "RT Operating Agreement".
- Clause 2 of the RSD provides for the nomination of relevant Accounts by the Transferor as Offeror and the offer of all existing and future Receivables arising on nominated Accounts by an offer to assign in a prescribed form. Clause 2.2 provides for subsequent nominations of Accounts and offers of Receivables arising thereunder at any time during the currency of the UK Receivables Trust II, in much the same way as is effected by the initial nomination and offer.
- Clause 3 provides that the Receivables Trustee may accept any Offer made in accordance with Clause 2, by a payment of the Acceptance Price (which is a flat sum of £10,000, regardless of the quantum of any particular Offer). Clause 4 provides that on acceptance of any Offer each relevant nominated Account shall become a Designated Account, and that all the Offeror's rights title and interest in and to existing and future Receivables (together with certain other rights) should thereupon vest in the Receivables Trustee on the terms and conditions of the RSD. Clause 4.2 provides that the assignment thereby constituted should take place in equity only, unless and until a Notice of Assignment should be given. Since it was central to the smooth operation of the securitisation process that the contractual relations between MBNA and its credit card holding customers should be unaffected by having their Accounts nominated, and their Receivables assigned, the giving of notice so as to require the customers to pay their debt to the Receivables Trustee was no doubt conceived of as a last resort, to be used only upon the insolvency or other collapse of MBNA.
- Clause 5.1 provided for a Further Payment (as defined) to be made by the Receivables Trustee to the Offeror "immediately after … acceptance" of any relevant Offer. The Further Payment amounts to the "Outstanding Face Amount of the Existing Receivables … less the Acceptance Price". The split between £10,000 and the Face amount of the Existing Receivables minus £10,000 was a Stamp Duty avoidance device having no particular VAT consequence.
- The assignment effected by the combination of offer and acceptance already described is of course an assignment of both Existing and Future Receivables. Clause 5.2 of the RSD made provision for payment by the Receivables Trustee of the Outstanding Face Amount of Future Receivables to be made to MBNA within 2 business days after the Date of Processing relating to such Future Receivables (or any longer period which might be agreed). In practice that meant 3 days after the creation of a Future Receivable by the use of a credit card by one of MBNA's designated customers, because the Date Of Processing was always one day after the electronic reporting of such use to MBNA.
- Clause 5.3 made provision by way of further consideration for the assignment of Receivables for the payment of Deferred Consideration. The provisions which identify the amount and the agreed date for payment of Deferred Consideration are very complex, but need not be described for present purposes. In summary therefore, the amount contractually agreed as the Purchase Price for the assignment of Receivables (Existing and Future) in respect of a particular accepted Offer was £10,000 together with the outstanding face amount less £10,000, together with the Deferred Consideration: see Clause 5.4.
- Clause 6 of the RSD made important provision as to the manner of payment of the Purchase Price. The £10,000 had to be paid into a designated MBNA account ("EBL Acceptance Price Account of the Offeror"). The obligation to pay the Further Payment (face amount less £10,000) in relation to Existing Receivables was to be satisfied by immediate payment in cash, to the extent that the Receivables Trustee had cash available for the purpose, and otherwise by an increase in the Transferor Interest in the UK Receivables Trust II ("The Receivables Trust"). Immediate payment by either of those methods was to constitute full compliance by the Receivables Trustee with its clause 5.1 payment obligation in respect of the Existing Receivables in question.
- At first sight, clause 6.3 appears to provide only for cash payment of the outstanding face amount in relation to Future Receivables, again into a designated bank account of MBNA known as "the EBL Receipts Account". But clause 6.3 is expressed to be subject to clause 13.3, which required the Transferor to allow a set-off against its clause 5.2 entitlement in respect of any "shortfall in the amount of Cash Available for Investment on that Business Day which is to be funded by the Transferor as beneficiary of the [Trust] in the circumstances contemplated by Clause 5.2 (c) (ii) of the Receivables Trust Deed and Servicing Agreement ("The RTDSA")", with a corresponding increase in the Transferor Interest in the Receivables Trust. Clause 5.2(c) (ii) of the RTDSA required the Transferor "to fund the Receivables Trustee in respect of payments to be made to the Transferor on any Business Day in excess of the Cash Available for Investment". That sub-clause went on to make it clear that any shortfall in cash receipts thereby occasioned to the Transferor was to be compensated for by a proportional increase in the amount of its beneficial interest in the Receivables Trust.
- I turn to consider the RTDSA itself. It was made upon the same date (including restatement date) as the RSD, between CCSE, MBNA, Deva One Ltd and Deva Two Ltd, and is the principal but by no means the only document regulating the conduct of the Receivables Trust by CCSE, and defining the beneficial interest therein of its beneficiaries. Deva One and Two Ltd are also Jersey registered SPVs whose only function is to participate in the securitisations. They are collectively described in the documentation as "the Investor Beneficiaries". They have Channel Islands resident directors and are beneficially owned by the same Jersey charitable trust as owns CCSE. Like CCSE they operate pursuant to the scheme in an entirely preordained way, having no relevant business discretion of their own. For the purposes of the particular securitisation series treated as the relevant example by the Tribunal and on this appeal, the relevant Investor Beneficiary is Deva One Ltd ("Deva One").
- Clause 2 of the RTDSA contains a declaration of an undivided bare trust by CCSE in favour of the Beneficiaries, subject to stated exemptions. The only relevant Beneficiaries are MBNA as "Transferor Beneficiary" and Deva One as "Investor Beneficiary". Clause 3.1(a) provides that:
"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.
- Clause 5 of the RTDSA (running to 15 pages) makes very detailed provision as to the running of the Receivables Trust, and in particular as to the handling of payments of money into and out of it, as Collections derived from the payment of their debts by designated credit card holders are credited to the trust by MBNA, acting for that purpose as CCSE's servicing agent. It is easier and quicker to summarise the effect of these provisions than their detailed terms. Broadly, payments and receipts into and out of the Receivables Trust are dealt with mainly daily, but certain classes of payments are made monthly, in a process described as "the waterfall". The daily inflow of Collections from MBNA is applied, to the extent that there is available cash, in the making of payment (3 days after their creation and assignment) for incoming Future Receivables. If there is a surplus after payment in full, that cash is returned to MBNA as payment in reduction of its beneficial interest in the Receivables Trust.
- The monthly process is concerned mainly with the distribution of incoming finance charges and interchange arising in relation to the Designated accounts. Broadly, sufficient of the cash necessary to enable Deva One to service its borrowings is passed to Deva One, and the remainder finds its way back to MBNA, partly in the form of its servicing fee, partly as "excess spread" and as to the balance, as payment in reduction of its beneficial interest in the Receivables Trust.
- The overall effect of these complicated provisions is that, in cashflow terms, available cash paid into the Receivables Trust is constantly swept back to MBNA, to the extent not required by Deva One to service its borrowings, and any consequential mismatch between MBNA's cash entitlement (as assignor of the Receivables and as service agent) is dealt with by constant adjustment of the amount of MBNA's beneficial interest in the Receivables Trust. Thus, when Collections exceed incoming Future Receivables, MBNA's beneficial interest decreases, and when incoming Future Receivables exceed Collections, MBNA's beneficial interest increases. As the Tribunal found, and the contractual provisions require, these payments are actually made, rather than being dealt with by mere accounting entries.
- The rights and duties of MBNA as Servicer of the assigned Receivables for CCSE are set out in clause 9 of the RTDSA. They are relevant to input issues, and I will therefore describe them later. The duties include both managing the Designated Accounts and providing CCSE with the detailed daily and monthly advice necessary to enable it to make all relevant payments out of the Receivables Trust.
- I have so far described only those provisions which govern the administration of the Receivables Trust itself, during the period before repayment becomes due by Deva One under the terms of its borrowings. I shall now summarise the structure by which Deva One obtains its borrowings, and then the process by which they are repaid. Deva One borrows the money which it then deploys as its "Contribution" to the Receivables Trust by issuing non-negotiable loan notes, on the security of its beneficial interest in the Receivables Trust, to a financial institution, in this case Chester Asset Receivables Dealings 2003 A plc. That company then issues negotiable commercial paper in the capital market, backed by Deva One's loan notes, which are held as security by a security trustee.
- Repayment of Deva One's borrowings is made during what the scheme describes as "the amortisation period". The process is regulated, for each Series, by its bespoke Supplement. For the Series under review, the period will begin on 31st January 2007, unless extended. From that date, cash incoming to the Receivables Trust is set aside to the extent necessary to enable Deva One to repay its borrowings and all associated costs, rather than being passed back to MBNA as already described. Once all borrowings have been repaid, and Deva One's beneficial interest in the Receivables Trust reduced to zero, MBNA becomes its sole beneficiary, and the Trust is (in theory) wound up. In practice, there are at any time more than one overlapping Series being operated under the Trust, so that winding up only occurs on the repayment of the borrowing which finances the last Series.
- The nature and essential character of the securitisation scheme comes closer into focus if its operation is examined over time, taking virtual snapshots at relevant moments during the life of a typical Series, and for clarity (but contrary to practical reality) imagining that there is only one series in operation at the time. That produces no relevant distortion, because the Receivables Trust structure is in truth the framework for the operation of a number of distinct Series. On day 1, the acceptance by CCSE of MBNA's initial Offer (by payment of £10,000) causes an immediate assignment of a very large parcel of Existing Receivables into the Receivables Trust. Since CCSE has no cash, they are paid for by a corresponding increase in MBNA's beneficial interest in the Receivables Trust, from zero to their approximate face value, less the £10,000 paid (and presumably pre-funded by MBNA to prime the pump). I was invited to assume that about £1 billion of Existing Receivables were assigned on day one.
- On each of days 2 to 4 (to the extent that designated card holders use their credit cards on that day) Future Receivables come into existence and are immediately assigned. This is because the original Offer is of an assignment of both Existing and Future Receivables in relation to designated accounts. They are not immediately paid for, but go to swell the beneficial interest of MBNA in the Receivables Trust. Collections also start to arrive, and since there is no payment obligation on CCSE on days 2 to 4, they are also held as an accretion to MBNA's beneficial interest, and paid out to MBNA as such.
- On day 5, payment for Future Receivables created on day 2 falls due. Cash from Collections is used. If there is a surplus, it is paid out to MBNA (there being no need to pay Deva One anything at this stage). Any imbalance between Collections and payments due is dealt with by an adjustment to MBNA's beneficial interest. Any spare cash is paid out to MBNA. This process continues until day 29. MBNA's beneficial interest in the trust will still be approximately £1 billion.
- On day 30, Deva One makes its Contribution, in the case of the Series under review, of £500 million. Subject to any shortage of Collections against payment obligations on that day, the whole of the £500 million is immediately paid out to MBNA in reduction (by approximately 50%) of its beneficial interest in the Trust.
- From then on, until the start of the amortisation period, Deva One's beneficial interest in the Trust remains constant, at or around £500 million, while MBNA's interest fluctuates in line with imbalances between incoming Future Receivables and incoming Collections, as already described. Daily receipts and payments continue, the effect of which is (in cash flow terms) that the cash inflow arising from the inevitable process of the maturing of assigned Receivables into money is passed back by CCSE to MBNA as soon as it is received, as delayed payment (by 3 days) for Future Receivables, or rather, as the COBE Tribunal held, correctly in my judgment, strictly as payment in respect of the increase in MBNA's beneficial interest in the Trust as from the moment of their creation: see paragraph 118 of the COBE Decision.
- In the meantime, all payments needed by CCSE to service its borrowing are regularly paid out of the cash coming into the Trust, as are the expenses of the administration of the scheme itself, including but not limited to the fees due to MBNA as Servicer. The structure of the payment obligations of CCSE for incoming Receivables is such that those obligations are deducted from what would otherwise be MBNA's beneficial interest in the trust.
- Finally, during the amortisation period, the effect of the use of incoming Collections to fund Deva One's repayment of its borrowed £500 million is to reduce its interest in the Trust pro tanto, until it reaches zero, and correspondingly to increase MBNA's interest back to the face value of the assigned Receivables, until it becomes the sole beneficial owner of the Trust's property, at a cash flow cost of approximately £500 million.
The Tribunals' decisions on output issue 1
- I must now decide whether the Tribunal's negative answer to this issue involved an error of law. For the most part, the MBNA Tribunal adopted the reasoning of the COBE Tribunal on the same issue, adding some brief additional reasons of its own. I have already mentioned that the COBE Tribunal had to consider a substantially identical scheme, drafted by the same professional advisors. There, the bank was COBE, the Receivables Trustee was Castle Receivables Trust Limited ("Castle") and the Investor Beneficiary was Carlisle Castle Funding Group Limited ("Carlisle"). Castle and Carlisle were, like CCSE and Deva One, also Jersey registered, and had the same Jersey based directors and managers. The factual findings upon which the COBE Tribunal proceeded were, mutatis mutandis, indistinguishable from those made by the MBNA Tribunal, although expressed in different language.
- Perhaps encouraged by counsel (again Mr Cordara and Mr Paines) the COBE Tribunal assumed that the answer to the question whether the assignment of receivables by COBE to Castle amounted to a supply (assuming consideration) required the Tribunal to choose between two competing contentions: (1) that the assignment was a simple sale (and therefore a classic supply); and (2) that the assignment was "not a supply at all but the giving of security to satisfy the conditions on which a lender is willing to make a loan, and that it is the loan which represents the supply": (paragraph 84 of the COBE Decision).
- The Tribunal's conclusion was that the securitisation scheme was "nothing more than a sophisticated means of borrowing money" (paragraph 113), and that it therefore followed that "the assignment of receivables was an assignment by way of security and not an assignment by way of sale" (paragraph 114). The Tribunal reached that conclusion primarily by treating the essential character of the assignments as governed by the character of the securitisation scheme as a whole. This best appears from the following extract from paragraph 112:
"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."
- The tribunal was assisted in attributing to the assignments the economic purpose of the whole scheme by its conclusion (at paragraph 113) that neither Castle nor Carlisle had any economic purpose of its own. In concluding that "the only analysis which stands up to scrutiny is that COBE created the security for a loan" (paragraph 114), the Tribunal relied in addition upon three features of the assignments. First, that under the contractual regime, neither Castle nor Carlisle could use the receivables otherwise than as security for the loan notes; second, that COBE did not wholly alienate the receivables, but rather imposed a regime which ensured that their proceeds found their way back to COBE as the purchase price of further receivables, also to be used as security by Castle and Carlisle; and third, that the receivables were at all times after assignment held in an undivided bare trust in which COBE always had a more than nominal interest.
- I have so far summarised the primary basis of the COBE tribunal's reasoning, which Mr Cordara criticised, both then and before me, as involving an illegitimate global approach. As a fall-back, the Tribunal applied a segmented analysis, looking at the effect of each assignment of a receivable (or group of receivables on a particular day): see paragraphs 117-8. On this analysis, its conclusion was that (for different reasons in relation to Existing and Future Receivables), all that happened was that COBE assigned them to a trust of which it was the relevant beneficial owner. As to the Existing Receivables assigned on day 1, COBE was the only beneficiary of the Receivables Trust. As for Future Receivables, the provision for payment 3 days after assignment (or rather creation, since they were pre-assigned) meant that the assignment initially merely swelled COBE's beneficial interest in the Trust. An assignment of such a type was merely a transfer by COBE to itself, and could not be a supply within the meaning of the Sixth Directive. Finally, when Carlisle's Contribution of £350 million was passed through the trust to COBE, that could not be a supply of receivables, but only the transfer of an interest in a trust, which could not be a supply at all. I shall call that analysis "the segmented approach". Mr Cordara criticised it as much too segmented. Before me, Mr Paines demonstrated little enthusiasm for the segmented approach either, and the MBNA Tribunal only made brief reference to it, at paragraphs 133 and 156.
- The MBNA tribunal added the following additional reasons of its own. First, it concluded that the interlinked and interdependent nature of the deeds by which the securitisations were effected required a global approach which compelled a conclusion that they "deal with loans to MBNA which it has to repay" rather than VAT supplies: paragraph 150.
- Second, relying on paragraph 47 of the AG's Opinion in the BLP case (supra), it concluded that the £500 million transferred through the trust to MBNA did not form part of MBNA's own resources, but of its borrowed resources, so that MBNA was as a borrower, receiving the supply of a loan service, not making a supply of the Receivables: paragraphs 152-3.
- Third, the Tribunal contrasted the sale of a trader's own resources, i.e. debts, to a factor (which by implication, in line with the Commissioners' then published guidance, now repudiated by Mr Paines, they assumed involved a supply by the trader), with an assignment of debts as security for a loan, treating them as two fundamentally different types of transaction for VAT purposes: paragraph 154. But that, with respect, begs the question whether the assignments were by way of security.
- Finally, the Tribunal purported to find as a fact that, "in the amortisation period, the moneys which CCSE has obtained for MBNA via Deva One…from the ultimate investors have to be, and are, repaid by MBNA", with the consequence that the moneys could not be considered to be other than loans, and therefore not supplies for VAT purposes.
- In my judgment, the Tribunals' concurrent global approach, the COBE Tribunal's segmented approach and the additional reasons of the MBNA Tribunal all involved errors of law, but both Tribunals were nonetheless correct in their conclusion that the assignments of receivables by COBE and MBNA were not supplies for VAT purposes. I shall deal with the global approach and the MBNA Tribunal's additional reasons first. Then I will address the segmented approach. Finally I will state my own reasons for agreeing with the Tribunals' ultimate conclusion.
- The common feature of the global approach and the MBNA Tribunal's additional reasons is that they all lead to what I consider clearly to be the wrong conclusion, namely that the banks borrowed anything from anyone, and that the assignments were by way of security. As my summary of the Tribunal's findings as to the rationale for the securitisation scheme makes clear, cardinal principles of its design were that (1) the banks should not be borrowers, and (2) their receivables should not be charged by them as security. The essential point of the securitisation structure was to enable the banks to bundle up and transfer a selection of their receivables, otherwise than by way of security, to a separate legal person or persons, so that those persons could use them as security for borrowings, and then pass the resulting cash flow to the banks, otherwise than by way of loan.
- That is in my judgment exactly what the structures achieved. That conclusion is in no way diminished by taking a global view of the structures as a whole. The wider and more comprehensive the review, the clearer is the conclusion. It is in my judgment a complete non-sequitur to say that because the overall purpose of the scheme is to enable the banks' receivables to be used as security for lending, assignments by the banks to the persons who are to be the borrowers and chargors must be by way of security for lending to the banks. There is a critical difference between an assignment by way of security and an assignment of property to another so that that other can use it as a security. That difference has been skilfully exploited by the banks and their advisors, not for a tax avoidance purpose, but so as to raise working capital at a competitive rate by a means which crosses no accounting or regulatory barriers.
- It is equally a non-sequitur to say that merely because Deva One's Contribution of £500 million to the Receivables Trust was made with its borrowed resources, when transferred to MBNA it formed part of MBNA's borrowed resources. I may borrow money to buy a house, but the purchase money does not after completion form part of the vendor's borrowed resources. It is true that MBNA's cash flow was improved only temporarily by the £500 million which it received, but not because it borrowed it, either from CCSE or Deva One. The cash flow improvement was temporary because during the amortisation period, payment for Future Receivables was no longer to take the form of an increased beneficial interest in the Trust for MBNA, automatically convertible into cash 3 days later, but rather the form of an increase in MBNA's beneficial interest in the Trust which it could no longer convert into cash, for as long as the other beneficiary Deva One needed the cash to repay its borrowings.
- Careful study of both Tribunals' reasoning reveals a constant and in my judgment illegitimate elision between the essential character and purpose of the scheme as a whole, and that of the assignments themselves. That cannot be justified by the conclusion that neither CCSE nor Deva One had any separate commercial purpose of its own. They were indeed slaves to the scheme, but it was no part of the purpose of the scheme that the assignments should be by way of security, or that the bank should incur the liability of a borrower.
- Nor in my judgment does the fact that neither CCSE nor Deva One was a free agent in relation to the Receivables once assigned lead to the conclusion that the assignments were by way of security. There cannot be a security granted if there is no repayment obligation owed by anyone to the grantee. Transfers of property with strings attached, but which are not by way of security, are legion. Similarly, although the transfer of property by way of security is an example of a transfer which reserves an interest to the transferor (namely his equity of redemption) there are numerous other types of reservations of interest which do not give the transfer the character of a security.
- By contrast with the Tribunals, Mr Paines did not in the end quarrel with the detailed legal opinions supporting the securitisation schemes, to the effect that the assignments were by way of sale rather than by way of security. Rather he submitted that they only provided a civil law classification, whereas the VAT classification both could and did properly reach exactly the opposite conclusion. My difficulty with that submission is that I have been unable to identify any principle of VAT law, in all the numerous authorities cited to me, which either permits, still less compels, a VAT analysis which produces a result flatly contrary to the civil legal analysis. This is not a borderline case where one civil legal system would characterise the transaction differently from another, or where the requirement to adopt an interpretation independent of any particular member state's civil law produces a result different from the law of the transaction itself. I cannot imagine any system of law which would characterise the assignments in this case as having been made by way of security, and none was suggested.
- The VAT approach to the identification of a supply carefully avoids the use of civil law concepts such as sale, charge or security, and the question whether any particular transaction is a supply is ultimately a question of applying the true meaning of the Sixth Directive (illuminated by case law) to the bundle of rights and obligations created by the transaction in question. But the Tribunals appear to have been invited to assume in relation to these assignments that the answer to the VAT question whether they involved supplies by the banks did indeed flow from the answer to the civil law classification question whether they amounted to sales or assignments by way of security. But a sale is usually a supply by the seller not because it is a sale, but rather because most sales satisfy the VAT criteria for a supply. Similarly, an assignment by way of security is not normally a supply by the assignor not because it is by way of security, but because such assignments are usually nothing more than the compliance by a borrower with a condition precedent to his receipt of a supply in the form of credit from the lender.
- It is true that there are cases such as Auto Lease Holland BV v Bundesamt fur Finanzen (Case C-185/01) in which the ECJ has, for example in order to ascertain in relation to an undoubted supply of goods who received the right to dispose of the goods under Article 5(1) of the Sixth Directive, allowed common sense to prevail over a multi-party structure which arguably led to a different conclusion. But that analysis did no violence to fundamental aspects of the parties' common commercial and legal purposes in structuring the transaction as they did. A conclusion that the assignments in this case were by way of security would do exactly that.
- The Tribunals' error of law in reaching that conclusion in this case was not merely the result, as Mr Cordara submitted, of adopting a global analysis or of collapsing a chain of transactions. It was influenced by the Tribunals' correct perception that the scheme produced a result in cash flow terms similar to a floating charge of book debts, but that ignores the principle that traders can produce identical commercial results by structures with very different VAT consequences. Forced to choose between two rigid categories, simple sale and security for a loan, they wrongly chose security for a loan. Their choice was in my judgment simply wrong as a matter of classification, and classification is a question of law, once the primary facts have been ascertained. They should not in my judgment have assumed either that there was such a straight choice to be made, or that the making of it would necessarily resolve the question whether the assignments involved a supply by the banks. Plainly the assignments were no more a simple sale than a form of security. They were a complex part of an even more complex scheme, and bore little resemblance to any other transaction in everyday use.
- I turn briefly to consider the segmented approach, mindful that neither party before me supported it, even as a fall back. My summary of how the securitisation scheme worked over time persuades me that the COBE Tribunal was correct to conclude that the immediate consequence of all the assignments was to give rise to a proportionate increase in MBNA's own beneficial interest in the Receivables Trust, and that the passage of the Contribution of £500 million from Deva One via the Trust to MBNA strictly involved, for the most part, an adjustment of beneficial interests in the trust, followed by a payment to MBNA by way of partial encashment of its beneficial interest. But in my judgment, broadly as Mr Cordara submitted, it involved an over-technical segmentation, or more simply a failure to see the wood for the trees. To be fair to the COBE Tribunal, I suspect that the segmented analysis was in essence a process of playing Mr Cordara at his own transaction-by-transaction game, rather than an expression of their own reasoning.
- While it is true that the trust structure may strictly be analysed as described by the COBE Tribunal, it was equally capable of analysis as a method of delayed payment for the Receivables, or, even more generally as the means of providing the temporary benefit of the securitisation of the Receivables without making a loan to the Bank. Either way, the adoption of such refined analysis does not in my judgment answer the VAT question whether the assignments involved supplies by the Bank, one way or the other. It was therefore wrong in law because it simply took the tribunal down a blind alley.
- I turn to my own reasons for concluding, in agreement with both Tribunals, that the assignment of Receivables by the banks to their respective Receivables Trustees did not constitute or involve the making a supply by the banks. For this purpose I exclude the consequential servicer function undertaken by the banks which, as is common ground, did amount to a supply of a service by the banks.
- Put in bare outline, in my judgment the assignments were, viewed separately from the rest of the scheme, in theory capable of constituting supplies, but because they were no more than the necessary pre-condition to the supply of a securitisation service to the banks, by the SPVs set up to operate that service, they are thereby deprived of the character of a supply by the banks. They therefore constitute an addition to the exceptional class of transactions which look prima facie like a supply, but which lose that character when viewed in their context. Other examples are the sale of currency to a forex dealer to obtain an exchange service, the assignment of debts to a factor to obtain a factoring service, and the assignment of property to a lender as security for (i.e. to obtain) a loan.
- In more detail, the starting point is that the securitisation scheme as a whole plainly provided a service to the banks. The SPVs took over a selection of the banks' Receivables on a rolling basis over a defined period, bundled up in a form suitable as first class security for a loan to them, and then made the consequential cash available to the banks for the same period in a manner which did not involve the banks either borrowing or granting security themselves, and at a more competitive cost than if the banks had done precisely that. For this purpose of deciding whether the banks made a supply it is irrelevant that the service was provided to the banks by more than one legal person, or by a series of interlinked contracts, rather than just one.
- Equally plainly, the service could not be provided at all unless the banks made available to the SPVs on a rolling basis a sufficient number and value of Receivables, to enable the SPVs to use them as first class security. A car owner cannot obtain a repair service unless he bails his car to the mechanic. While there may be other reasons why the bailment is not a supply by the car owner, one of them is that the owner is not providing a service to the mechanic at all.
- While it is strictly true that each individual Receivable is assigned to the Receivables Trustee on terms that ensure that it will mature into a Collection rather than be returned to the bank, the Receivables as a revolving class are returned, or their proceeds are returned, at the end of the relevant period, once the borrowings by Deva One have been repaid in full, and the need for a security ceases. Neither CCSE nor Deva One have any reason to want the Receivables for any purpose other than as the security for, and the means for the servicing of, their borrowings, in the course of their supply of a securitisation service to MBNA.
- None of the above analysis requires the assignments to be forced into impossible or technical pigeon-holes, such as assignments by way of security or sales to oneself. Nor does it involve collapsing the links in a chain of supply, but rather a review of the whole chain so as to understand the essential characteristic and commercial purpose of each relevant link. It does involve acknowledging their status as a revolving class, and analysing them in the context of the scheme as a whole, but in my judgment that offends no VAT or other principle. On the contrary, it complies with the principles outlined earlier in this Judgment.
- A number of potential contra-indications, pressed upon me by Mr Cordara, have given me considerable pause for thought, and I do not pretend that the conclusion which I have reached has been an easy one. The first and most important is that the classes of case in which a prima facie supply turns out not to be one when set in its context constitute an exception to the general, simple and robust rule that any transaction whereby goods or services are transferred or provided for consideration is a supply. Exceptions should be carefully confined. The Tribunals reached their conclusion on the basis that the assignments fell into an established exceptional class, namely security for a loan. My conclusion is that they constitute a new class of exception, namely transfer of receivables for the purpose of their being used in the provision of a securitisation service for the transferor.
- I have been able to overcome my reluctance to recognise such a new class for the following reasons. First, the identification of the class flows from the application to it of exactly the same principle that underlies the existing classes. The transfer is nothing more than the compliance with a necessary condition for the supply of the service by the transferee to the transferor. Secondly, the transaction is not one of barter, where the recognition of cross supplies in a single transaction is established. Third, there is a close analogy between a securitisation service and the supply of credit on the security of revolving book debts. In neither of them does the assignment of the subject matter of the security (the receivables) make sense as a VAT supply. My impression from reading the highly experienced Tribunals' Decisions is that they were powerfully influenced by an appreciation that a positive answer to the question produced a VAT nonsense. They therefore felt driven to the only analysis offered to them that produced a negative conclusion.
- My second cause for concern is that the reasoning which has led me to my conclusion was offered to neither Tribunal, nor to me, although Mr Paines endorsed it when I tentatively suggested it to him as a possibility. In that respect I must comfort myself by the fact that parties in adversarial litigation often advance widely opposed positions where the true analysis, asserted by neither of them, lies somewhere in between.
- Finally, as I have already mentioned, I have been troubled by the fact that the Commissioners' published guidance is (or was until the COBE Decision) that assignments of receivables to factors were supplies by the trader, even though the pre-condition for the receipt of a factoring service. Furthermore, in correspondence leading to the creation of the 1999 Agreed Method for the apportionment of residual outputs (to which I shall have to return in detail) both MBNA and the Commissioners appear to have treated it as common ground, after a full review of the documents constituting the securitisation scheme, that the assignments constituted supplies by MBNA.
- It is occasionally the case that a long settled view about the true legal classification of a particular form of transaction turns out to be wrong. A notorious recent example is the decision of the House of Lords in Spectrum Plus, in which a purported fixed charge on book debts in wide use by banks was held to be a floating charge. I am comforted in my conclusion by the fact that two experienced Tribunals were persuaded to depart from an analysis previously assumed to be correct by both parties, albeit for different and, as I hold, flawed reasons.
- I therefore decide output issue 1 in the negative. The assignments of receivables to CCSE do not constitute supplies by MBNA.
Output Issue 2 – If the assignments of receivables constitute supplies by MBNA, what was the consideration for them?
- Various answers to this question were proffered, ranging from negative, nil and £10,000 to the amount of the Contribution (in this case £500 million) and the Purchase Price as defined in Clause 5.4 of the RSD, which because of the constant replacement of new receivables for old would run to several billions. The COBE Tribunal fixed on the Contribution, but the MBNA Tribunal did not address this as a distinct issue.
- In my judgment it would not be appropriate for me to do so either. Having regard to my conclusion on output issue 1, the question does not arise, and would involve me in a hypothetical exercise in a situation where this court is not the fact finding tribunal. If a higher court should reach a different conclusion on issue 1, then the facts relevant to the identification of the consideration will either be found in the Tribunal's decision, or not. If they are so to be found, well and good. If not, the matter will have to be remitted to the Tribunal, not to this court.
- I would just add this. If either of the two higher amounts referred to above were found to constitute the consideration, it would lead to the extraordinary result that the value of MBNA's VAT supplies attributable to the securitisation of its receivables would be greater by at least an order of magnitude than the value of the credit service supplies which created the receivables in the first place. In the same correspondence which assumed that the assignments were supplies, both parties agreed from the outset that to include their value in any apportionment fraction under Reg. 102 would be "distortive". That realistic view, which not even MBNA has formally repudiated, may go a long way towards explaining why the Tribunals thought that it would be a nonsense in VAT terms to treat the assignments as supplies by MBNA at all.
- Similarly, if the conclusion were that the assignments were for negative or nil consideration, they could not by definition be supplies at all: see Article 2 of the Sixth Directive. The only consideration which would neither be a distortive nonsense nor fatal to the status of the assignments as supplies is therefore £10,000. But that answer is, of all of them, the one which flies most clearly in the face both of commercial reality, and of the definition of consideration in Article 11 and the relevant case law. It appears therefore that the analysis of the consideration question, if ever it has to be conducted, is likely to add force to the conclusion that the assignments are not supplies at all.
Output Issue 3 – If the assignments were supplies, where were they made?
- The relevance of this question is that if the supplies were made in Jersey, outside the EU, they would be specified supplies, so that VAT paid by MBNA on inputs attributable to them (directly, or by apportionment of residuals) would be recoverable. If made in England, as the Commissioners have thus far unsuccessfully contended in both the COBE and MBNA cases, the supplies would be exempt, so that attributable input tax would not be recoverable.
- Like output issue 2, this question is both academic and hypothetical, for as long as my decision on issue 1 stands. Again, the facts have all been found by the Tribunal, and are not in issue. This question was however directly addressed by the Tribunal, so I will state my conclusion on it very briefly.
- It was common ground that the combined effect of Article 9 of the Sixth Directive and Section 9 of the Value Added Tax (Place of Supply of Services) Order 1992 is that any 'supply' of the receivables effected by the assignments was made to CCSE's fixed establishment in Jersey, and therefore made there, unless it can be shown that both (1) CCSE had another fixed establishment in the UK and (2) the receivables were 'used' there.
- Mr Paines sought to prove both those propositions, based upon the fact (which is also common ground) that MBNA as Servicer for CCSE continued to administer the day to day collection of the receivables and management of its end of the continuing contractual relationship with its credit card holding customers from offices in Chester. This fact he said served two purposes. First, it showed that CCSE had a fixed establishment in Chester, by a loose analogy with Customs and Excise v DFDS A/S (Case C-260/95)  STC 384. Second, it showed that the receivables were used in Chester, where they were serviced.
- In my judgment, neither of those points are made good by the factual base upon which they are advanced. Whereas the outsourcing of the servicing function might be capable of constituting an activity of the outsourcer if (as in DFDS) the outsourcer controls the person to whom the function has been outsourced, in this case the control was exercised, if at all, the other way round. MBNA controlled CCSE. Therefore MBNA's Chester office was not a fixed establishment of CCSE.
- Secondly, the servicing of a receivable is not to be equated with its use. CCSE used the receivables, by making them available for use as a security by Deva One, also incorporated and having its fixed establishment in Jersey. Thus, for reasons which largely correspond with those of both Tribunals, I would hold that any supply constituted by the assignments was made in Jersey.
The Input Issues
- In order to make the input tax issues intelligible, it is first necessary to set out a little more of the background, and of the relevant law, than is contained in the introductory paragraphs 1 to 4 of this judgment. Regulations 101 – 103 of the VAT Regulations to which I have already referred establish a UK version of an EU wide scheme for the attribution of inputs to outputs, itself set out in Articles 17 and 19 of the Sixth Directive. Article 17.2 provides that a taxpayer may deduct input tax from output tax "in so far as the goods and services are used for the purposes of his taxable transactions". Thus it establishes a basic 'use test' for the deductibility of input tax. Only if the goods and services on which input tax is payable are used for the purposes of his taxable outputs, is the input tax deductible.
- Article 17.3(c) confers the additional right to deduct if the input is used for the making of specified (rather than taxable) supplies. Article 17.5 sets up the concept of residual inputs, namely "goods and services to be used by a taxable person both for transactions …in respect of which VAT is deductible, and for transactions in respect of which VAT is not deductible". It then provides that only the proportion of input tax attributable to the former is deductible. It then directs the reader to Article 19, which contains an EU-wide default formula for the apportionment or attribution of residual input tax, before permitting Member States to set up their own national regimes. Article 17.5(c) specifically authorises member States to adopt a use-based concept for attribution, and sub paragraph (d) authorises member States to adopt an Article 19 type of method.
- Article 19 itself directs by way of default an annual turnover-based proxy for use, in the following terms:
"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."
- Section 26 of VATA authorised the Commissioners to make regulations "for securing a fair and reasonable attribution of tax to supplies" by way of implementing a UK system as permitted by Article 17(5). They did so in the form of regulations 101 to 103 of the VAT Regulations 1995. The relevant parts of regulations 101 to 103 provide as follows:
"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."
- In Customs and Excise Commissioners v Liverpool Institute for Performing Arts  UKHL 28  STC 891, the House of Lords held, by reference to the statutory predecessors to Regulations 101-103, that Regulation 101 was limited in its effect to attribution of inputs to supplies made in the UK ("in-country supplies"), and Regulation 103 to attribution of inputs to foreign supplies ("out of country supplies"). Subject to any Special Method or "PESM" agreed or directed under Regulation 102, Regulation 101 directs a rigid value based formula for apportionment of residual inputs to in-country supplies. By contrast, Regulation 103 directs no formula at all, but simply requires attribution in accordance with use. Regulation 102 expressly permits the rigidity of Regulation 101 to be overridden by a Special Method. It is common ground that the Commissioners' general powers also enable them to agree a particular formula by way of a reasonable proxy for use in relation to out of country supplies under Regulation 103. The difference between the two is that whereas a Special Method replaces the Regulation 101 formula by something else, an agreement in relation to out of country supplies merely implements Regulation 103 in an agreed way.
- Neither in Regulations 101-3 nor in the LIPA case is there any guidance as to how to apportion residual inputs as between in-country and out of country supplies. The need to do so will arise at least in theory wherever a partially exempt trader runs his in-country and out of country business from the same offices or factory. Usually this causes no problem, because either by agreement or otherwise, the trader uses the same formula for both, thereby obviating the need for any such attribution. The 1999 Agreed Method did just that in this case. In the absence of any such agreement, and in circumstances where a trader does not wish to be hide-bound by using the rigid Regulation 101 formula for his out of country supplies, he will need to make an in-country/out of country apportionment of his inputs on some fair and reasonable basis, before applying Regulations 102 and 103 to each. The overriding principle for attribution is based on use, as is apparent from Article 17(2) of the Sixth Directive.
- Regulation 102 does not in terms impose any fetter upon the termination by the Commissioners of an agreed or directed Special Method, and the terms of most agreed methods (including the 1999 Agreed Method) are such as to enable them to be terminated by the Commissioners without breach of contract. But in Banbury Visionplus Ltd v HM Revenue and Customs  EWHC 1024 (Ch) Etherton J. held that the Commissioners could not validly terminate a Special Method, if the consequence of termination was to require the taxpayer to adopt a less satisfactory method in its place. He held that the VAT Tribunal had a full appellate jurisdiction to determine whether a decision of the Commissioners under Regulation 102 "substitutes, in place of an existing method, a method which secures, or at least better secures, a fair and reasonable attribution of input tax to taxable supplies for the purposes of s.26(3) of the 1994 Act".
- Although the Banbury decision was later in time than the Tribunal's Decision in this case, it approved an earlier decision to the same effect of the London VAT Tribunal in Merchant Navy Officers Pension Fund Trustees Ltd v Commissioners of Customs and Excise (VAT Decision 14262) which was fully considered by the MBNA Tribunal.
- I turn to the relevant facts. This is for the most part a summary of the findings in paragraphs 84 to 100 of the Decision. Soon after it commenced trading, MBNA entered into a PESM with the Commissioners, on 24th November 1994: ("the 1994 Agreed Method"). In August 1995 MBNA started its first securitisation programme, and so informed the Commissioners. Between then and November 1999 the parties negotiated a revised method to take account of that fact, both in correspondence and at meetings. The correspondence, which speaks for itself, shows that (1) both sides assumed that assignments of receivables would be supplies by MBNA; (2) both sides agreed at the outset that to include their value in any apportionment formula for attribution of residual inputs would be distortive; (3) there were other relevant aspects of the securitisation process which gave rise to relevant inputs to, or exclusions from any new formula; and (4) that the bargain ultimately struck involved a significant measure of give and take on both sides about those other aspects, but not about the exclusion of the value of the assignments. Meanwhile the 1994 Agreed Method remained in force.
- A new agreed method was finally arrived at, in the terms of a letter from the Commissioners dated 19th November 1999, ("the 1999 Agreed Method"). Like its predecessor, it covered both in-country and out of country supplies by a single value based formula. This was therefore a combined PESM and Regulation 103 agreement. Its relevant terms were as follows:
"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."
- The application of the 1999 Agreed Method produced a substantial increase in MBNA's percentage of recoverable output tax, and in due course the Commissioners repented of their agreement. After a review instituted in May 2002, and a failure by the parties to agree a further new method for which each blames the other, the Commissioners purported to withdraw the 1999 Agreed Method on the ground that it did not constitute a fair and reasonable residual input tax attribution, with effect from 1st July 2003. The Commissioners had been minded to direct a new method (for in-country supplies) under Regulation 102, but in the event did not do so. They could not direct any particular method or formula for out of country supplies under Regulation 103.
- On 31st July 2003 MBNA made a voluntary disclosure ("the Voluntary Disclosure") claiming to have erroneously applied paragraph 3(b) of the 1999 Agreed Method through its life, by using an accruals rather than receipts basis for distinguishing between sums receivable from securitised and non-securitised accounts. The disclosure included schedules which purported to show that there had been a substantial under-declaration of recoverable input tax throughout that period.
- For the remainder of 2003, MBNA continued to make monthly VAT returns as if the 1999 Agreed Method had not been terminated, but in accordance with what it claimed in the Voluntary Disclosure to be its true construction. Thereafter, MBNA made returns for its out of country supplies under Regulation 103, by reference to a formula for residual inputs which divided the value of specified supplies by the value of all supplies, while applying a strict Regulation 101 formula to its in-country supplies. In June 2005 the Commissioners raised assessments in respect of all periods after July 2003, on the basis that MBNA's returns had been incorrect.
- There were then four appeals to the Tribunal, of which only 3 were live by the time of the hearing. The first challenged the Commissioners' withdrawal of the 1999 Agreed Method. The second challenged the Commissioners' rejection of the Voluntary Disclosure. The third challenged all the post July 2003 assessments. Save for one point in relation to the third appeal (which is not part of any issue before me) the Tribunal dismissed all three appeals. At paragraph 17 of the Decision the Tribunal defined the issues which it had to decide (in the absence of agreement between the parties) as being eleven in number, under three headings (1) Withdrawal of the Agreed Method (2) The Assessments and (3) The Voluntary Disclosure. All three headings remain live on this appeal, but not every issue under each.
- Under the first heading, I have already dealt with two of the issues identified by the Tribunal, as my output issues 1 and 3. Under the second heading, it is common ground that I need only decide one of the issues defined by the Tribunal, namely whether MBNA's servicing of its designated customers' accounts used residual inputs. If not, as the Tribunal decided, then the remaining issues under that heading fall away. If it did, then it is agreed that I should remit the appeal against the assessments back to the Tribunal for re-consideration on that basis. As for the third heading, both issues before the Tribunal remain live. The first is the question of construction of the 1999 Agreed Method raised by the Voluntary Disclosure. It is only if I were to reverse the Tribunal on that issue, that the second issue, which is a limitation question, will arise.
Withdrawal of the 1999 Agreed Method.
- The Commissioners based their decision to withdraw the 1999 Agreed Method on their perception that in excluding under paragraph 3(b) of the letter setting out the Method exempt interest and finance charges arising from designated card holders' accounts, the formula failed to produce a fair and reasonable attribution of residual inputs. The Commissioners did not expressly make a Banbury type comparison between the 1999 Agreed Method and the strict application of Regulations 101 and 103. It was in their view sufficient that the 1999 Agreed Method was seriously flawed.
- MBNA argues that the failure to do that comparison inevitably undermined the withdrawal. It asserts that the Regulation 101/103 system is on any view worse as a means of attribution than the 1999 Agreed Method, and it denies that the exclusion of exempt interest and finance charges in relation to designated accounts was a flaw, being just part of a fair compromise in which both parties made concessions. The Tribunal rejected all those arguments. My task is first to decide whether the Tribunal made any relevant error of law.
- It is evident from paragraphs 119 to 126 of the Decision that the Tribunal did not entirely accept the Merchant Navy test, at least as it has been interpreted and applied in Banbury. They considered it sufficient that the Commissioners properly concluded that the existing agreed (or directed) method fails to produce a fair and reasonable attribution, while remaining open minded as to whether the 101/103 methods or some other agreed or directed method would do so. The Tribunal was not of course bound by the Merchant Navy decision, and Banbury had yet to be decided, let alone reported. But in my judgment Banbury is correct, for the reasons given by Etherton J. If at the moment of withdrawal there is no alternative Special Method agreed or directed, then that comparison with the Regulation 101/103 standard method needs to be made. To that extent therefore the tribunal erred in law.
- But it by no means follows on the particular facts of this case that it was a relevant error of law. Both Merchant Navy and Banbury were Regulation 101 cases. There were no out of country supplies to which inputs could be attributed, under Regulation 103. That does not of itself affect the principle established by those cases, but it is hard to see how its application to out of country supplies works in practice. As I have already stated, Regulation 101 imposes a standard value based proxy for a use based apportionment, which may when applied to any particular business be a good, bad or indifferent (i.e. reasonable or unreasonable) basis for attribution of residual inputs. But Regulation 103 does not impose a proxy at all. It merely requires the taxpayer to use any fair and reasonable way of attributing his residual inputs to specified out of country supplies that corresponds with his use of those inputs. He may choose any rationally fair method; there is no mandatory formula: see the Tribunal's analysis of this at paragraphs 123-4 of the decision.
- It follows in my judgment that the application of the Merchant Navy / Banbury comparison between an existing Special Method and the Regulation 103 requirement in relation to the attribution of inputs to out of country supplies cannot lead to a conclusion that the use of Regulation 103 can possibly force the taxpayer to adopt a less fair or reasonable method than the Special Method. Regulation 103 simply enshrines his right to a fair and reasonable method. Of course the opposite is true of the rigid formula in Regulation 101. It follows that the application of the Merchant Navy / Banbury comparison to the business of a partially exempt trader whose residual inputs (as here) fall to be attributed both to in-country and out of country supplies will only produce a conclusion that the result of the termination is less fair and reasonable than the continuation of the Special Method, if his attribution of inputs to in-country supplies under Regulation 101 is less fair and reasonable than under the Special Method.
- On the facts of this case, that plainly cannot be said. As the Tribunal found, neither the 1999 Agreed Method nor Regulation 101 produces an attribution of residual inputs to MBNA's in-country supplies approaching 1%, so that the rounding up process leads to a 1% recovery of such inputs in any event. That is no doubt why MBNA went over to a Regulation 101 method for its in-country supplies at the end of 2003, and has not made an issue of it on its appeals. The real dispute is entirely related to MBNA's out of country specified supplies, but that falls to be dealt with under Regulation 103, if the 1999 Agreed Method is terminated, and cannot for the reasons given above produce a result less fair and reasonable (although it may be less favourable) than the 1999 Special Method.
- Mr Cordara's only answer to this analysis was that traders inevitably have to adopt a uniform method where they make in-country and out of country supplies, so that they are driven to adopt the standard Regulation 101 formula for all their supplies. I reject that submission. The same submission (coincidentally again by Mr Cordara) was specifically rejected by Lord Scott in the LIPA case. MBNA observed no such straitjacket in any of its returns after 2003. For the reasons set out above it is simply wrong. It follows that the error of law constituted by only partially applying the Merchant Navy principle in advance of its approval in Banbury was not relevant to the outcome. The termination of the 1999 Agreed Method did not require MBNA to adopt an attribution which was less fair and reasonable than the Agreed Method itself. That attack on the validity of its revocation therefore fails.
- That leaves only the question whether, in agreeing with the Commissioners that the exclusion of exempt interest and finance charges arising from designated accounts was a flaw in the 1999 Agreed Method, the Tribunal made an error of law. Mr Cordara sought to identify three relevant errors. First he submitted that the Tribunal must have concluded, as a matter of law, rather than as a matter of the evaluation of the structure of a particular business, that an output based method had to include all outputs. In my judgment the Tribunal made no such assumption. At paragraph 114 the Tribunal records Mr Paines making just such a submission for the Commissioners, but it is than expressly rejected as a matter of law, in favour of Mr Cordara's submission to the contrary. The Tribunal's conclusion was that the question whether a fair formula needed to include all outputs depended on the facts of each case. That approach is repeated at paragraph 130.
- Next Mr Cordara submitted that it was wrong in law for the Tribunal, after finding that the Agreed Method was flawed, to compare it with the other methods suggested by MBNA, and then to conclude that all those other methods were therefore not fair or reasonable because they produced a higher return for MBNA than the Agreed Method: see paragraph 129 of the Decision. That may or may not be so, but the relevant comparison, as already explained, is between the Agreed Method and the Regulation 101 / 103 fall back method. In my judgment, if that different comparison involved any error of law, it was irrelevant, provided that the Tribunal's conclusion that the Agreed Method was flawed was not vitiated by such error.
- Finally Mr Cordara submitted that it was wrong in law to conclude that an income stream which MBNA had assigned could, let alone should, be included as part of MBNA's outputs. In my judgment it is Mr Cordara's submission rather than the Tribunal's conclusion that is wrong. MBNA never assigned the income producing property which gave rise to the stream of interest and finance charges from the designated accounts. That property was, and remained, MBNA's bundle of rights under its contracts with its credit card holding customers. All MBNA assigned was the income itself. As Mr Cordara accepted, that did not mean that the interest and finance charges ceased to be part of MBNA's turnover. The outputs for which the interest and finance charges were the consideration were and remained MBNA's supplies of credit to its customers. A taxpayer does not escape from VAT liability to charge and then pay VAT on his outputs merely be assigning the income from it at the moment of receipt. The fact that these outputs were exempt is neither here nor there.
- It follows in my judgment that the Tribunal made no error of law in concluding that the Commissioners had validly terminated the 1999 Agreed Method. This part of MBNA's appeal therefore fails.
The Assessments – Does the servicing of designated customers' accounts use residual inputs?
- The Tribunal concluded, in accordance with the basis on which the Commissioners had raised the disputed assessments, that the servicing of designated customers' accounts did not use residual inputs: see paragraphs 184 to 194 of the Decision. Again, the first question is whether that conclusion involved a relevant error of law.
- By clause 9.1 of the RTDSA, CCSE as Receivables Trustee appointed MBNA to be its Servicer. Clause 9.1(b) provides as follows:
"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…"
- Clause 9.1 also provided for MBNA to advise CCSE of the payments necessary for the daily and monthly administration of the Receivables Trust, but that separate activity is not part of the servicing of designated customers' accounts. Clause 9.2 provides for a single servicing fee to be payable to MBNA for all its activities under clause 9.1. It is common ground that regardless of whether the assignment of the Receivables constitutes a supply, the performance of the first limb of the servicing function, namely the servicing of designated customers' accounts, does constitute the supply of a service made in Jersey, and that the servicing fee includes consideration for that supply. As a specified supply in relation to which attributable input tax is recoverable, the value of the servicing function would therefore increase MBNA's recovery of input tax, if any inputs could be attributed to it.
- The Tribunal was persuaded that residual inputs were not used by MBNA in servicing designated customers' accounts by the argument that because the promise in clause 9.1 (b) was merely to continue doing something which MBNA was already obliged to do anyway as part of its credit business, that new promise did not "deflect" the inputs attributable to the credit business towards the servicing business. By contrast with its treatment of the question whether the exclusion of interest and finance charges was a flaw in the 1999 Agreed Method, which was an issue as to its fairness, the Tribunal's decision in relation to the non-attribution of inputs to the servicing function was expressed to be, and in my judgment was indeed, a matter of hard analysis with a conclusion of law at the heart of it. It depended upon the proposition that where a trader incurs inputs in supplying a service to A, and then promises B to go on supplying the same service to A, with the result that he receives payment from A and B for providing a single service, then inputs incurred in providing that service remain wholly attributable to the supply to A, so that the supply to B is input free, even though B pays for it.
- There is, as the Tribunal recognised, no authority directly in point. In Customs and Excise Commissioners v Redrow Group plc  STC 161 the House of Lords held that where services are supplied of a kind which benefit A and B, and only B pays for them, then there is a supply to B, so that B can recover input tax paid in relation to it, even if the services primarily benefit A. In the present case both A and B pay for the service, and the question is whether the particular nature of the promise to B is such that none of the input tax incurred in the provision of the single service can be attributed to the supply to B.
- In my judgment the Tribunal was wrong on this point. I can envisage no reason why, in circumstances where a single business activity constitutes a supply of a service to two different persons who each pay separately for what they receive, the inputs incurred in carrying out the single activity should be wholly attributable to the supply to one of them. The fact that the supply to one consists of the performance of a promise to go on making a continuing supply to the other may be relevant to the fair and reasonable apportionment of the inputs as between each supply, but it does not justify the a priori conclusion that no part of the inputs can be attributed to the supply to the promisee.
- To that extent I therefore allow the appeal against the Tribunal's decision on the assessment appeal, and remit that appeal back to the Tribunal for the determination of the fair and reasonable attribution of MBNA's residual inputs to the supply constituted by the servicing of the designated accounts.
The Voluntary Disclosure
- I have already set out the relevant terms of the 1999 Agreed Method. They required the deductible proportion of residual inputs to be calculated by reference to the ratio that the values of taxable supplies bore to the value of taxable and exempt supplies, treating specified supplies as if they were taxable supplies: see paragraphs 2(c) and 4(a). The process of give and take that led to the agreement required various of MBNA's income streams to be excluded from the valuation of supplies. The excluded streams are set out in paragraph 3. The types set out in sub paragraphs (a), (c) and (d) give rise to no difficulty: Those streams are wholly excluded. In principle, the exclusion of payments of interest and finance charges by card holders whose accounts were designated, so as to become the subject of securitisation arrangements, did not either. All those payments were to be excluded.
- But a timing difficulty arose from the inevitability that some card holders' accounts would become or would cease to be designated accounts during the lifetime of the 1999 Agreed Method, and during a relevant monthly or annual period. A convenient and appropriate point in time had to be agreed upon at which the continuing income stream of interest and finance charges from card holders whose accounts became designated should cease to be included in the valuation of the continuing supply of credit to those card holders. Similarly, a point in time needed to be agreed when income from card holders whose accounts ceased to be designated should cease to be excluded. That was a matter of pure bargain, just as was the exclusion only of income from designated accounts itself.
- The language chosen by the parties to express their bargain on that issue was that payments from a card holder should be excluded if (but only if) his account was designated at the time when the payment in question became "receivable". That is the plain meaning of the phrase "any sum receivable from…cardholders whose account is, at that particular time, the subject of securitisation arrangements". That solution to the timing issue made commercial common sense, because the securitisation scheme transferred receivables to the Trust, rather than merely MBNA's interest and finance charge income once paid by card holders. By contrast, the choice of the date of receipt of the income as the point at which to examine whether the card holder's account was designated could produce counter intuitive results. For example, a late payment by a card holder after his account ceased to be designated of interest incurred before designation ceased would fall to be included, even though the relevant receivable belonged to the Trust rather than to MBNA.
- It is of course possible for an agreement to be construed otherwise than in accordance with even the plain meaning of its language, for example where that meaning makes commercial nonsense, or where for any reason the court concludes that "something must have gone wrong with the language" (per Lord Hoffmann in the West Bromwich case, at  1 WLR 913. Mr Cordara sought to persuade me that the parties must have misused the language, in particular the word "receivable", and that the 1999 Agreed Method should be interpreted as it they had used the word "received" as identifying the relevant point in time. His main point was that the VAT tax point for the supply of credit was, pursuant to Regulation 90 of the VAT Regulations 1995 the time when the charge for the credit (i.e. the interest and any finance charge) is paid. The residual inputs fraction was based on the valuation of supplies by MBNA, including supplies of credit to card holders, so that to include or exclude interest and finance charges from the valuation by reference to a point in time based upon receivability (i.e. accrual) rather than receipt would be to look back to a point in time earlier that the VAT system recognised that a supply had even taken place.
- I recognise the force of that argument from a technical point of view. The parties might have chosen a receipt rather than accrual point in time if they had been more impressed with the technical than with the commercial analysis. What actually led them to the particular choice of words in the 1999 Agreed Method is neither in evidence nor admissible as an aid to construction. Nor is the undoubted fact that for several years after the making of the agreement, MBNA applied paragraph 3(b) on an accruals rather than a receipts basis, admissible as an aid to construction.
- Neither Mr Cordara's main argument nor any of his submissions on this point come anywhere near persuading me that the 1999 Agreed Method should be given some meaning other than that appearing plainly from the language used. The use of a point in time based on receivability rather than receipt for the purposes of paragraph 3(b) seems to me to be well within the range of sensible choices within which the parties were free to make this part of their bargain. There is therefore no reason why the plain meaning of their chosen language should not prevail. I therefore dismiss the appeal in relation to the voluntary disclosure, and the limitation point does not therefore arise.
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