Will the payment VAT exemption survive a narrow interpretation? The Supreme Court (SC) has unanimously dismissed the appeal of Target Group Limited (“Target“) against the court of appeal’s decision that loan administration services Target provided to a bank (including operating loan accounts and processing payments from borrowers) were not exempt from VAT.
The SC decided, considering the Court of Justice of the European Union (CJEU) case law, that the payment VAT exemption should be interpreted “narrowly.” It held that, for the payment VAT exemption to apply, it is necessary to be involved in the actual execution of the transfer or payment, which requires “functional participation and performance.” It is not enough to give instructions to another party, even if it triggers a transfer or payment. Target was merely giving instructions.
This decision has far-reaching implications for all UK businesses that are active in the payment sector, from Payment Service Providers (PSPs) and in-house payment entities to e-money and crypto providers and wider payment schemes. The ruling clarifies that a more hands-on approach is required for the payment VAT exemption to apply. Businesses involved in the payment sector will need to review their operations and ensure that they are meeting the new criteria set out by the SC.
The case arose from Target’s provision of loan administration services to a bank. Target operated loan accounts and processed payments from borrowers on behalf of the bank. Target argued that these services should be exempt from VAT under the payment VAT exemption. However, the court of appeal rejected this argument, and now the SC has affirmed that decision.
The SC’s interpretation of the payment VAT exemption is in line with CJEU case law. The CJEU has consistently held that the exemption should be narrowly construed, and that mere instruction-giving is not enough to qualify for the exemption. The SC’s decision provides clarity and guidance on how the exemption should be applied in practice.
The impact of this decision extends beyond Target and the loan administration services it provided. It affects all businesses operating in the payment sector, regardless of their specific activities. PSPs, in-house payment entities, e-money and crypto providers, and wider payment schemes will all need to assess their operations and ensure compliance with the new interpretation of the payment VAT exemption.
The SC’s decision may also prompt businesses to reconsider their payment arrangements and explore alternative structures that may be more tax-efficient. This could include outsourcing payment functions to third-party providers who meet the criteria for the payment VAT exemption.
Overall, the SC’s ruling provides much-needed clarity on the payment VAT exemption and its scope. It sets out a clear standard for businesses to follow and ensures consistency with CJEU case law. While the decision may require some adjustments for businesses in the payment sector, it ultimately promotes fairness and a level playing field in the application of VAT rules.
In conclusion, the Supreme Court’s dismissal of Target’s appeal reaffirms the narrow interpretation of the payment VAT exemption. Businesses in the payment sector must now ensure that they meet the criteria of “functional participation and performance” in order to qualify for the exemption. This ruling has significant implications for all UK businesses involved in payments, requiring them to review their operations and potentially make changes to comply with the new interpretation. The decision promotes consistency and fairness in the application of VAT rules and provides clarity for businesses operating in the payment sector.
