Banking


VAT - consideration - credit cards - input tax - output tax - partial exemption - securitisation - supplies - assignment of receivables - partial exemption special method



MBNA Europe Bank Ltd v Revenue & Customs Commissioners: ChD (Mr Justice Briggs): 22 September 2006



The appellant (M) appealed against the withdrawal by Customs of a partial exemption special method and consequent assessments to VAT, and against Customs' failure to act on M's voluntary disclosure claiming repayment of input tax.



M operated a credit card business. Although it mainly made exempt supplies of credit, it did make some taxable supplies.



As a partially exempt trader, M was entitled to recover a proportion of the VAT incurred on overheads and residual expenditure, and it had agreed with Customs a special method of calculating that apportionment.



To obtain working capital, M securitised the debts due from customers by assigning those receivables on a rolling basis to a special purpose vehicle registered in Jersey that borrowed in the capital markets, using the assigned receivables as security, and passed the proceeds back to M. Credit card holders' accounts that had been securitised were known as designated accounts. The partial exemption special method assumed that the assignments of receivables by M were supplies for VAT purposes.



Customs decided that the agreed method was flawed and withdrew it. M continued to apply the agreed method, slightly modified, and Customs issued assessments to recover input tax allegedly overclaimed.



M later submitted a voluntary disclosure, claiming repayment of input tax. Customs refused to act on the voluntary disclosure.



The tribunal reduced the amounts of the assessments to take account of input tax recoverable under regulation 103 of the Value Added Tax Regulations 1995, but dismissed the appeal against the withdrawal of the agreed method and the claim under the voluntary disclosure.



M submitted that the assignment of the receivables was an assignment by way of sale and not, as the tribunal had found, by way of security only, and that the withdrawal of the special method had been flawed because it was better as a means of attribution than the application of the standard method under regulations 101 and 103 of the 1995 regulations.



Held, the assignments of receivables by M were not supplies for VAT purposes. The essential point of the securitisation structure was to enable M to transfer a selection of its receivables, otherwise than by way of security, to a separate legal person so that that person could use them as security for borrowings, and then pass the resulting cash flow to M otherwise than by way of loan. That was what the structure achieved and the tribunal had been wrong to hold that the assignments were by way of security only.



The assignments, viewed separately from the rest of the scheme, were capable in theory of constituting supplies, but because they were no more than the necessary pre-condition to the supply of a securitisation service to M by the special purpose vehicles set up to operate that service, they were thereby deprived of the character of a supply.



If the assignments were supplies, they were made in Jersey. The tribunal had made no error of law in concluding that Customs had validly terminated the agreed special method. Customs 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 (Banbury Visionplus Ltd v Revenue and Customs Commissioners [2006] EWHC 1024 (Ch), [2006] STC 1568 applied).



If, at the moment of withdrawal, there was no alternative special method agreed or directed, then a comparison had to be made with the standard method under regulations 101 and 103. Although regulation 101 involved a rigid formula for in-country supplies, regulation 103 simply enshrined a right to a fair and reasonable method for out-of-country supplies.



The dispute related to M's out-of-country supplies, which fell to be dealt with under regulation 103 if the agreed method was terminated, so that that termination could never force M to adopt a less fair or reasonable method than the special method, although it might be less advantageous. The tribunal had not erred in agreeing with Customs that the exclusion of exempt interest and finance charges arising from designated accounts was a flaw in the agreed method.



The tribunal had wrongly concluded that the servicing of designated accounts did not use residual inputs, and the issue of a reasonable attribution of M's residual inputs to the supply constituted by the servicing of the designated accounts was remitted to the tribunal.



As a matter of interpretation of the agreed method, the voluntary disclosure appeal failed.



Appeal allowed in part.



Roderick Cordara QC, Mark Smith (instructed by KPMG) for the appellant; Nicholas Paines QC, Peter Mantle (instructed by Revenue & Customs solicitor) for the respondents.