Paymex Ltd v Revenue & Customs [2011] UKFTT 350 (TC)

FTT-Tax
Paymex Ltd v Revenue & Customs
[2011] UKFTT 350 (TC) · 2011-05-26
[1]This is an appeal by Paymex Limited (“the Appellant”) as the representative member of a group of companies which includes Blair Endersby Limited (“Blair Endersby”) against decisions of HMRC dated 15 August 2007 and 2 October 2007 that supplies made by Blair Endersby in connection with consumer Individual Voluntary Arrangements (“consumer IVAs”) are taxable supplies for VAT purposes. The Appellant claims that the supplies are exempt within both the EU legislation, namely Art 13B(d)(3) of the Sixth Directive and Art 135(1)(d) of the Principal VAT Directive, and the relevant domestic legislation (Value Added Tax Act 1994 (“VATA”), s 31, and Sch 9, Group 5, item 5).[2]The Paymex group also includes Baines & Ernst Limited (“Baines & Ernst”), which provides debt management services. The facts[3]We had substantial documentary evidence before us and we heard from three witnesses for the Appellant and an expert witness called by HMRC. The three witnesses for the Appellant were: Nicholas Morgan, who is an insolvency practitioner and was part of the senior management team employed by Blair Endersby from May 2005 to 2009; Andrew Wisedale, who has been employed by Baines & Ernst as operations director since 9 February 2004; and Timothy Greenwood, the head of group internal audit for the Appellant since May 2007 who was employed by Baines & Ernst from May 2006 to May 2007 and worked across all the group companies. The expert witness was Norman Cowan FCA, FABRP, MCIArb, MEWI, an insolvency practitioner of Wilder Coe LLP, whose specialist field is insolvency, having taken insolvency appointments since 1980.[4]From this evidence, which included witness statements of the Appellant’s witnesses, reports of Mr Cowan, and oral evidence and cross-examination of all the witnesses, we find the following facts. Outline of the IVA procedure[5]The Individual Voluntary Arrangement (“IVA”) procedure was introduced by the Insolvency Act 1986. Modifications were made by the Enterprise Act 2003 to streamline the procedure. It enables an insolvent individual to make a proposal for an IVA with his creditors [1] . The arrangement must take the form of a composition in satisfaction of the individual’s debts or a scheme of arrangement of his affairs.[6]An IVA will normally include all the debtor’s unsecured debts. The rights of secured creditors, such as mortgage lenders, cannot be affected without their consent, and those creditors will accordingly usually remain outside the IVA.[7]The principal benefit of an IVA for a debtor is that it gives him protection against unsecured creditors. If the proposal is approved by 75% in value of the creditors present in person or by proxy voting on the resolution it is binding, subject to any challenge on grounds of unfair prejudice or material irregularity, on creditors who were entitled to vote at the meeting (whether or not present or represented), or who would have been entitled if they had had notice of the meeting.[8]In common with other insolvency procedures, the IVA can only be conducted by a licensed insolvency practitioner (“IP”), licensed either by the Department for Business, Innovation or Skills or by one of a number of recognised professional bodies (“RPBs”). Blair Endersby employs IPs (one of whom, at the relevant time, was Mr Morgan) to enable them to undertake the IVA work; however, much of the background work is done by members of Blair Endersby’s staff who are not formally qualified.[9]There are a number of stages to the IVA process, which we shall describe in greater detail below. By way of introduction however, the IP, or members of staff, will collect information from the debtor as to his financial circumstances, advise the debtor as to the best course of action in his particular circumstances and draft the proposal. At the stage when a proposal is ready for submission for approval by creditors the IP acts as a Nominee, with statutory responsibility for making a report to creditors, and at relevant times up to April 2010 to the court, as to whether, in the opinion of the Nominee, the proposal has a reasonable prospect of being approved and implemented. And when a proposal is approved, the Nominee will usually (though not invariably) act a Supervisor of the IVA, at which time his responsibilities are governed by the arrangement. These duties include monitoring the performance of the IVA, collecting payments from the debtor, and accounting to the creditors. The IVA processes: Baines & Ernst[10]Blair Endersby commenced its involvement in the IVA business in 2004, and in 2005 employed its first IPs. Before that time Baines & Ernst had been carrying on a debt management business. Baines & Ernst is a well-recognised name in the field of debt management. It conducted television advertising in the early 2000s. Although in the early stage of its start-up Blair Endersby also sought to develop a high profile, from 2006 the group came to use the Baines & Ernst name to attract business to the group generally, including therefore both debt management and IVAs. Since 2007 there has only been what Mr Wisedale described as a single point of entry under the Baines & Ernst name.[11]Consequently, although there were occasions on which a debtor making enquiries about an IVA would contact Blair Endersby in the first instance, in the main this initial contact was with Baines & Ernst.[12]Initial contact would normally take place by a telephone call made by the individual to Baines & Ernst. Baines & Ernst operated a computerised system for collecting initial information, known as Baines & Ernst Product Selector, or BEPS. This system is designed to record basic information from the individual, including address, occupation, and date of birth, along with the debt position, focussing on unsecured debts, and the debtor’s income and expenditure and assets, particularly any equity in property. The system has an algorithm which, following input of all the basic information, will itself set out the options available based on the profile that has been presented. Typically, more than one option, such as bankruptcy, IVA and debt management, will be presented. Baines & Ernst will then discuss with the individual the advantages and disadvantages of those options.[13]If the IVA option is thought to be the most appropriate way to proceed, then as part of this initial telephone contact the Baines & Ernst operative makes a start at completing an IVA application form. This is a form that must be completed and signed by the debtor, but the opportunity is taken in the initial contact for the form to be pre-populated with information taken down by the initial adviser. The form sets out(i) personal details,(ii) a description and value for each debt, including secured debts, the contracted payments for each debt and whether legal proceedings have been commenced,(iii) background information as to when the debtor’s financial problems commenced, and the reasons for those problems, and what steps the debtor had already taken to manage his debts,(iv) details of the debtor’s home, including financial details for a home owned by the debtor,(v) table of monthly income and expenditure, and(vi) other assets.[14]The work carried out by Baines & Ernst in relation to its IVA service was governed by an Authorisation Form. That form indicated that the service carried out by Baines & Ernst was limited to introducing the debtor to a qualified insolvency practitioner. Once that introduction was made, the form points out that it will be the IP’s responsibility to liaise with the debtor and the creditors. Baines & Ernst will liaise with the debtor, the creditors and the IP in order that it can carry out its introduction service.[15]The Authorisation Form sets out what is outside the scope of the services of Baines & Ernst:
“4. What we do not do 4a We do not lend you money or give you any credit facilities. 4b We do not give you legal advice. 4c We do not issue payments to your creditors as part of the IVA service . 4d We do not give you advice on how to, or contact your creditors in order to: restructure your debt repayments; or settle your debts early.”
[16]The Authorisation Form refers to an Administration Payment which is to be paid by the debtor for the IVA service to be provided under the agreement, calculated from the financial information provided by the debtor. It is used to cover the initial costs of collecting and reviewing the debtor’s documentation, liaising with creditors (if this were done) and passing the case to the IP.[17]Following the initial telephone call a Welcome Pack brochure was posted to the debtor, and this included the Authorisation Form. The debtor is asked to return the signed Authorisation Form.[18]The initial information obtained from the debtor in the initial telephone call had to be confirmed and supported by documentation. Baines & Ernst arranged a home visit to enable the IVA application form to be finalised and signed and for documents to be collected. These documents included identification checks for money-laundering purposes, an authority form to enable information to be obtained from creditors by Blair Endersby and a direct debit mandate in favour of Blair Endersby so that, if a payment proposal were agreed, regular payments could be made from the debtor’s bank account. Once that had been done the case could be passed over to the IP and to Blair Endersby.[19]The stage of initial advice and information-gathering, carried out largely, if not exclusively, by Baines & Ernst, was not part of the service supplied by Blair Endersby which is the subject of this appeal. The Administration Fee has always been subject to VAT. This has been treated at all times as a separate taxable supply by Baines & Ernst. We find that Blair Endersby did on occasion provide this introductory service, and used terms and conditions similar to those used by Baines & Ernst, but that service was operated in the same way as the service undertaken by Baines & Ernst, and was a separate service from that, or those, carried out by Blair Endersby after the introduction to the IP was made. The IVA processes: Blair Endersby[20]In this section we find the facts relating to the IVA process as undertaken by Blair Endersby, acting in part through its employed insolvency practitioners.[21]On receipt of the debtor’s documents, these would be scanned by Blair Endersby and returned to the debtor. Any updates are made in respect of the debtor’s credit commitments, and the file is then passed to the Blair Endersby member of staff who has the responsibility of drafting the debtor’s proposal (“the drafter”). This process includes consultation by telephone with the debtor.[22]This consultation by Blair Endersby with the debtor is a more detailed fact-finding and advisory process than that carried out at the initial stages by Baines & Ernst. Such a consultation is provided for in guidance note Statement of Insolvency Practice 3 (“SIP3”) issued under procedures agreed between the insolvency regulatory authorities acting through the Joint Insolvency Committee (“JIC”), and approved by them and the recognised professional bodies in respect to insolvency practice. This states, with respect to initial contact with the debtor, that the IP should offer to meet the debtor personally, or arrange for a suitably experienced member of staff to do so. If the debtor declines the offer, the IP or member of staff may conduct the initial interview by telephone. In the case of consumer IVAs of the nature dealt with by Blair Endersby, the almost invariable practice was for these interviews to be by phone.[23]The interview proceeds along standard lines, designed to accord with the SIP3 guidelines. This includes advising the debtor of the different roles the IP would perform during the process, as Nominee and Supervisor, and the different duties and responsibilities that they entail, to the debtor, the creditors and to the court. SIP3 refers in this respect to the need for the debtor to be informed that the duty of the IP as Nominee is to perform an independent, objective review of the proposal for the purpose (up to April 2010) of reporting his opinion to the court and generally balancing the interests of the debtor and the creditors.[24]This interview also entails a further review of the debtor’s financial circumstances. The guidance indicates that the IP should exercise his professional judgment to satisfy himself that the debtor has received appropriate advice on his position and that the options available to him and the consequences of his decision to propose an IVA have been fully explained to him. In the case of Blair Endersby, this role was carried out by a suitably-trained member of staff; Blair Endersby had extensive training programmes. SIP3 also provides that, before recommending an IVA, the IP should be reasonably satisfied, on the basis of the financial information obtained, that the debtor’s proposed payments will be sustainable.[25]It was accepted by Mr Morgan, and we find, that the giving of appropriate advice to the debtor, as to the suitability or otherwise of an IVA, as opposed to other possible approaches, such as debt management and bankruptcy, is a very important part of the process. In Mr Morgan’s words, in cross-examination, “… the advice is key to everything”.[26]Once it has been determined on this basis that an IVA is the most appropriate way to proceed, then, based on the information received from the debtor, the proposal to be put to creditors is drafted by the drafter. Although this reflects the debtor’s financial position, it is not an exercise undertaken in isolation from the likely requirements of the creditors. Those requirements are well-known to Blair Endersby, and have become more standardised over time through the adoption of standard conditions for IVAs produced by the Association of Business Recovery Professionals (R3) – of which Blair Endersby’s IPs are members – and the use by major creditors of voting houses, with standard modification requirements.[27]Voting houses are instructed to act by major creditors to vote on IVA proposals. The voting houses are instructed to seek standard modifications to an IVA proposal that is made by a debtor. Part of the role of the drafter is to anticipate such requirements and to seek to build them into any proposal. The shape of the initial proposal that will go to creditors is very much influenced by the positions known to be adopted by the creditors in question. These modification requirements cover areas such as the Nominee and Supervisor’s fee, the minimum amount of dividend in the £, the date of commencement of dividend payments, the treatment of equity in the home (typically by release through re-mortgage), and provisions for certain events or debtor behaviour to constitute a failure of the IVA. These requirements are explained to a debtor in order to seek to achieve a workable proposal and to manage a debtor’s expectations.[28]Creditors are unwilling to alter their own form of modification. Each creditor typically considers its own modification to be in the most appropriate form. However, we heard, and we accept, that it has been possible on occasion for Blair Endersby to procure the removal of modifications of a creditor with a low percentage of the outstanding debt in favour of modifications of a more substantial creditor. But this is the exception; creditors prefer to apply their own modifications.[29]The process of creditors seeking modifications has been affected by the adoption within the industry, from February 2008, of a new IVA Protocol. This protocol introduced the Standard Consumer IVA (or SCIVA), which sets out some basic requirements, including terms and conditions, format and standards, and standardises the format of the proposal. One of the stated aims of the protocol is to improve efficiency in the IVA process and avoid the need for modifications wherever possible, without affecting the creditors’ voting rights.[30]Following further internal review, and the completion of checklists, the proposal is drafted. Blair Endersby’s client administration department prepares a letter of engagement addressed to the debtor from the IP. The letter of engagement is a substantial document. It includes provisions covering the following:(1) Confirmation that the IP, having reviewed the information provided by the debtor as to the debtor’s financial position, is willing to act as the Nominee if the debtor decides to proceed with proposing an IVA.(2) It encloses a leaflet published by R3, “Is a Voluntary arrangement Right For Me”, which aims at helping people understand what is involved and what alternative insolvency related procedures are available.(3) It advises the debtor to attend the company’s offices to discuss the leaflet and the course of action that the debtor wishes to take. This is a meeting of the nature referred to in SIP3. The letter of engagement suggests that the IP may, if the debtor is unable to attend, be willing to conduct the meeting over the telephone. As with the earlier review, in almost every case these meetings took place by telephone.(4) It is explained that the IP is an employee of Blair Endersby, but that the office of Nominee is a personal appointment. It goes on to explain that Blair Endersby’s services are additional to the statutory duties of the Nominee. However, although this distinction is important from the statutory perspective, there was only a single charge rendered by Blair Endersby, and no separate Nominee fee. The debtor is asked to send a cheque for the first month’s contribution; the balance of the fee is met from the contributions that are proposed to be made under the IVA.(5) The duties and responsibilities of the Nominee are again explained in full. The letter states: “As Nominee I have a duty to perform an independent objective review and assessment of the proposals for the purposes of reporting my opinion to the Court [note: this requirement ceased from 6 April 2010] and generally balancing your interests and those of your creditors. This duty of independence and objectivity arises irrespective of the extent of my involvement in assisting you to draft your proposals. My duties as a Nominee cannot be fettered by any instructions from you or any third party.”(6) The debtor is reminded of the requirement under the Insolvency Act and Rules that all assets and liabilities must be disclosed.(7) The draft proposal and draft Statement of Affairs are enclosed. It is made clear that these are subject to any amendments the debtor might wish to make and modifications that creditors might request be included. The R3 and Blair Endersby’s own standard terms and conditions, which apply to the proposal, are also enclosed.(8) The debtor is advised that no further goods or services should be obtained on credit, and that no assets should be disposed of except in the ordinary course of trade.[31]The letter of engagement refers back to Blair Endersby’s terms of business. As we have found, the terms and conditions given to the debtor at the outset were almost invariably those of Baines & Ernst, although Blair Endersby did use similar conditions in relation to its own initial activities. We do not consider that anything turns on the reference to terms and conditions in the letter of engagement. To the extent that there were no such terms for Blair Endersby in a particular case, the reference would have no effect. If there were, then all the reference in the letter of engagement does is to state that the letter of engagement and the terms of business constitute the entire agreement between the parties. The terms of business do not therefore constrain the role of the IP or Blair Endersby under the letter of engagement.[32]Blair Endersby discusses the engagement letter and the proposals with the debtor. The letter of engagement is then signed by the debtor and posted back to Blair Endersby. At that point Blair Endersby becomes the Nominee.[33]The proposal document is headed with the name of the relevant county court in which jurisdiction the debtor resides, and with the words “Proposal for Voluntary Arrangement with Creditors pursuant to Part VIII of the Insolvency Act 1986”. It sets out the background to the financial circumstances of the debtor, including steps taken by the debtor to resolve his financial difficulties. It sets out as an appendix a statement of assets and liabilities and their estimated values. Where the debtor owns a property, the proposal will deal with what the debtor is prepared to offer by way of equity release through re-mortgage. This is an aspect that is covered in the IVA Protocol, which provides that the release of home equity should be attempted six months prior to the end of the IVA. The protocol includes a statement of the debtor’s monthly income and expenditure and sets out the monthly contributions that the debtor proposes to make, including additional contributions if net income in excess of that disclosed is received. The IVA Protocol requires monthly contributions to be increased by 50% of any net surplus one month after a review.[34]The proposal sets out in a further appendix an estimate of the likely outcome of the IVA and a comparison with the situation that would be likely to arise in the event of the debtor’s bankruptcy. The Nominee is identified, and typically the Nominee is proposed to act as the Supervisor of the voluntary arrangement. There is a section detailing the Nominee’s fee, expressed as a specific sum, plus disbursements, and the Supervisor’s fee calculated as a percentage of the realisations, less the Nominee’s fee. A separate fee is payable if there is a need for an additional meeting of creditors to consider a variation to the arrangement.[35]Proposed dates of distributions to creditors are set out. These are made at the discretion of the Supervisor when he believes that there are sufficient funds held in order that a realistic and cost effective distribution can be made. The estimate will set out, for each of the anniversaries of the five-year arrangement, the anticipated distributions based on the realisations set out in the appendix, detailing the estimated outcome. The estimates are also subject to the satisfactory agreement of creditors’ claims, the availability of funds and any later variations.[36]The proposal document is a professional document. To draft it requires a detailed knowledge of insolvency issues, and the practice of establishing an IVA. It also requires a detailed and systematic examination of the debtor’s position, financial and personal, and knowledge of the sort of proposals that may be acceptable, or on the other hand, unacceptable to creditors. However, at the drafting stage no contact is made with the individual creditors.[37]Once the proposal has been signed by the debtor, a meeting of creditors must be convened. Prior to 6 April 2010, the Nominee was required to submit a report to the court stating whether, in his opinion, the proposed IVA had a reasonable prospect of being approved, and whether, and if so when and where, the creditors’ meeting should be called. That requirement no longer applies; the Nominee’s report is instead made to the creditors.[38]SIP3 states that, in considering the proposal, the IP should bear in mind a number of questions: Is it feasible? Is it fair to creditors? Is it an acceptable alternative to formal insolvency (bankruptcy)? Is it fit to be considered by creditors? Is it fair to the debtor?[39]The Nominee convenes the meeting of creditors and gives notice of the meeting to all known creditors and to the debtor. With the notice to creditors there are enclosed the debtor’s proposal, including the summary statement of affairs, the Nominee’s comments on the proposal, an explanation of the voting rules at the meeting, a creditor’s guide to insolvency practitioners’ fees, a proxy form and a statement of claim form for the purpose of proving the creditor’s debt.[40]We heard evidence, and we accept, that it is almost invariably the case in the IVAs dealt with by Blair Endersby that the meeting is held on paper, by way of proxies given to the Nominee or his representative, or voting by way of fax and e-mail. The Nominee himself does not conduct the meeting. This function is performed by a suitably-trained member of Blair Endersby’s staff. This individual chairs the meeting. He was described in Mr Morgan’s evidence as a “meeting of creditors negotiator”, but we do not accept that this was a title in any formal sense, nor do we accept it on its face as descriptive of his function at the meeting. In common with other evidence describing the operations of Blair Endersby as “negotiation”, we consider this to be a question of law for us to decide.[41]At the stage of the creditors’ meeting the proposal will have been put forward on the basis of known requirements of those creditors for which information is available. This will have been discussed in advance with the debtor. The creditors, or the voting houses acting for them, may put forward modifications to the proposal. The vote of a creditor, which may have been given by proxy or indicated up to seven days in advance of the meeting, may be conditional on certain modifications being accepted. These modifications have to be put to the debtor by the Nominee in order to obtain his agreement to the modification. There are three possible outcomes of a meeting. The proposal may be approved without modification, it may be subject to modifications which are agreed by the debtor and then approved, or it may be rejected. In the latter two cases, the responsibility of the Blair Endersby employee chairing the meeting is to discuss matters with both the creditors and the debtor to see if a proposal can be agreed and approved. Examples of matters that can typically arise include cases where creditors take a view on lifestyle sacrifices a debtor should be asked to make, including the continued ownership of certain assets, such as a car. To facilitate further consideration of such issues, the meeting can be adjourned for up to 14 days.[42]Following conclusion of the meeting the chairman issues a report. This sets out whether or not the proposal has been approved, the person appointed as Supervisor, details of any modifications to the original proposal and the results of the voting procedure. The Insolvency Service is informed of the details of the IVA, which are placed on a register.[43]On approval of a proposal (by the 75% majority to which we have previously referred) the role of the Nominee normally changes to that of Supervisor of the IVA. It is possible, but not common, particularly in consumer IVAs, for the Supervisor to be a different insolvency practitioner from the one acting as Nominee. Where this might happen is in the case of an IVA for a trader, where the proposal requires the Supervisor to conduct a business, which would require particular skills and experience.[44]It is only if a proposal is approved that Blair Endersby becomes entitled to any fee or remuneration for the insolvency practitioner acting as Nominee, or for acting as Supervisor. The only amounts that, in accordance with the letter of engagement, are deducted from the cheque paid by the debtor in respect of the first month’s contribution are for the costs of registering with the IP’s insurer and any reasonable disbursements. Otherwise, if the proposal is not approved (and subject to the rejection not being attributed to the debtor) the contribution is returned to the debtor.[45]According to SIP3 the main duty of a Supervisor is to ensure that the IVA proceeds in accordance with the terms of the agreed proposal. The R3 Standard Conditions provide that the Supervisor’s primary function is to supervise the debtor’s performance of his obligations under the arrangement and to administer the IVA. Mr Morgan’s evidence was that the role of the Supervisor is to pay money to the creditors. We accept that is one of the roles. In practice the debtor sets up a direct debit or standing order to enable payment of the agreed contribution to be made on a monthly basis. Funds received are held in a separate bank account. From this the Supervisor will take fees and disbursements, and the balance is remitted to creditors in accordance with the proposal. Blair Endersby’s cash receipts and payments systems are automated.[46]In the supervision of the debtor’s performance Blair Endersby also monitors payments and missed payments, and in the case of missed payments will write to the debtor to remind him of the obligations under the IVA, and to ask if there has been any change of circumstances, so that the creditors can be advised of the situation. We find that Blair Endersby does not, by this correspondence, seek to enforce payment of any amount by the debtor, or demand that the debtor make a payment. After two months arrears Blair Endersby will write to the debtor to advise him that a failure to make payments for three months might result in the failure of the IVA, and that protection from creditors will come to an end. This letter says that, if the debtor is able to pay the outstanding amount he should do so immediately in the usual way. We find that this letter is seeking to advise the debtor of the consequences of missed payments, but is not a demand for payment.[47]The Supervisor has a more general supervisory role with regard to the implementation of the proposal. Some IVA proposals proceed as envisaged from start to finish. Others involve changes in circumstances of debtors, sometimes for the better, such as an increase in income; other times for the worse, such as illness or unemployment. In these circumstances it would normally be the case that a further meeting of creditors would be convened to consider if revisions might be made to the proposal. This would typically entail the presentation of a revised offer from the debtor, and possibly an offer of full and final settlement. These “variation meetings” are subject to a vote in the same way as the earlier meeting for approval of the proposal. This can entail significant work for the Supervisor and his team. As we have noted, this work is the subject of an additional fee as provided for in the proposal.[48]During the currency of the supervision Blair Endersby makes an annual report to creditors, in accordance with the Insolvency Rules 1986. This sets out the progress of the contributions required to be made under the arrangement, a review of the debtor’s income and expenditure, an update on the drawing of remuneration in respect of the Nominee’s fee and disbursements and the Supervisor’s fee, and a schedule of creditors’ claims received. The review of the debtor’s financial position may lead to the need for revisions to the proposal as described above.[49]The IVA may terminate on a successful conclusion, or it may come to an end by reason of failure or default. Where failure has occurred, the SIP3 guidance is that the Supervisor should notify the creditors accordingly and advise them what action he has taken or proposes to take. The R3 standard terms and conditions contain provisions for this event. In the case of default, the Supervisor has statutory power to initiate bankruptcy proceedings against the debtor. Expert witness evidence[50]We had the benefit of two expert witness reports of Norman Cowan, a chartered accountant and licensed insolvency practitioner, who was called by HMRC and who gave oral evidence.[51]In his first report Mr Cowan sets out the issues he was asked to address as follows:
“The issues I have been asked to address are the concept of an Individual Voluntary Arrangement (IVA), together with the overall methodology; procedures and compliance obligations of an Insolvency Practitioner (IP) in respect to IVAs. This covers the professional work and obligations from when the IP is first approached by an individual with financial problems, termed ‘the Debtor’, through to the IP carrying out the functions of a Supervisor in order to obtain a satisfactory conclusion for the Debtor so that all creditors are satisfied. I have been asked to set out the services of a Debt Management Company (DMC) and to distinguish them from that of an IP carrying out the duties in respect of preparation, administration with respect to IVAs.”
[52]Mr Cowan makes it clear in his first report that he has no practical experience of debt management plans, and accordingly had based his findings in this respect on the documentation provided by the Appellant. We do not consider that a comparison between an IVA and a debt management plan is a useful line of enquiry for the purpose of our determination of this appeal. We can well understand why this became a subject for submissions, having regard to the tribunal decision in Debt Management Associates (2002; VAT decision 17880), which we shall consider, and the way in which the Appellant made its original claim, but what matters is the nature of the supply that Blair Endersby makes for the consideration, or considerations, it receives. That involves a non-comparative analysis of Blair Endersby’s own operations in the IVA process, and an application of the relevant law to that analysis, and we do not consider that this can be assisted by a comparison with another business, engaged in a different, though related, insolvency procedure.[53]Nevertheless, Mr Cowan’s reports, and his oral evidence, is highly material to the analysis of the nature of the business of conducting IVAs generally. Mr Cowan was clear in his evidence that he did not have the experience of consumer IVAs that Blair Endersby did; his experience is of the more bespoke end of the market. However, we make the following findings of fact from the evidence given by him, in so far as we have not already made findings above.[54]Insolvency practitioners are required to be licensed. A licence can be obtained from the Department for Business, Innovation and Skills, or from one of a number of recognised professional bodies. Those bodies have rules to ensure that the IP is a fit and proper person so to act, and have monitoring and disciplinary functions. An IP must pass the Joint Insolvency Examination Board examination and have the necessary practical experience to carry out insolvency work.[55]An IP has duties to the court, and the court is entitled to exercise control in appropriate circumstances. An IP can also become liable in negligence.[56]Before acting as an office holder in any insolvency procedure an IP must have security in the form of a General Penalty Bond for the proper performance of the IP’s functions. This is renewable annually. The bond is issued by an insurance company and provides a blanket cover for all appointments up to a specified limit. The bond ensures reimbursement should the IP illegally withdraw funds without the means of repayment. Upon becoming an office holder in a particular case (and in this respect, for periods since 1 January 2003, becoming a Nominee), the IP must notify the insurance company and take out a specific bond to cover that case, at a premium based on the assets subject to the IVA.[57]Mr Cowan’s evidence of the IVA procedure, although coming from a different standpoint in terms of the nature of the IVAs he had undertaken, did not differ materially from the evidence of the Appellant’s witnesses. However, it was helpful in emphasising the essential intermediary role of the IP, and his staff, or, as Mr Cowan put it the “to-ing and fro-ing” that the IP has to do between the debtor and the creditors.[58]The starting point, as we have found, is the initial advice to the debtor and the fact-finding process. The proposal is drafted and the debtor is given the opportunity to read and understand it. It has to be agreed by the debtor.[59]The proposal and all the documents that go with it, including the Nominee’s report, are sent to the creditors for the purpose of voting on the proposal. When the creditors send in their voting intentions Mr Cowan ensures that the proxy has been correctly completed, and that the amount of the debt substantially accords with the information given by the debtor.[60]At the creditors’ meeting to approve the proposal, Mr Cowan’s preference is to have the debtor in his office. This is to be able to deal with last-minute votes. If those votes are against the proposal, Mr Cowan discusses that with the debtor and asks him for his views. If the debtor is prepared to make a modification, then that can be agreed immediately and the IVA can be approved.[61]This was one example of the to-ing and fro-ing theme to which Mr Cowan repeatedly returned, describing the role of the IP on another occasion as that of a “go between”. He also accepted, in cross-examination, Mr Cordara’s description of the process as “shuttle diplomacy”. He explained this role by reference to Blair Endersby’s own training flow charts. These illustrated the process of agreement being reached, and the need for the IP or his staff repeatedly to have contact with the debtor and the creditors to ascertain if agreement can be secured. The IP has to do the best for both the debtor and the creditors. That is the reason for the inclusion of an IP in the process. If the creditors do not understand a debtor’s particular problem, it is for the IP to explain it to them. The flow of information from the debtor, through the IP, to the creditors is a crucial element of the process. Mr Cowan went on to describe the position of the IP as “between two stools”. His role is not to work for the debtor as such, but to try to assist creditors so that they can draw conclusions that will ultimately mean that they agree the proposal. The IP endeavours to facilitate the creditors’ agreement to the proposal. The IP operates in the nature of a conduit between the debtor and creditor.[62]As regards the supervisory stage of the IVA process, Mr Cowan, when questioned, agreed that the role of the Supervisor is to ensure that the right amount of money reaches the right creditor on the right date in respect of the right debt. He also agreed that this would be the debtor’s main aim. However, the role of the Supervisor is not simply to handle money. The IP must seek to ensure that the debtor pays the Supervisor what is required under the IVA. The Supervisor has to agree the creditors’ claims and pay the creditors in accordance with the arrangement. However, it is no part of the Supervisor’s role to enforce payment under the proposal.[63]The debtor knows that if he continues to perform his obligations under the IVA, then at the end he will have settled his debts fully. The debtor is not concerned with the performance by the Supervisor of his statutory duties. However, part of the responsibility of the IP is to ensure that the debtor is performing his obligations under the proposal. This includes advising him of the consequences of failing to do so, such as bankruptcy, but falls short of any enforcement role. The advice in this respect is given in the best interests of the debtor. The statutory insolvency framework[64]An IVA is made and conducted in the context of a statutory framework, subject to the supervision of the court. The relevant statutory provisions are to be found in Part VIII of the Insolvency Act 1986 (“IA”) and the Insolvency Rules 1986 (as amended). The following does not set out the statutory provisions in detail, but summarises their content and effect.[65]The provisions distinguish, in the first instance, between provisions which apply in a case where an interim order is sought, and those cases where there is no such application. An interim order is appropriate in circumstances where the debtor is at risk of bankruptcy or other enforcement proceedings; if the order is made it confers protection on the debtor against a number of proceedings which might otherwise be brought against him. The court can only make an interim order if it is satisfied that the debtor intends to make a proposal for an IVA, and the Nominee is willing to act in relation to the proposal (IA, ss 252 – 255). Section 256 imposes obligations on a Nominee in these circumstances, before the interim order ceases to have effect, to submit a report to the court, including as to whether the proposed IVA has a reasonable prospect of being approved and implemented.[66]The making of an interim order is very much the exception. Most IVAs fall under the procedure that applies if no interim order is sought or made. The commencement of that procedure is governed by s 256A IA under which the following criteria must be met:(1) The debtor must intend to make a proposal for an IVA.(2) If the debtor is an undischarged bankrupt, he must have given notice of the proposal to the official receiver and, if there is one, to the trustee of his estate.(3) The debtor is required to submit to the Nominee a document setting out the terms of the IVA which the debtor is proposing. As we have seen, in practice the work of drafting the proposal is not done by the debtor, but by Blair Endersby. However, as a matter of form, once the debtor has agreed the contents of the proposal, he will submit it to the insolvency practitioner who is to be the Nominee.(4) The debtor must also submit to the Nominee a statement of affairs, containing prescribed information. This will also have been drafted by Blair Endersby.(5) The Nominee must then submit a report to the creditors (before 6 April 2010 the report had to be submitted to the court) stating: (a) whether, in his opinion, the voluntary arrangement which the debtor is proposing has a reasonable prospect of being approved and implemented; (b) whether, in his opinion, a meeting of the debtor’s creditors should be summoned to consider the debtor’s proposal; and (c) if in his opinion such a meeting should be summoned, the date on which, and time and place at which, he proposes the meeting should be held.[67]In the event of default, the debtor can seek the appointment of a replacement insolvency practitioner to act as Nominee (s 256A(4) IA).[68]The obligation to summon the creditor’s meeting (whether in the light of an interim order or otherwise) is imposed on the Nominee (s 257(1) IA). The date and time of the meeting are as set out in the Nominee’s report. Section 258(1) requires the creditor’s meeting to decide whether or not to approve the Nominee’s proposal. It can approve modifications to the proposal if the debtor consents to them. Section 258 imposes certain specific requirements on the creditor’s meeting, but it is otherwise carried out in accordance with the Insolvency Rules. If the meeting declines to approve the proposal, the court may discharge any interim order, under s259(2) IA.[69]The effect of approval of the proposal is set out in s 260 IA, subsections (1), (2) and (2A) of which are worth reproducing:
“(1) This section has effect where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications). (2) The approved arrangement— (a) takes effect as if made by the debtor at the meeting, and (b) binds every person who in accordance with the rules— (i) was entitled to vote at the meeting (whether or not he was present or represented at it), or (ii) would have been so entitled if he had had notice of it, as if he were a party to the arrangement. (2A) If— (a) when the arrangement ceases to have effect any amount payable under the arrangement to a person bound by virtue of subsection (2)(b)(ii) has not been paid, and (b) the arrangement did not come to an end prematurely, the debtor shall at that time become liable to pay to that person the amount payable under the arrangement.”
[70]Section 260(4) and (5) also deal with any outstanding interim order or bankruptcy petition if a proposal is approved. Section 262 provides a mechanism by which the meeting’s decision may be challenged by an interested person (a debtor or a creditor).[71]The Nominee or Supervisor has a number of further obligations whilst acting in the course of an extant IVA. If it appears to the Nominee or the Supervisor that the debtor has been guilty of a criminal offence in connection with the arrangement, he must report the matter to the Secretary of State, and provide relevant information (s 262B IA). The Nominee or Supervisor must render all assistance to the prosecuting authority and can, in default, be directed to do so by the court.[72]The activities of the Supervisor are themselves, in certain instances, subject to the intervention of the court. This can take place at the instigation of a debtor, creditor or any other person, dissatisfied by anything decided, done, or omitted to be done, by the Supervisor. In that case the court can confirm, reverse or modify a decision of the Supervisor, give him directions or make such other order as it thinks fit. The court can also intervene, when it is inexpedient, difficult or impracticable for a replacement Supervisor to be appointed without the court’s assistance, and make such an appointment. The Supervisor can himself also apply to the court for directions in relation to any matter arising under the voluntary arrangement (s 263 IA).[73]More detailed regulation of the IVA process is contained in the Insolvency Rules. The areas covered include:(1) Contents of the proposal. Rule 5.3 sets out that the proposal must include a short explanation from the debtor why, in his opinion, an IVA is desirable, and give reasons why his creditors might be expected to concur with such an arrangement. There is a detailed list of matters which must be stated, or otherwise dealt with, in the proposal. The proposal has to be accompanied by the statement of affairs. Rule 5.5 makes provision for what the statement of affairs must comprise, which is to supplement or amplify, so far as is necessary for clarifying the state of the debtor’s affairs, what has been included in the proposal.(2) Notice of proposal. Rule 5.4 provides that the debtor must give written notice of the proposal to the intended Nominee. This is, in practice, honoured in form rather than substance, as it is the proposed Nominee, or his staff, who prepares the proposal for approval by the debtor.(3) Nominee’s report. Rule 5.14A concerns the Nominee’s report. It prescribes the documents that must be delivered to creditors (and, in appropriate circumstances, others, such as the official receiver).(4) Creditors’ meetings. The summoning and conduct of the creditors’ meeting, and consequential reporting requirements, are dealt with by Rules 5.17 – 5.29. The chairman of the meetings, in the case of Blair Endersby, is usually an experienced employee, rather than the Nominee himself; this is permitted by Rule 5.19. The chairman acts as proxy-holder (Rule 5.20). Rule 5.21 sets out the entitlements of creditor’s to vote, and how that entitlement is calculated, by reference to amounts of debt. The chairman is responsible for admitting or rejecting claims of persons to be entitled to vote as creditors (Rule 5.22); this is subject to appeal to the court.(5) Approval and modification of proposal . It is Rule 5.23 that provides for the requisite majority for approval or modification of a proposal, namely 75% or more (in value) of those present in person or by proxy voting in favour. The chairman’s decision is subject to appeal to the court.(6) Hand-over of property. Rule 5.26 makes provision for property included in the IVA to be put into the Supervisor’s possession. However, this was not a feature of the IVAs that are the subject of this appeal. In those IVAs, assets remained in the possession of the debtor. Any realisations of assets were performed by the debtor, and any refinancing of the debtor’s home, for which provision might be made in the proposal, in order to release equity, was carried out by the debtor, and not by the Supervisor or by Blair Endersby.(7) Report of creditors’ meeting. The chairman is required to prepare a report of the meeting, as set out in Rule 5.27. This is sent to the creditors and, by rule 5.29, to the Secretary of State.(8) Supervisor’s accounts and reports. Rule 5.31A requires the Supervisor to keep accounts and records of the Supervisor’s acts and dealings, including records of all receipts and payments of money. These can be required to be made available to the Secretary of State (Rule 5.32).(9) Fees and expenses. Rule 5.33 limits the fees and expenses to agreed remuneration and disbursements made by the Nominee prior to approval of the IVA and fees, costs, charges and expenses sanctioned by the IVA or are such as would be payable in the debtor’s bankruptcy.(10) Completion of the IVA. On final completion of the IVA, Rule 5.34 provides that the Supervisor must send notice to the debtor and creditors with a summary report of all receipts and payments, and explaining any differences in implementation from the original proposal. A copy has to be sent to the Secretary of State. Insolvency practitioners[74]Under s 388, a person who is proposed or approved as a nominee or supervisor of an IVA acts as an insolvency practitioner in relation to an individual.[75]Section 389 IA makes it an offence for a person to act as an insolvency practitioner in relation to an individual at a time when he is not qualified to do so, unless he is authorised to act as a nominee or supervisor under s 389A. This requires the person to be a member of a body recognised for the purpose by the Secretary of State. A body can only be recognised if it maintains and enforces rules for securing that its members:(a) are fit and proper persons to act as nominees and supervisors, and(b) meet acceptable requirements as to education and practical training and experience.[76]Accordingly, only insolvency practitioners and those authorised under s 389A IA can act as nominees or supervisors in relation to an IVA.[77]The Insolvency Practitioners Regulations 2005 make provision in connection with the regulation of insolvency practitioners. We need not set the provisions out in any detail. We are satisfied on the evidence that authorisation as an insolvency practitioner is an onerous process, requiring the passing of professional examinations, continuing professional development and the maintenance of high professional and ethical standards. The VAT law (1) EU law[78]Article 2 of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, 77/388/EEC (“the Sixth Directive”) provided that the supply of services effected for consideration shall be subject to VAT. A number of exemptions from liability to VAT were contained in Title X to the Sixth Directive. Under Article 13(B), these exemptions related to certain activities other than those in the public interest.[79]The Sixth Directive has been repealed and replaced by Council Directive (EC) 2006/112/EC of 28 November 2006 on the common system of VAT as the source of Community legislation on VAT (“the Principal VAT Directive”). By Article 414, the Principal VAT Directive entered into force on 1 January 2007. Pursuant to Article 411, the Sixth VAT Directive was repealed from this date, subject to the time limits listed in Annex XI, Part B, for the transposition into national law and implementation of these Directives.[80]The Appellant’s request for a liability ruling came after the entry into force of the Principal VAT Directive. We refer therefore only to the specific terms of the Principal VAT Directive. However, as there is no material difference between the Sixth Directive and the Principal VAT Directive in these respects, our findings are equally applicable to the period when the Sixth Directive was in force.[81]Article 2(1)(c) of the Principal VAT Directive provides that VAT shall be payable on the supply of services for consideration within the territory of a Member State by a taxable person acting as such.[82]Title IX to the Principal VAT Directive covers exemptions. Chapter 2 sets out exemptions in the public interest. Chapter 3 makes provision for exemptions for “other activity.” So far as we shall be required to refer to it, Article 135(1) states: “1. Member States shall exempt the following transactions:(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;(b) the granting and the negotiation of credit and the management of credit by the person granting it;(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection; …” [2] (2) The Value Added Tax Act 1994[83]Section 31(1) VATA provides that:
“A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 and an acquisition of goods from another member State is an exempt acquisition if the goods are acquired in pursuance of an exempt supply.”
[84]Schedule 9 sets out a series of groups of goods and services that qualify for exemption from VAT under domestic law. Group 5 covers Finance. Its relevant provisions read as follows:
“Item No. 1. 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. 2. The making of any advance or the granting of any credit. 2A. The management of credit by the person granting it. … 5. The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity. …”
[85]The statutory Notes accompanying the above items provide as follows:
“(1) Item 1 does not include anything included in item 6. (1A) Item 1 does not include a supply of services which is preparatory to the carrying out of a transaction falling within that item. … (5) For the purposes of item 5 “intermediary services” consist of bringing together, with a view to the provision of financial services— (a) persons who are or may be seeking to receive financial services, and (b) persons who provide financial services, together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities. (5A) For the purposes of item 5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries, between— (a) a person who provides financial services, and (b) a person who is or may be seeking to receive financial services. … (5B) For the purposes of notes 5 and 5A “financial services” means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6.”
Discussion[86]The essential question in this case is whether the services provided by Blair Endersby to its client, the debtor, are, as the Appellant argues, exempt supplies, or, as HMRC submits, standard-rated supplies.[87]It is common ground that exemptions represent exceptions from the general rule that VAT should ordinarily be charged on the supply of services for a consideration, and accordingly exemptions fall to be construed restrictively, whilst not depriving them of their intended effect. We were taken to a number of authorities of the Court of Justice (“CJEU” or “ECJ”) that make this clear: Sparekassernes Datacenter (SDC) v Skatteministeriat (Case C-2/95) [1997] STC 932 , at [20], and Velvet & Steel Immobilien und Handels GmbH v Finanzamt Hamburg-Eimsbüttel (Case C-445/05) [2008] STC 922 at [14]. The position is summarised in Commissioners for Customs and Excise v Axa UK plc (Case C-175/09) [2010] STC 2825 , where the CJEC held (at [25]) that:
“It is also clear from the case law that the terms used to specify the exemptions set out in art 13 of the Sixth Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all goods and services supplied for consideration by a taxable person. Nevertheless, the interpretation of those terms must not deprive the exemption in question of its intended effect (see, to that effect, Don Bosco Onroerend Goed (para 25) and the case law cited; Future Health Technologies (para 30); and EMI Group Ltd v Revenue and Customs Comrs (Case C-581/08 ) [2010] STC 2609 , para 20).”
[88]The correct approach is also helpfully distilled in the judgment of Chadwick LJ in Expert Witness Institute v Customs and Excise Commissioners [2002] STC 42 . After referring to the requirement for strict interpretation of the terms of the exemptions, he said, in the context of an issue on the construction of the phrase “aims of a civic nature” (at [17]):
“It does not follow, however, that the court is required to give to the phrase 'aims of a civic nature' the most restricted, or most narrow, meaning that can be given to those words. A 'strict' construction is not to be equated, in this context, with a restricted construction. The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption, so that if the court is left in doubt whether a fair interpretation of the words of the exemption covers the supplies in question, the claim to the exemption must be rejected. But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question.”
[89]According to the settled case law, the exemptions constitute independent concepts of EU law the purpose of which is to avoid divergencies in the application of the VAT system as between one member state and another. As regards the exemptions for financial transactions, the services in question must, viewed broadly, form a distinct whole, fulfilling the specific, essential functions of a financial service described in Article 135 ( Axa , at [24], [27]).[90]In order to answer the question whether the services supplied by Blair Endersby fall within one or more of the exemptions, we must have regard to the nature of those services themselves. The services are not defined in terms of the person supplying or receiving the service ( Axa , at [26]). Where the transactions in question relate to the sphere of financial transactions, the exemption is not subject to the condition that the transactions must be carried out by a certain type of institution or legal person (see SDC , at para 38, Velvet & Steel at para 22 and Axa , at [26]). Nevertheless, in order to be an exempt transaction, the transaction in question must relate to the sphere of financial transactions ( Velvet & Steel , at para 22).[91]The principal submission made by Mr Cordara and Mr King, on behalf of the Appellant, is that Blair Endersby makes two supplies to it clients; a supply of negotiation concerning debts, and a supply of payment handling. Each of these, it is said, are separate supplies that are in themselves exempt. Alternatively, if that is wrong and there is a single supply, the submission is that the predominant element of that supply is negotiation, which is exempt.[92]Against this, for HMRC, Mr Beal submits that the supplies made by Blair Endersby are supplies of professional services, akin to supplies of legal or accountancy services, and that this is a single supply. He points to the fact that the service is supplied in the context of the implementation and operation of a statutory insolvency procedure. He submits that in order to be classified as an exempt supply of the negotiation of credit there would have to be an underlying transaction that either was, or at least was capable of being, an exempt supply of credit, and argues that no such transaction can be identified here. Whilst his primary submission is that in any event the services provided by Blair Endersby ought not properly to be characterised as the “negotiation of credit”, nor the supply of payment services, he also submits that if the role of the Supervisor were to be characterised by reference to the receipt and distribution of payments pursuant to the terms of the IVA, that service would be one of debt collection.[93]In the course of the hearing Mr Cordara put forward a further alternative submission, namely that the service of effecting the IVA, in so far as it is capable of being a free-standing supply in its own right, is also a supply of a transaction concerning debts and payments. He bases this alternative submission on the fact that it is only at the stage of a legally binding IVA having been achieved that results in the consideration for the supply becoming payable. The only VAT supply is where there is a successful conclusion of the IVA (at least at the Nominee stage). He argues that although this cannot be achieved without negotiations having taken place, the actual achievement of the transaction as also part of the service. He submits, on this basis, that this is a transaction concerning debts: it has legal significance, and in principle delivers the benefits that the customer is seeking, namely a clearly-structured timetable to pay and debt forgiveness, in the context of an enforceable legal framework. Single supply or separate supplies[94]We turn first to consider whether what Blair Endersby supplies to its client is a single supply or two separate supplies. The classic test is found in Card Protection Plan v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270 (“ CPP ”), where the Court of

Justice said (at paras 29 – 30):

“29. In this respect, taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service. 30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see Customs and Excise Comrs v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97 ) [1998] STC 1189 at 1206, para 24).”
[95]The identification of a principal and one or more ancillary supplies is one instance where the Court of Justice has held that there is a single supply. But it is not essential for there to be such an analysis. Thus, in Levob Verzekeringen BV and another v Staatssecretaris van Financiën (Case C-41/04) [2006] STC 766 , the Court of Justice, after referring to para 30 of the Court’s judgment in CPP , said (at para 22):
“The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.”
[96]More recently, in Axa , the CJEU gave the following guidance, in the context of a series of transactions effected by an intermediary in the course of the payment of debts due from a patient to a dentist under a dental plan (at [20] – [22]):
“20. Since that service encompasses various actions, it must, in the first place, be determined whether, for VAT purposes, and in particular the interpretation of the provision referred to in the questions referred, Denplan supplies its clients with several distinct and independent services requiring separate assessment or a single complex service comprising several elements (see, to that effect, in particular Levob Verzekeringen BV v Staatssecretaris van Financiën (Case C-41/04 ) [2006] STC 766 , [2005] ECR I-9433 , paras 18 and 20; Ministero dell'Economia e delle Finanze v Part Service Srl (Case C-425/06 ) [2008] STC 3132 , [2008] ECR I-897 , paras 48 and 49; and Don Bosco Onroerend Goed BV v Staatssecretaris van Financiën (Case C-461/08 ) [2010] STC 476 , para 34). 21. Indeed, in certain circumstances, several formally distinct services, which could be supplied in isolation and thus give rise, separately, to taxation or exemption, must be considered to be a single transaction when they are not independent. This is particularly true where two or more elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split (see, to that effect, Part Service (paras 51 and 53); RLRE Tellmer Property sro v Financni reditelstvi v Usti nad Labem (Case C-572/07 ) [2009] STC 2006 , [2009] ECR I-4983, paras 18 and 19; and Don Bosco Onroerend Goed (paras 36 and 37)). 22. According to the court's case law, where a transaction comprises a bundle of features and acts, regard must be had to all the circumstances in which the transaction in question takes place in order to determine whether there are two or more distinct supplies or one single supply (see, to that effect, in particular Levob Verzekeringen (para 19); Aktiebolaget NN v Skatteverket (Case C-111/05 ) [2008] STC 3203 , [2007] ECR I-2697 , para 21; and Don Bosco Onroerend Goed (para 38)).”
[97]In Debt Management Associates Limited v Customs & Excise Commissioners (VAT decision 17880, 7 November 2002) the VAT and Duties Tribunal (chairman Colin Bishopp) considered the nature of supplies made by the appellant in carrying on a debt management business, which has certain parallels with the IVA services supplied by Blair Endersby. The tribunal found in that case that the appellant carried on a negotiation service that was an exempt supply, and it was accepted by the commissioners that the payment handling service was also exempt. After referring to the passages in CPP we have set out above, the tribunal decided that, although it was unlikely that a client would avail itself of one part of the service without the other, the fact that this could be done pointed to the conclusion that there were two supplies, and that – although not conclusive – the fact that two fees were charged supported that view.[98]Whilst taking full account of the tribunal’s reasoning in Debt Management Services , we have reached a different conclusion in this case on the question whether Blair Endersby makes a single supply, or more than one supply. We take the view that the service provided by Blair Endersby, although comprising a number of elements, is essentially in economic terms a single service of the provision to the client of the means whereby his debts can be restructured so as to provide him with protection from his creditors, an achievable cash flow and debt repayment schedule, and, if the arrangement reaches its planned conclusion, an element of release from part of his indebtedness. That supply, when made by a single supplier, is in our view a single indivisible economic supply which it would be artificial to split. Whilst it is correct that it is possible that the service could be split between the fact-finding and Nominee element and the Supervisor stage, in our view that does not lead to the conclusion that each element is of itself a separate supply, unless they are, exceptionally, carried out by two separate suppliers. Where, as is normally the case, both elements are carried out by one supplier, the elements are so closely linked as to amount to a single supply.[99]The way in which the price is charged is not decisive. In the same way as the charging of a single price does not point conclusively in favour of their being a single supply (see CPP at para 31), the making of separate charges for the two elements does not mean that there are two supplies ( Levob , at para 25). Indeed, on the facts of this case, the two fees were interlinked; the fee for the supervisory stage was calculated after deduction of the Nominee fee, and a global fee was collected through the payment arrangements. This supports the view that, as carried out by Blair Endersby, those elements are parts of a single indivisible economic supply. The nature of the supply 100.Having decided that the service supplied by Blair Endersby constitutes a single supply, we turn to a determination of the nature of that supply. We have referred to Debt Management Associates , and the finding by the tribunal in that case that there was an exempt supply of a negotiation service, along with the acceptance by the commissioners that the payment handling service was exempt. We heard evidence on the comparisons and contrasts between that case and this. However, as we indicated earlier, we did not derive any material assistance from such a comparative analysis. We consider that the right approach is for us to determine objectively, on the facts we have found as to the services provided by Blair Endersby, in substance the nature of Blair Endersby’s supply for VAT purposes.[100]101.As we have described it above, we have found that Blair Endersby supplies a service to its debtor clients of the means whereby debts can be restructured so as to provide protection from creditors, an achievable cash flow and debt repayment schedule, and if the arrangement is successful, an element of release from indebtedness. Such a service, provided for a consideration, is a taxable supply for VAT purposes unless it falls within an exemption. Where, as we have found, there is a single supply, the Appellant’s position is that the supply is of “negotiation concerning … debts”, and that the exemption in this respect in article 135(1)(d) of the Principal VAT Directive therefore applies. HMRC say that although there is a negotiation element to the service provided by Blair Endersby, that element is but a small part of the overall supply of professional services. The exemption does not apply, and the supply overall is taxable.[101]102.Where, as in this case, a supply is made up of a number of elements and activities, it is necessary for us to identify the predominant or core element or elements of the supply. Mr Cordara took us to Customs & Excise Commissioners v FDR Ltd [2000] STC 672 and the judgment of Laws LJ in the Court of Appeal. What is required where there are multiple acts of supply is a fair and reasonable approach to the question how the consideration given by a supplier for his reward should be categorised for VAT purposes (at [54]). The first question is, as put by Nolan LJ in Bophuthatswana National Commercial Corp Ltd v Customs and Excise Commissioners [1993] STC 702 at p 708, “what is the true and substantial nature of the consideration given for the payment”. That may identify a single or unitary supply, the nature of which – and thus whether it is taxable or exempt – may be clear. But it may also lead to the conclusion that there are a number of elements of the supply which are integral to each other or “physically and economically indissociable”. In those circumstances it is necessary to look at the elements which comprise the core in order to determine whether the taxable or exempt elements predominate (see Laws LJ, FDR at [55]).[103]In this case the overall service provided by Blair Endersby does comprise a number of elements which are each integral to the supply that is made. These are the provision of advice, fact-finding and information gathering, drafting the proposal and preparation of other essential documents, intermediating between the debtor and his creditors, holding and chairing a meeting to approve the proposal and any modifications, supervising the implementation of the proposal, collecting payments from the debtor and making distributions to the creditors, monitoring compliance by the debtor and proposing modifications in the event of changes in circumstances. We must therefore examine these elements to determine what elements are taxable, and what are exempt, and which predominate.[104]Mr Beal submitted that the supplies made by Blair Endersby in return for their fees were supplies of professional services akin to legal or accountancy services. He referred to the fact that, as was not disputed, the package of different activities undertaken by Blair Endersby required the exercise of professional judgement, care and skill. Mr Beal argued that the analysis was simple: Blair Endersby were providing the professional services of an insolvency practitioner. The Appellant was seeking to over-refine the issue, by seeking to shoe horn its case into the Procrustean bed of an exemption from VAT. Mr Beal drew our attention to the professional and ethical standards an IP is required to observe, the need for accreditation by a recognised professional body and the arduous process of becoming a licensed IP. In carrying out their duties in connection with an IVA, as well as other insolvency procedures, IPs are required to have regard to both the debtor and the creditors. But this, argued Mr Beal, does not lead to the conclusion that an IP is acting in this respect as an intermediary. What the IP does is to facilitate or give effect to a specific insolvency procedure which is a statutory alternative to bankruptcy. 105.In support of his submission, Mr Beal referred us to three cases where, he said, the ECJ has explicitly recognised that the provision of professional services is a standard-rated supply. The first is EC Commission v Netherlands (Case 235/85) [1987] ECR 1471 , where the ECJ held that the services of bailiffs and notaries in the Netherlands, although regulated by public law, constituted economic activities and were taxable, and not within the exemption for bodies governed by public law. EC Commission v Netherlands was applied by the ECJ in the second of the cases referred to in this connection by Mr Beal, that of Ayuntamiento de Sevilla v Recaudadores de las Zonas Primera y Segunda (Case C-202/90) [1991] ECR I-4247 , where the activities of independent tax collectors appointed under Spanish legislation by local authorities were held to be outside the exemption for bodies governed by public law.[106]With respect to Mr Beal, we can find nothing of assistance in these two cases. The Netherlands case was firstly concerned with whether the bailiffs and notaries carried on economic activities, and secondly on the scope of the public law exemption. That exemption did not apply where the bailiffs and notaries were not themselves part of the public administration, but carried on an independent economic activity. But the exemptions with which we are here concerned have no public administration requirement. They are applicable to independent economic activities. Similar remarks may be made about Ayuntamiento de Sevilla , where the decisive factor was the independent character of the tax collectors’ activities. 107.The third case referred to by Mr Beal in this context was Levob . As well as considering the question of single or separate supplies, Levob also looked at the place of supply of the services at issue in that case, namely the customisation of computer software. The ECJ held that the relevant place of supply rules were concerned, not with the professions themselves, but with the services provided by those professionals and similar services. Here Mr Beal argued, the ECJ had no difficulty in recognising that a supply of professional services by a professional will both be standard-rated and may well be determinative of the place of supply. He invited us to adopt the same approach to establishing the nature of Blair Endersby’s supplies. Again, we derive no assistance from this reference to Levob . The acceptance in that case of the taxable nature of the supplies, and the application of the place of supply rules there, does not throw any light upon the nature of Blair Endersby’s own supplies. Nor, in the same way that we reject comparison with debt management services as an approach to the question we have to determine, do we derive any assistance from reference to the taxable nature of the activities of other liberal professionals, such as lawyers and accountants, whose business may from time to time involve negotiation. The fact that a service is a professional service does not itself prevent it from being an exempt supply, if it falls within the terms of an applicable exemption. Whilst accepting the professional status of an IP, and the professionalism with which an IP’s services are provided, what we must do is to undertake an objective economic assessment of the underlying nature of those services. Only in this way can we determine whether the service that is provided is taxable, or exempt.[107]108.This approach is confirmed by Sparkassernes Datacenter (SDC) v Skatterministeriat (Case C-2/95) [1997] STC 932 , a case that in part concerned Article 13B(d)(3) of the Sixth Directive, the precursor to Article 135(1)(d) of the Principal VAT Directive. It was held that the transactions exempted were defined by reference to the nature of the services provided and not to the type of person supplying those services or effecting those transactions. The Court of Appeal has adopted the same approach in FDR and in Customs and Excise Commissioners v Electronic Data Systems Ltd [2003] STC 688 . Negotiation[109]Mr Beal was critical of the liberal use of the term “negotiation” throughout much of the written witness evidence on behalf of the Appellant. We share his disquiet in this regard. The use of that term, without regard to its legal interpretation, added nothing to the factual analysis we were required to make, and we have placed no reliance on the assertions in the witness evidence that various activities undertaken by Blair Endersby themselves involved negotiation. What matters is not how the Appellant (or indeed anyone else) seeks to describe the activities of Blair Endersby, but the economic substance of those activities. 110.In determining whether the service supplied by Blair Endersby included negotiation concerning debts, and if so to what extent, we take as our starting point the Court of Justice judgment in CSC Financial Services Ltd v Customs and Excise Commissioners (Case C-235/00) [2002] STC 57 . That case, which concerned the services provided by a call centre to a financial institution concerning investment in units in a unit trust. The exemption in question was that in what was formerly article 13B(d)(5) of the Sixth Directive (now article 135(1)(f) of the Principal VAT Directive), which exempts “transactions, including negotiation … in shares … and other securities”. After noting that article 13B(d)(5) did not define the meaning of “negotiation in securities” for the purposes of that provision, the Court went on (at [38] to [40]):
“38. Clearly, the words 'including negotiation' are not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation. 39. It is not necessary to consider the precise meaning of the word 'negotiation', which also appears in other provisions of the Sixth Directive, in particular, art 13B(d)(1)–(4), in order to hold that, in the context of art 13B(d)(5), it refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product, and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side. The purpose of negotiation is therefore to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of the contract. 40. On the other hand, it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject-matter of the contract. In such a case, the sub-contractor occupies the same position as the party selling the financial product and is not therefore an intermediary who does not occupy the position of one of the parties to the contract, within the meaning of the provision in question.”
[111]This construction of article 13B(d)(5) has since been adopted by the ECJ in Volker Ludwig v Finanzamt Luckenwalde (Case C-453/05) [2008] STC 1640 (at [23]). In that case the ECJ went on to elaborate on what had been said in CSC Financial Services . The Court said (at paras 38 – 39): “… The concept of negotiation does not, therefore, necessarily presuppose that the negotiator, as sub-agent of the main agent, enters into direct contact with both parties to the contract, in order to negotiate its terms, provided, however, that his activity is not limited to dealing with some of the clerical formalities related to the contract. 39. In addition, the very fact that the terms of the credit agreement have been fixed in advance by one of the parties to the contract cannot, as such, preclude the supply of a negotiation service for the purposes of art 13B(d)(1) of the Sixth Directive, given that, as stated in the previous paragraph, the activity of negotiation may be limited to pointing out to one party to the contract suitable opportunities for the conclusion of such a contract.” 112.It is important to recognise that negotiation is not limited to direct contact with both counterparties, nor to the achievement, through proposal and counter-proposal, of an agreed outcome. The essential element is that, for a consideration, a service of a distinct act of mediation is performed by a person who does not occupy the same position as one or other of the counterparties. It may involve as little as pointing out opportunities to one counterparty for the conclusion of a contract with another, or as much as involvement in the detailed negotiation of individual elements of the contract. There can be negotiation in the sense of article 135(1)(d) even if one party’s position is fixed, if what is done is to point out to another party the opportunities for the conclusion of such a contract.[112]113.Mr Beal’s primary submission was that to regard the Nominee stage of the IVA procedure as involving the IP in providing an exempt supply of debt negotiation would be to mis-characterise the much more extensive role played by the Nominee in the IVA process. We will come to that submission. But we should first deal with an alternative case put for HMRC, namely that in order to be classified as an exempt supply of the negotiation of credit or debt, there would have to be a transaction that either was or at least was capable of being an exempt supply of credit. There is, Mr Beal argued, no such transaction in this case.[113]114.Mr Beal referred us to what the Advocate General (Jääskinen) said in the recent case of Skandinaviska Enskilda Banken AB Momsgrupp v Skatteverket (Case C-540-09( [2011] All ER (D) (Mar) (“ SEB ”) at [46]: the definition of what constitutes a financial transaction should be considered with regard to the economic context of the transaction. In that case what was in issue was the provision of an underwriting guarantee in respect of an issue of shares. The Advocate General did not consider that article 13B(d)(2) should be limited to credit guarantees; he reasoned that institutions providing banking and financial services could provide both credit and other types of guarantee, and that, as article 13B(d) exempts almost all activities of such institutions, article 13B(d)(2) should be read in the wider sense (at [42]). This wide reading was in turn tempered by the requirement that the service must relate, as a whole, to the sphere of financial transactions. The view of the Advocate General was that the underwriting guarantee service related to the sphere of financial transactions. However, he took the view that article 13B(d)(2) did not exempt the underwriting guarantee, as there was no other specified party to the guarantee. Nevertheless his opinion was that the underwriting guarantee amounted to a transaction in securities within article 13B(d)(5).[114]115.In the course of his opinion the Advocate General also referred to Velvet & Steel (at para 24) to the effect that the purpose of exempting financial transactions has been discerned by the court as to alleviate difficulties connected in determining the tax base and the amount of VAT deductible, as well as to avoid the increase in the cost of consumer credit. Nevertheless, despite none of these difficulties being apparent in a share underwriting for a fee, the CJEU subsequently held, agreeing with the Advocate General, that the underwriting guarantee service was exempt under article 13B(d)(5).[115]116.In reaching this conclusion, the Court referred (at [30] – [31]) to the tests for the application of article 13B(d)(5), namely that the trade in securities involves acts which alter the legal and financial situation as between the parties ( SDC , paras 72 and 73) and those which are liable to create, alter or extinguish parties’ rights and obligations in respect of securities ( CSC Financial Services , para 33).[116]117.By way of preliminary observation, the Court referred (at [18]) to the fact that the underwriting guarantee fell within the scope of the Sixth Directive as a supply of services effected for consideration. Mr Beal submitted that, on this basis, that it was necessary, before examining whether the terms of an applicable exemption were met, to explore first whether or not there was a transaction capable of amounting to a supply of services for a consideration. He argued that in the case of an IVA there is no underlying transaction between the creditors and the debtor for consideration. There has been the operation by statute of an insolvency procedure. The debtor does not give any consideration, in the EU sense of reciprocal performance as described in Town and County Factors v Revenue and Customs Commissioners (Case C-498/99) [2002] ECR I-7173 (at [18]). The debtor is not providing anything to the creditors in order to be released from the full ambit of his contractual duties. The IVA procedure is a statutory alternative to bankruptcy, designed to produce a better outcome for creditors than would otherwise result. The arrangement is by statute binding on the debtor and the creditors, including dissenting creditors. This, Mr Beal submitted, is the antithesis of a consensual contractual transaction for the supply of services.[117]118.In Customs and Excise Commissioners v BAA plc [2003] STC 35 , the issue was whether commissions paid by a bank to a subsidiary of BAA (BAAE) for various services performed by BAAE in relation to the issue and use of a credit card fell within the expression “negotiation of credit” within article 13B(d)(1) of the Sixth Directive. The Court of Appeal, upholding both the VAT Tribunal and the High Court, held that they did. It held that the agreement between the bank and BAAE contained details of the credit to be offered to card-holders, and that it was immaterial whether and to what extent that offer was the result of negotiation between BAAE and the bank. BAAE performed introductory services, but those services were not typical of the services performed by the grantor or grantee of credit. BAAE was not itself a party to the grant of credit by the bank to a card holder, nor was it a sub-contractor of such a party.[119]Mr Beal referred us the only reasoned judgment, that given by Sir Andrew Morritt V-C. Rejecting a submission from the commissioners’ counsel that the decision of the Court of Appeal in Customs and Excise Commissioners v Civil Service Motoring Association [1998] STC 111 could not survive the ECJ judgment in CSC Financial Services , the Vice-Chancellor said (at [30]):
“Both recognise that negotiation is an exercise preliminary to and connected with the relevant transaction. In both the negotiator was remunerated by commission. In neither is it suggested that the negotiator should be able to affect the terms of the transaction.”
[120]What Mr Beal says about this is that it shows that negotiation involves, and necessarily presupposes, an underlying relevant transaction. At one point his argument was that a transaction concerning debts should be construed as a transaction giving rise to a debt. However, at a late stage of the hearing he moved away from that position, putting the more limited submission that what was needed was an underlying transaction for consideration that falls within the exemption. He accepted that a contractual variation of a debt for consideration would be an exempt transaction. The key point was the absence of consideration. 121.In our view there is nothing to support Mr Beal’s submission that the underlying transaction that is the subject of negotiation has itself to be a transaction capable of being a supply of services for consideration. The reference in the judgment in SEB at [18] to the supply being for a consideration is to the actual supply at issue, namely the underwriting guarantee, and not to the underlying transaction in securities. Nor is there anything in BAA that supports the proposition that the relevant transaction must itself be a relevant supply. The proper approach, in the case of negotiation, in our view, is to consider if what has been done by the intermediary is so closely related to the alteration of the legal and financial situation of the counterparties, or the creation, alteration or extinguishment of the rights and obligations of those counterparties as to fall within the financial services exemption. If the service of an intermediary gives rise, or is designed to give rise, to such an outcome in relation to a debt, it does not, in our view, matter if that outcome is, or is not, one that would in itself be a supply for VAT purposes, is for consideration or is an outcome that is the consequence of statute.[121]122.It follows that we do not accept that it is material that, as Mr Beal submitted, in an IVA there is no underlying service provided by the creditors to the debtor which is being provided for consideration, and that instead what is taking place is the operation of a statutory insolvency procedure. Mr Beal argued that there is no underlying economic transaction taking place, merely the operation of a form of insolvency procedure sanctioned by the State, and that accordingly Blair Endersby did not negotiate any transaction which had fallen or was capable of falling within the terms of article 135(1)(b) or 135(1)(d). We do not agree. If what Blair Endersby does for the remuneration it receives amounts to negotiation, then in our view it is negotiation concerning debts, as it is intrinsically connected to the alteration, by statute, of the legal and financial situation of the counterparties, and to the alteration or extinguishment, again by statute, of the rights and obligations of the debtor and the creditors.[122]123.Furthermore, we do not accept that negotiation concerning debts, within the terms of article 135(1)(d), is, as Mr Beal submitted, an extension to the exemptions for underlying financial transactions. That this is not so can be seen clearly from Velvet & Steel where the ECJ held that the assumption of an obligation to renovate buildings could not fall within the exemption in article 13B(d)(2) of the Sixth Directive (now article 135(1)(c) of the Principal VAT Directive) because it was not, by its nature, a financial transaction. In Velvet & Steel the ECJ considered a number of terminological differences that had arisen in different language versions of the Sixth Directive provision. In some the expression “assumption of obligations” had a general meaning; in others it referred to pecuniary obligations. The Court held (at para 20) that the scope of that phrase could not be determined on the basis of an exclusively textual interpretation. The Court went on (at paras 21 – 22): “21. Concerning the context in which the expression is used, it is clear that the exemption provided for in art 13B(d)(2) of the Sixth Directive concerns, in addition to the assumption of obligations, the negotiation and assumption of credit guarantees or any other security for money and the management of credit guarantees. It is common ground that all those transactions are, by their nature, financial services.[22]The same conclusion is also valid for the other transactions set out in subparas 1 and 3 to 6 of art 13B(d) of the Sixth Directive. Thus, subpara 1 concerns credit; subpara 3, deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments; subpara 4, legal tender; subpara 5, shares and other securities; and subpara 6, management of special investment funds. Although those transactions, defined according to the nature of the services provided, do not necessarily have to be carried out by banks or other financial institutions (see, to that effect, SDC , para 32; Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01 ) [2003] STC 951 , [2003] ECR I-6729 , para 64; and Abbey National plc v Customs and Excise Comrs (Case C-169/04 ) [2006] STC 1136 , [2006] ECR I-4027 , para 66), they relate, nevertheless, as a whole, to the sphere of financial transactions.”[124]On this basis we accept Mr Cordara’s submission in this respect that a negotiation concerning a debt is by its own nature a financial transaction, and thus comes within the scope of the exemption in its own right. It is not an extension of any other exemption, but stands to be construed on its own terms within the context of the sphere of financial transactions falling within article 135(1). It is not necessary to identify another underlying transaction that would itself fall within the exemption in order to find, if it be the case, that the provision of a service of negotiation concerning debts is exempt. 125.Nor, in our view, is Mr Beal’s argument supported by the reference to the purpose of the exemption for financial transactions referred to in Velvet & Steel (at para 24). Although in the context of a service of negotiations concerning debts for a fee issues of tax base and the amount of VAT to be deducted do not commonly arise, we consider that the objective of avoiding an increase in the cost of consumer credit is self-evidently applicable to a process designed to alleviate the otherwise insolvent position of an individual debtor.[125]126.Turning then to the question whether the services supplied by Blair Endersby do comprise “negotiation concerning debts” within article 135(1)(d), we consider that, on the authority of CSC Financial Services , SDC and SEB , the following are the tests we should apply:(1) Is the service one of a distinct act of mediation?(2) Is Blair Endersby a person that does not occupy the position of debtor or creditor, or as a subcontractor of one or both of them?(3) Are the services supplied by Blair Endersby not typical of the services performed by a debtor or creditor?(4) Is the purpose of the activity undertaken by Blair Endersby to achieve a change in the legal or financial situation of debtor and creditors, or to create, alter or extinguish the rights and obligations of the debtor and creditors in relation to the debts?[126]127.It is clear that (2) and (3) are satisfied in this case. The only questions therefore are whether the services provided by Blair Endersby can properly be described as a distinct act of mediation, in the sense described by the ECJ in CSC Financial Services , and whether the purpose of Blair Endersby’s services is as set out in (4). Mr Cordara submits that the exemption refers to the facilitation or conducting some form of consensual offer and acceptance relating to debts, such as part satisfaction and forgiveness, and that this perfectly describes what is done by Blair Endersby in this process. Mr Beal argues that, although Blair Endersby faces towards both debtors and creditors it does not discharge that role with a view to bringing a debtor or creditor together for the provision of credit or for a contract to be formed. It is, he submits, making professional services available to a debtor as an alternative to bankruptcy, in order that both the debtor and creditors may benefit.[127]128.Mr Beal referred us to Swiss Re Germany Holding GmbH v Finanzamt München für Körperschaften (Case C-242/08) [2010] STC 189, where the ECJ held that the transfer of a portfolio of life reinsurance contracts was not an exempt banking or reinsurance transaction, nor was it by its nature a financial transaction within the meaning of article 13B(d) of the Sixth Directive (see para 48). The Court held (at para 49) that this interpretation was confirmed by the purpose of the exemptions, including the avoidance of an increase in the cost of consumer credit. Since the carrying out of the transaction at issue was unrelated to such a purpose, that transaction could not benefit from the exemption.[128]129.Mr Beal argued that the IVA procedure and the services discharged by Blair Endersby are not equivalent to a financial transaction; they are not equivalent to negotiation of a specific credit agreement. The services go much wider than that.[130]Customs and Excise Commissioners v Electronic Data Systems Ltd [2003] STC 688 concerned whether certain administrative services supplied by EDS to a bank in connection with the making of loans, including the making of payments and transfers of funds, constituted “transactions, including negotiation, concerning … payments [and/or] transfers” within the meaning of article 13B(d)(3) of the Sixth Directive. In his judgment Jonathan Parker LJ referred to the need to interpret the exemptions strictly, but not restrictively, and said (at [129]):
“There is, as it seems to me, a degree of inherent tension between on the one hand the need to interpret the exemptions strictly and on the other hand the adoption of a purposive approach to the interpretation of the wide and general words. In my judgment, that tensions falls to be resolved by interpreting the exemptions in a way which does not have the effect of extending their scope beyond their fair meaning, as ascertained by adopting a purposive approach to their interpretation.”
[131]Lord Justice Jonathan Parker then referred to SDC , setting out (at [135]) a number of propositions derived from the ECJ’s judgment in that case. This emphasised the functional aspects of the payment transfer services provided by EDS. Mr Beal argued on this basis that the essential and specific function discharged by Blair Endersby in the performance of its services was not the negotiation of a credit agreement between the creditors and the debtor. However, SDC was concerned with transactions concerning the transfer of funds, for which the Court held that the functional aspects were decisive, so that the service did not have to be provided directly to the end customer by the bank. That is a different question to that we must consider. 132.We are satisfied that the services supplied by Blair Endersby are related to a financial transaction which has as its purpose both a change in the legal and financial situation of the debtor and creditors, and the alteration and/or extinguishment of their respective rights and obligations in relation to those debts. It is of no consequence, in our view, that this is the result of a statutory insolvency procedure, rather than a contractual arrangement, or that the process requires a licensed insolvency practitioner to act as Nominee and Supervisor, or that the IP is a professional person, licensed by a regulatory body, carrying out his role subject to professional and ethical obligations.[132]133.Mr Cordara argued that at its core the IVA process is, unlike other insolvency procedures such as bankruptcy or liquidation, consensual. In essence, there must be a consensual deal, brokered by the IP and Blair Endersby, between the debtor and the creditors. Mr Beal on the other hand argued that the relationship between the debtor and the creditors in an IVA process is a statutory one, through the Insolvency Act and Rules. He compared the position to the liquidation of a company, and to the bankruptcy of an individual, which in neither case, he submitted, woukld involve a commercially-negotiated transaction.[133]134.Without saying anything about the position in any other insolvency procedure, in relation to the IVA process we agree with Mr Cordara. There is a statutory framework, but it is one designed in the first place to regulate the process whereby, the debtor and a sufficient majority of creditors can reach agreement on a proposal put forward by the debtor, and secondly it is only after such an accord has been achieved that the statutory affects of an IVA come into play. The essence of the process is the making of a proposal by the debtor and the approval of it by creditors, within the statutory framework and procedure. Nor does it matter that certain creditors might not approve the proposal but nevertheless be bound by the decision of a 75% majority. It is not necessary for a negotiation to succeed for it to fall within the exemption, and accordingly it is clear that the exemption can apply even if the intermediation does not result in agreement by all creditors.[134]135.We also find that the services do constitute, within the meaning of CSC Financial Services , a distinct act of mediation. On the facts we have found the role of the IP, and of Blair Endersby, throughout the process is one of intermediary. This role was emphasised by the evidence we heard, particularly from the expert witness Mr Cowan. Blair Endersby was, in substance, a go-between in its relations with the debtor and creditors. That role was not confined to the meeting of creditors. It pervaded all aspects of the process. At the stage after the initial advice on the suitability of an IVA, when proposals were being discussed with the debtor and the proposal for the IVA itself was in preparation, and even before any contact was made with the creditors, Blair Endersby used its knowledge of the positions likely to be adopted by creditors to advise the debtor as to appropriate proposals to put forward. The fact that creditors, or their voting houses, typically insist on their own form of modifications to the proposal for the IVA does not, on the authority of Ludwig , prevent this element of the process from constituting negotiation. What Blair Endersby was doing was pointing out these positions to the debtor, and thereby the opportunities for putting together an acceptable proposal. Any modifications were discussed with both the debtor and creditors in a form of “shuttle diplomacy” as was described in the evidence. Once the proposal was approved, and the supervisory stage was reached, the role of the Supervisor also included intermediation in those cases where a change of circumstances might result in proposals to modify the arrangement. Payment handling service[135]136.It was not disputed that the supervisory stage involves an element of payment handling. On Mr Cordara’s primary submission that the supervisory stage involves a separate supply, he submitted that the supply was of a payment handling service. He relied upon SDC , where the Court said (at para 66):
“In order to be characterised as exempt transactions for the purposes of points (3) and (5) of art 13B, the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points. For 'a transaction concerning transfers', the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation. A service exempt under the directive must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank. In this regard, the national court must examine in particular the extent of the data-handling centre's responsibility vis-à-vis the banks, in particular the question whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions.”
[136]137.We are satisfied that, applying this test, the receipt by Blair Endersby of payments from debtors and the making of distributions to creditors falls within the description of a transaction concerning payments in article 135(1)(d) of the Principal VAT Directive. We also accept Mr Beal’s submission that, in so far as the activities of the Supervisor extend beyond payment handling or transfers of funds, these would not be within that particular exemption. These activities extend to supervising and reporting on the progress of the arrangement, monitoring compliance, and ensuring that overall fairness is being maintained, in addition to the services around modifications to the arrangement which, as we have described, in our view represent part of the negotiation service.[137]138.Our conclusion regarding the payment handling service is subject, however, to the submission made by Mr Beal that the services provided by Blair Endersby in this respect fall to be categorised as debt collection, and accordingly are taken out of the exemption by the express exclusion in article 135(1)(d). In this connection he referred to Axa . That case concerned the services operated by a member of the Axa group, Denplan, for dentists which were designed to support the operation of their practices. Principal amongst these was the operation of payment plans between dentists and their patients. Denplan acted as the agent of the dentist in receiving payments due to the dentist. Denplan received payments from patients by direct debit, provided payment advices to the dentists and contacted those patients from whom it had not received payment. After payment was received, Denplan accounted to the dentist, less certain deductions, including fees charged to the dentist. Those fees were charged to VAT, and Axa claimed that they constituted consideration for exempt financial services under article 13B(d)(3) of the Sixth Directive.[138]139.The ECJ held that the service provided by Denplan was covered by the term “debt collection and factoring” in article 13B(d)(3) and was thus precluded from the exemption. The object of the service was to benefit Denplan’s clients, namely dentists, by payment of the sums due to them from their patients. That service was therefore intended to obtain the payment of debts. The Court held that Denplan was, in return for remuneration, responsible for the recovery of the debts and provided a service of managing those debts for the account of those entitled to them. The term “debt collection and factoring” is an exception from the derogation from the general application of VAT provided by the exemption and accordingly must be interpreted broadly. It refers to financial transactions designed to obtain payment of a pecuniary debt see Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01) [2003] STC 951 ). By undertaking the recovery of debts for the account of those entitled to them, Denplan freed its clients of tasks which, without its intervention, those clients as creditors, would have had to perform themselves, tasks consisting in requesting the transfer of the sums due to them, via the direct debit system.[140]Mr Beal showed us two domestic decisions, which he said were consistent with the approach of the Court of Justice in Axa. One was in the Court of Session, HBOS plc v Revenue and Customs Commissioners [2008] CSIH 69 , where the issue was the treatment of supplies by agents of HBOS to whom defaults in making payments would be referred. The services were described as Debt Negotiation Services. It had been held by the tribunal that the dominant purpose of the arrangement was the recovery of money due to HBOS. Elements of negotiation involved in the recovery of money was not an aim in itself, although it might be a desirable feature. The Court agreed that the essential aim or dominant purpose of the service supplied was debt recovery. The exercise of skills by the agent, including those that might be described as negotiation directed to that end, were elements in the debt collection service, but negotiation was not an end in itself, let alone an essential aim.[141]In the second case , Barclays Bank plc v Revenue and Customs Commissioners in the VAT Tribunal (No 20528, 9 January 2008), there was a similar arrangement under which customers of Barclaycard failing to make minimum credit card payments would be placed in a delinquency cycle. Services were provided to Barclaycard by operatives in South Africa who would make telephone calls to Barclaycard customers in the UK who had overdue interest and principal payments owing on their Barclaycard accounts. The agreement with Barclaycard described the services as “engaging in outbound telephone negotiations with Customers whose accounts are delinquent with the objective of securing” full or minimum payment or promise of full or part payment. The tribunal (chairman Dr John Avery Jones) held that, in accordance with its objective character, the essential aim of the service was the recovery and collection of debts. 142.In our view all of these cases are distinguishable from this appeal. All involved services provided to the creditor, whereas Blair Endersby’s services are provided to the debtor. This is a material factor, and we agree in this respect with the tribunal in Barclays when, after referring to the observation derived from MKG that the exempt transactions are defined solely in terms of the nature of the services listed, since no reference is made to the status of the persons supplying or receiving them, it said (at para 16) that this was not to be taken to mean that it does not matter whether negotiations are carried on for the debtor or creditor. Debt collection by its nature can only be performed for the creditor.[142]143.Mr Beal argued that the direction of the supply in this respect is not material. He said that it would not be unusual for a debtor to bear the cost of a debt collection service, and that it would be a simple matter for contracts to be written so as to provide for the debtor to be charged. We accept that, but that would not in our view be decisive of the question. What matters is the economic substance, and the essential aim of the service, irrespective of who pays for it.[143]144.In determining the economic substance and the essential aim, it is necessary to look at the transactions in their own context. In this case that context is the establishment and supervision of a voluntary arrangement. It has as its essential aim the provision for the debtor of an alternative to bankruptcy, protection from creditors and a means of paying debts over time, with some debt release. Recovery and collection of debt is clearly an aim of the creditors, but that is not the question that has to be addressed. What is material is the essential aim of the service provided by Blair Endersby to the debtor for the consideration that the debtor pays. We have found as a fact that Blair Endersby does not seek to enforce payment by the debtor, or make any demand in this respect. What Blair Endersby does, in our view, is materially different the activities of the taxpayers in each of Axa , HBOS and Barclays . The service provided by Blair Endersby is not a debt collection service. Conclusion[144]145.We have found that the service supplied by Blair Endersby, covering both the Nominee and Supervisory stages in the IVA process, constitutes a single supply. We have found further that this single supply is made up of a number of elements, of which part is negotiation of debts and part is transactions concerning payments, and not debt collection. Although there are other elements to the service, including advice on the suitability of an IVA, overall supervision of performance of the IPA and reporting to creditors and, up to 6 April 2010, the court, and those elements are themselves integral and key to the overall process, it is clear to us that all these aspects of the service are ancillary to the core elements of negotiation and payment handling, and that accordingly, viewed overall, the supply is exempt as falling within article 135(1)(d) of the Principal VAT Directive.[145]146.We do not consider that it is necessary for us to decide as between negotiation and payment handling which is the dominant element of the supply. Both are exempt, and it is only necessary for us to determine whether the dominant elements are those that are exempt or those that are taxable ( FDR ). However, were it necessary for us to have done so, we would find that negotiation is the core supply; the intermediary role of Blair Endersby dominates the whole process, in particular at the Nominee stage, including the formulation of the debtor’s proposals in the knowledge of the creditors’ likely positions, the drafting of the proposal document, receipt of creditors’ voting intentions and modifications, and any adjustments to the proposal prior to approval. The extent of intermediation during the Supervisory stage depends on whether modifications are required to be made to the proposal, but even if no such intermediation is required, the negotiation element of the IVA process overall is, in our view, so fundamental, that it is the core element of the single supply.[146]147.Finally, in view of our conclusion that Blair Endersby’s supply is exempt as falling within article 135(1)(d) of the Principal VAT Directive, since that has direct effect there is no need for us to consider the application of the corresponding provisions of the VATA. Appellant’s alternative argument[147]148.We referred earlier to an alternative argument raised by Mr Cordara during the hearing to the effect that the service of Blair Endersby in effecting the IVA, if this were a free-standing supply in its own right, is also a supply of a transaction concerning debts and payment. As we have found in favour of the Appellant on its primary case, and in view of the fact that, as Mr Cordara himself acknowledged, this alternative argument raises a novel point, we do not think it would be right for us to express a view on it in this appeal. Decision[148]149.For the reasons we have given, we allow this appeal. Costs[149]150.As this appeal is “current proceedings” we directed pursuant to para 7(3), Sch 3, Transfer of Tribunal Functions and Revenue and Customs Order 2009 that rule 29 of the Value Added Tax Tribunals Rules 1986 should apply to this appeal.[150]151.We direct that HMRC pay the Appellant’s costs of this appeal, such costs to be assessed on the standard basis by a costs judge, if not agreed. Application for permission to appeal This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. ROGER BERNER TRIBUNAL JUDGE RELEASE DATE: 26 May 2011[151][1] For ease of reference we use the masculine form throughout. [2] The relevant exemptions for financial transactions were formerly found in Article 13B(d) of the Sixth Directive.

Cited in 4 later judgments