“1. That the expression 'loan arrangement and execution services' is an apt general description of the package of services supplied by EDS under the 1999 agreement. 2. That, within that package, the 'core supply' (to use one of the expressions referred to earlier) is that of administrative services in connection with (' concerning ') the making of loans. That is the specific essential function of the supply. 3. The package of services is properly to be regarded as forming a 'distinct whole', and it would be thoroughly artificial to attempt to split it into separate elements, whether on economic or on any other grounds. 4. The performance of the package of services crucially and inevitably involves the making of payments and transfers of funds: such transactions are not merely essential but absolutely central to the 'core supply'. 5. The functional aspects of the movements of money effected by EDS in performing services under the 1999 agreement result in changes in the legal and financial situation of the relevant parties.”
“… refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemptions set out in the first part of art 13B(d)(3)…” 63. In Axa Arden LJ rightly contrasted “normal retail banking activities”
“… from the point of view of the typical consumer, who must be determined on the basis of a group of objective factors. In the course of that overall assessment, it is necessary to take account, in particular, of the design of the aquatic park at issue resulting from its objective characteristics, namely the different type of facilities offered, their fitting out, their number and their size compared to the park as a whole.” (paragraph [33]) 80. The CJEU went on to explain that this included taking account, for example, of whether the aquatic areas lend themselves to swimming of a sporting nature or to recreational use. The fact that the intention of some visitors does not relate to the predominant elements of the supply does not call that determination into question. The focus is on the “objective character” of the transaction (paragraphs [34] to [36]). 81. I think it is clear that the starting point is to identify the individual elements of a single complex supply. Whether that supply falls to be treated as exempt will generally (but not necessarily exclusively) be determined by reference to predominance, but this might either be a single predominant element or in some cases a combination of elements. The test is an objective one, from the perspective of a typical consumer, and based on the contract and the economic realities. I agree with Mr Cordara that the reference by Advocate General Tizzano to “economic purpose”, referred to by Jonathan Parker LJ in Tesco (see [66] above) is relevant. Also relevant are the descriptions referred to by the same judge in EDS at 130, where he referred to the expression “single or core supply” used by Laws LJ in FDR at [62] and to the references to “the essential feature of the scheme or its dominant purpose” and “main objective” by Lord Slynn in the House of Lords decision in CPP ,[2001] STC 174 at [25] and [26]. Whether what is supplied includes “transactions…concerning…payments, transfers” within Article 135(1)(d) 82. Although HMRC did not formally concede this point at the hearing, adopting what was described as a neutral stance on the issue, they also did not seek to argue that what was supplied did not include elements falling within this description or its equivalent in Item 1 of Group 5 of Schedule 9 VATA. 83. Mr Cordara’s submissions focused primarily on the reference to “transactions…concerning...payments, transfers”, rather than the reference to debts. He relied on the principles set out in SDC , as applied in FDR , EDS and ATP in particular, and the evidence provided by Mr Evans and Mr Ferguson, including the evidence that the loan accounts are controlled and maintained by Target and provide the sole record of the position between Shawbrook and the borrower. The key, he said, is Target’s authority and responsibility to effect changes to the parties’ legal and financial situations. 84. I have concluded that Target has established that what is supplied includes an element or elements comprising “transactions…concerning...payments, transfers”
“42. It is convenient before going further to say something about the general nature of current accounts such as those that are the subject matter of these proceedings, although each of the Banks has (as is common ground between the parties before me and I am to assume) standard terms which govern its contractual arrangements with its personal current account customers and those terms define the parties' rights and obligations. 43. It is a basic characteristic of a customer's current account with a bank that the bank is under an obligation to receive money, cheques and payments by other methods into the customer's account and to effect repayment to the customer and payments to third parties to the customer's order and as the customer's agent. This observation reflects the classic description of the relationship between a bank and a customer with a current account given by Atkin LJ in N Joachimson v Swiss Bank Corp[1921] 3 KB 110 at p 127 , 90 LJKB 973, [1921] All ER Rep 92 and the description by Lord Atkinson in Westminster Bank Ltd v Hilton(1926) 136 LT 315 , 43 TLR 124. It applies to all of the accounts with which I am concerned. 44. It is inherent in the nature of such an arrangement that the account between the bank and the customer will show at any time either a credit for the bank and debit for the customer or a debit for the bank and a credit for the customer (or, I suppose, perchance, a nil balance). Thus, in Rolls Razor Ltd v Cox[1967] 1 QB 552 at p 574 E-F,[1967] 1 All ER 397 ,[1967] 2 WLR 241 , Winn LJ said: “. . . the relationship of banker and customer upon a current account implies from its very nature an intention on the part of both parties that debits and credits arising between them shall be brought into a running account on which by reason of the customary method of keeping such account, there will at any given moment be an outstanding debit or credit balance.” 45. The customer is not obliged, in the absence of contrary agreement, to maintain or increase a credit balance in the account – that is to say, to lend to the bank. Nor is the bank under an obligation to lend to a current account customer or to allow him overdraft facilities unless it has agreed to do so: Bank of New South Wales v Laing[1954] AC 135 atp 154 ,[1954] 1 All ER 213 ,[1954] 2 WLR 25 . 46. Banks provide a variety of facilities by which money can be paid into current accounts and payments or withdrawals made from them. Thus, customers or third parties can deposit or pay money (by way of cash or by way of cheques or other payment instructions) into accounts at a branch, by post or by electronic means. Cash can be withdrawn at a branch, through automatic teller machines (“ATMs”) or through “cash-back” arrangements between banks and retailers. Payments to third parties can be made in a variety of ways, by standing order and direct debit, by cheque, by bank draft, through CHAPS (the Clearing House Automated Payment System), by use of a debit card and through arrangements made by telephone or internet banking. Cheques are generally cleared by the Banks through the clearing house system, a rule of which, I understand, is that, if a cheque is not returned through the system, it is to be paid. 47. Banks receive two kinds of instructions from customers for withdrawals or payments from current accounts. There are “live” transactions, which are received by banks when they are given by the customer, and include withdrawals at a branch or an ATM, some payment instructions given by telephone or by internet, and CHAPS payments. There are also “off-line” transactions, where banks receive the customer's payment instructions in batches, often through a clearing house in the case of cheques or through BACS (Bankers Automated Clearing Services) in the case of standing orders or payments by direct debit. 48. Banks generally provide further facilities to current account customers, including arrangements whereby customers can readily monitor their accounts in various ways (by sending bank statements, by providing information at ATMs, and by telephone and by internet arrangements). 49. Often banks provide their customers with cheque guarantee cards and debit cards. Many retailers will not accept cheques unless they are guaranteed by a card. Cheque guarantee cards have a limit upon the amount of the cheque which can be supported by them. In the case of debit cards, sometimes a retailer must have a transaction specifically authorised by the bank that has issued the card if its value exceeds the retailer's “floor limit”, and payments by debit card may be either “live” or “off-line”, depending upon whether or not the payment is authorised by the bank when the customer uses his debit card. 50. I have not set out an exhaustive list of the facilities that banks provide to current account customers, but this general description applies to all the Defendant Banks and is sufficient for present purposes. The precise facilities provided by different banks vary, albeit in relatively minor respects, and also vary depending upon the type of current account that the customer has or, for example, the customer's age or status: for example, there are accounts directed to students or graduates, and some banks refuse to allow overdraft facilities to customers who are not aged 18 years.” 91. This description was referred to by the Court of Appeal in the same case with apparent approval ([2009] EWCA Civ 116 at [6]). The Court of Appeal dismissed the appeal, but that decision was overturned by the Supreme Court. In the Supreme Court Lord Walker referred without comment at paragraph [23] to the description of the operation of current accounts in the High Court decision. Lord Phillips also included the following description at paragraph [53]: “…The operation of a current account by a Bank for its customer involves the provision of a number of different services. These include the collection of cheques drawn in favour of the customer, the honouring of cheques drawn by the customer, payments on behalf of the customer pursuant to the use by the customer of credit or debit cards and cash distribution facilities.” 92. The reasons for my conclusion that the accounts created and operated by Target in this case are not current accounts for the purposes of the PVD or domestic VAT exemption are as follows: (1) The term current account does not have a specific legal, as opposed to commercial, definition. It takes its meaning from the commercial world. I am quite clear, and Mr Cordara did not disagree, that a banker (or indeed a typical individual with some familiarity with bank accounts – perhaps one of the many travellers on the modern version of the Clapham omnibus) would take the view that the accounts operated here are not current accounts, but loan accounts. (2) I agree that some features of current accounts have changed considerably over the years. For example, the references to cheques and cheque guarantee cards in Andrew Smith J’s description look largely out of date even a few years later, and it may be that cheque books are now not offered on some current accounts. But this goes to the means of access. I agree with Ms McCarthy that what is critical is functionality, not the means by which any particular function is achieved. In particular, the key functions of a current account include the ability not only to pay in and draw out funds by one or more methods, but also, and importantly, to pay third parties (again by one or more means) by drawing on funds or credit available. A typical current account may show either a debit or credit, or occasionally nil, balance, although the terms of some current accounts may well seek to prohibit debit balances for the customer. But subject to this a current account is not only a running account but one where the balance owing can vary from credit to debit. An important element of the functionality is that there is also a free ability on the part of the customer to vary the amount owed to it up and down. Although on some accounts there may be agreed limits such as a minimum balance, beyond that there will be no obligation to maintain or increase a credit balance. Similarly, and within any agreed overdraft limit, there will be no obligation for any overdraft to remain at a particular level. (3) The loan accounts in this case do not have this functionality. I am prepared to accept for the purpose of argument that the loan accounts are running accounts and that set off operates in a similar way to a current account, although strictly these points would be determined by the all-important terms of the loan between Shawbrook and its borrowers (no samples of which were included in the documentary evidence), which might well have specific provisions regarding matters such as appropriation, for example that payments discharge charges or interest first. However, there is no ability to pay third parties. There is no general ability to draw out funds in any form or to go into credit. The only circumstance where this occurs is where an unauthorised overpayment is made. That is essentially a situation where a mistake has occurred, and that cannot affect the proper characterisation: unauthorised overpayments are not an economic purpose of the contract. Another aspect of this is that the customer has no general ability to pay into the account at will. Loans are generally for fixed periods with agreed repayment schedules, and early repayment charges apply for repayments above a certain level ([54] above). This is in marked contrast to any general understanding of a current account. (4) Mr Cordara’s approach would render the reference to deposit accounts in both the PVD and Item 8 otiose. Deposit accounts clearly satisfy Mr Cordara’s suggested three criteria (see [89] above). But they do not have the functionality of current accounts, in particular the ability to pay third parties. They are also credit only accounts. (Some also of course have specific restrictions on access, albeit that this is not a defining feature and there is no reason why the terms of a deposit account may not permit it to be accessed without restriction. Others may have restrictions on the deposits that may be made, but again that is not a defining feature.) I note that Item 8 also refers to savings accounts, but HMRC’s suggested explanation that this was included for the avoidance of doubt to cover deposit accounts with entities that are not strictly deposit takers, such as building societies, makes sense and in any event I would make the same comment about functionality in relation to anything that might be described as a savings account rather than deposit account. (5) Whilst it is clear that the references to current and deposit accounts in Article 135(1)(d) need to be interpreted in their context (see for example Expert Witness at [19] and SDC at [22]), it does not follow that this means that they should be given a broad meaning, beyond what is required by a strict but fair interpretation. (6) Mr Cordara’s example of an offset mortgage account is not a matter for decision in this case. There was insufficient evidence available to determine whether HMRC are correct to suggest that such accounts operate by means of a current account linked to a separate mortgage account, but the point is not relevant. For what it is worth, I can see no difficulty in concluding that an arrangement under which the interest or other amounts payable under a mortgage may be reduced by credit balances in a current account does not prevent the current account operating as such, and being defined by reference to its functionality, in particular the ability to pay third parties and the ability to vary the balance, rather than simply make payments according to a fixed schedule. (7) It is worth bearing in mind that lenders have another route to exemption, Article 135(1)(b) of the PVD and Items 2 and 2A of Group 5 of Schedule 9. The potential for a charge to VAT arises only in the context of outsourcing. It is not irrelevant to refer here to the description of the purpose of the exemption for financial transactions in Velvet & Steel (see [68] above). There will generally be no difficulty in ascertaining the level of VAT chargeable on a supply by a service provider. (8) In summary, and using the concept of economic purpose referred to by Advocate General Tizzano in Mirror Group and Cantor Fitzgerald ([66] above), the economic purpose of a current account is to allow a customer to pay in varying amounts and to draw out amounts, including by payment to third parties. The economic purpose of the transaction between Shawbrook and its borrowers is quite different. That purpose is to lend a fixed amount on specified terms, including as to the rate of repayment and interest chargeable. Any additional advance is effectively dealt with as a fresh loan. The loan account is no more than a ledger which records the current and historic position as between the lender and borrower in terms of the amounts paid and the amounts due or falling due. 93. In reaching this conclusion I am conscious that in FDR the VAT and Duties Tribunal ((1999) VAT Decision 16040) concluded at paragraph [185] that credit card holders’ accounts are current accounts within Article 13B(d)(3), commenting that debits and credits to those accounts are just as much transactions concerning current accounts as if the accounts were normal cheque accounts. The Tribunal reached the same conclusion as regards merchant accounts at paragraph [195]. The Court of Appeal found the point unnecessary to decide, although Laws LJ commented at [49] that he could see that “one might categorise the cardholder/merchant accounts as current accounts … with no great offence to linguistic usage”