- Receiving money from depositors (their customers).
- Investing that money in government bonds.
- Returning the interest to their creditors at a lower rate. This interest rate spread covered INGs expenses and profit margin.
The above business model was subject to a VAT analysis in the Upper Tribunal. In particular, whether ING was making specified supplies or exempt supplies. If INGs services were classified under the former category (specified supplies) that would allow it to claim retrospective input tax credits to a value of around £6m, whereas the latter category (exempt supplies) would result in a denial of the claim altogether.
Specified Supplies
An exempt supply made outside the EU is generally a specified supply under s.3(a) of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999. This rule exists as a fairness mechanism to promote consistency across the global VAT system and to avoid double taxation. Specifically s.26(2)(c) of the VATA 94 provides that expenses relating to 'specified supplies' can be used to claim input tax credits.
Exempt Supplies
If it can be shown that ING in its capacity as a deposit taking institution was offering financial supplies (which are exempt from VAT) to residents of the EU, all expenses in relation to its activities would not claimable for VAT purposes.
The Contentions
ING argued that its depositors supplied it with credit and that it used those funds to supply financial services to non-EU investment funds. ING contended that its transactions with depositors amounted to no more than a loan arrangement, which according to EU case law is not subject to VAT (BLP Group [1995] ECR I-983).
ING made note of the fact that it had no UK branches and operated a minimalist business structure through its website and call centres. It contended that its activities in that respect were minimal and more importantly ancillary to the true economic nature of the 'lending' arrangement. ING further contended that there could be no supply of financial services because it didn't charge fees - which was apparent from its 'no fees guarantee'.
The HMRC contended that there was a legal agreement between ING and its customers which is set out in the terms and conditions. The HMRC contended that the depositors are INGs customers under this arrangement and thus received services as part of INGs banking arrangement. They contended that the contractual arrangement between ING and the customer could not be likened to a loan agreement because the customer could withdraw their funds at any time. Overall it was said that INGs business model amount to financial services to UK customers, which would be an exempt supply, thus no input tax was claimable in relation to those services.
The Decision
The Upper Tribunal found in favour of the HMRC for the following reasons:
"We have concluded that although, in legal terms, borrowing and lending was involved, the key characteristic of the transactions between IDUK and depositors was that IDUK was providing accounts with the features described by the FTT, and that this is qualitatively different to something that is only a borrowing and lending transaction. We do not think that those features are analogous to the provision of security by a borrower or the assignment of receivables in MBNA Europe. The features were not just a precondition to loans being made, but determined the character of the transactions.
In our view the features that support the conclusion that IDUK provided services to its depositors as customers or consumers, rather than merely borrowing 30 from depositors, are:
In our view the features that support the conclusion that IDUK provided services to its depositors as customers or consumers, rather than merely borrowing 30 from depositors, are:
a) IDUK undertook to accept deposits. Provided a depositor had opened an account with a minimum of £1, IDUK was contractually obliged to accept further deposits as the depositor wished. It would be very unusual for a mere borrowing transaction to be driven entirely by the lender’s wish to lend a particular amount and for the borrower to be obliged to borrow at the lender’s whim. It is however a key feature of a bank account.
b) More generally, all activities on an account were at the depositor’s instigation: he or she determined when either deposits or withdrawals were made. IDUK could not require any deposit to be made beyond the initial £1 and, short of closing the account (usually on two months’ notice), IDUK could not compel any repayment. Again, this would be unusual for a mere borrowing transaction.
c) A number of deposits and withdrawals could be made to and from the same account. Rather than being treated as individual borrowing transactions, they would have been treated as transactions affecting a single balance on the account. This feature describes the essential characteristic of a bank account. Although a similar result might be achieved under a “revolving” loan agreement under which amounts can be drawn, repaid and redrawn, we would expect that to occur at the instigation of the borrower.
d) IDUK set all the terms and conditions, including of course interest rates. The terms for any particular product would have been unaffected by the identity of the particular depositor and the product would have been available only on those standard terms. We would not expect a borrower in a lending transaction to set the terms in this way.
e) IDUK did all the work: it kept the records of how much it owed, produced statements and supplied information to the depositors. A lender would not ordinarily leave it to the borrower alone to determine what the lender was owed.
f) IDUK provided a cheque clearing facility in relation to third party cheques."(p50)
Notes
Case [2016] UKUT 298 (TCC): http://www.bailii.org/uk/cases/UKUT/TCC/2016/298.html
Legislation
Council Directive 2006/112/EC
Value Added Tax Act 1994
The Value Added Tax (Input Tax) (Specified Supplies) Order 1999
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