Fintech Tax Update – Target – Scope of UK VAT Exemption for Payment Services

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FinTech Wales member PWC have provided us with  FinTech Tax update on the Supreme Court decision in Target Group Ltd [2023] UKSC 35 (“Target”) concerning the scope of the UK VAT exemption for payment services.

This may be relevant to organisations within membership and beyond – if so please feel free to reach out to Dhanesh Patel at PwC who will be happy to discuss this with you in further detail.

Please see  a brief summary of the decision below for ease:

  • The UK Supreme Court dismissed an appeal by Target Group Ltd, a loan administration service provider, against HMRC, who denied Target’s claim for VAT exemption on its services to Shawbrook Bank Ltd, a lender.> > > >
  • The court applied the EU law on VAT exemption for transactions concerning payments, transfers and debts, as retained in UK law after Brexit, and followed the narrow interpretation of the CJEU case law on this issue.
  •  The court held that Target’s services did not fall within the exemption because they did not have the effect of transferring funds or changing the legal and financial situation of the parties, but merely involved giving instructions or making ledger entries that recorded the payments or transfers effected by others.
  •  The court rejected Target’s arguments based on the CJEU decision in ATP and the English case of Momm, finding them distinguishable on the facts and not supporting a wider interpretation of the exemption.> > > >

The court also commented that in many cases it will only be services provided by a bank or similar financial institution that can access this area of the exemption, but that this is not necessarily the case in every scenario.

Ultimately this is a taxpayer loss and could impact payment businesses in various ways:

  • Where income is treated as exempt under these provisions the business should ensure it is comfortable with this treatment following the release of this decision;> > > >
  • Where businesses procure such services and these are currently treated as exempt this may impact the cost base of the business  – where the business procures these services from overseas a decision will need to be made as to whether the “reverse charge” needs to be applied (i.e. whether VAT needs to be self-accounted for both historically and prospectively)

The decision is likely to impact not only similar loan administration services to those at issue in the case, but also to other services involving the movement of monies between parties by non bank or payment infrastructure providers. It is of relevance to any bank, payment provider, merchant acquirer, securitisation servicers and any buyer of outsourced financial services connected to movements of money.

The full decision can be accessed here.