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Target Group v HMRC - VAT on loan administration services

21 November 2023

The Supreme Court has confirmed that the VAT exemption for certain financial services as set out in article 135(1)(d) (the "Financial Services Exemption") of the Council Directive 2006/11/EC (the "Principal Directive") should be narrowly interpreted. The decision confirms the UK Court's interpretation of the exemption aligns with that of the European Courts and provides important guidance as to what does not fall within the financial services exemption.

Target Group Limited ("Target") maintained loan accounts and operated bank accounts for Shawbrook Bank. Target was responsible for issuing payment instructions to facilitate direct debit payments, updating the loan accounts to reflect credits and debits to the account and reallocating payments between accounts, amongst other administrative functions.

HM Revenue and Customs ("HMRC") determined that Target should have charged VAT on its supplies to the bank. Target appealed this decision to the First Tier Tribunal ("FTT") on the basis that the services were exempt in accordance with the Financial Services Exemption. The FTT confirmed that the services constituted "transactions…concerning…payments, transfers, [or] debts" in accordance with the Financial Services Exemption but were not exempt as the services constituted debt collection, which is specifically excluded from the Financial Services Exemption.

Target appealed  through the appeal courts to the Supreme Court. At each stage Target's appeal was dismissed. The principal issue for the Supreme Court was whether the services provided by Target were "transactions…concerning…payments, transfers, [or] debts". Target argued that the Financial Services Exemption applied to its services because the services were integral to the payments process and the instructions issued to the BACS system inevitably led to the payment being executed.

The Financial Services Exemption

Target relied on the Court of Appeal decision in C&E Comrs v FDR Ltd [2000] STC 672 which stated that services that automatically and inevitably lead to a payment being made are exempt from VAT under the Financial Services Exemption.

HMRC argued that FDR was an incorrect interpretation of previous decisions of the European Court of Justice ("CJEU") and that subsequent clarifications by the CJEU provided authority that just because services are provided that make a payment or transfer inevitable this does not mean the Financial Services Exemption applies.

In DPAS (Case C-5/17) the CJEU stated that a transaction concerning transfers or payments will only be exempt where:

"…it has the effect of making the legal and financial changes (emphasis added) which are characteristic of the transfer of a sum of money. By contrast, the supply of a mere physical, technical or administrative service not effecting such changes will not come within that concept…"

The CJEU has made it clear that a narrow interpretation of the Financial Services Exemption is required and services "must have the effect of transferring funds and changing the legal and financial situation" of the parties involved. Instructions for, or essential services to, the making of a payment or effecting a transfer are not sufficient.


The Supreme Court upheld the reasoning of the Court of Appeal in rejecting Target's appeal, endorsing four main reasons, as below:

  1. Target does not provide loan origination services to the bank;
  2. Target's services facilitate the payment or transfer but do not effect them;
  3. Target's services do not "effect the legal or financial changes characteristic of the transfer of money"; and
  4. Target does not assume responsibility or liability for achieving a transfer or payment in the services it provides.

The Supreme Court stated that "in many cases this will mean that it is only the services provided by a bank or similar financial institution which will be exempt".

The Supreme Court made the distinction that while Target provided ancillary services to a bank, these services related to the loan and mortgage arm of the bank and therefore related to credit services and as such did not make the necessary legal and financial changes that constitute a payment or transfer.

Debt collection

Even if the services provided by Target were deemed to be "concerning payments, transfers, [or] debts" they would have needed to show that the services did not amount to "debt collection" as this is specifically excluded from the financial services exemption under the Financial Services Exemption. The First Tier Tribunal initially found that Target's services concerned payments or transfers but amounted to debt collection so were not exempt.

As the Supreme Court concluded the services did not relate to "transactions…concerning…payments, transfers, [or] debts" and it was not necessary for them to consider the debt collection exclusion.

Why is it important?

This case confirms that the UK Courts' interpretation aligns with the EU's regarding the narrow interpretation of the Financial Services Exemption and that the FDR decision cannot be relied upon. It also provides an insight into the intricacies of the VAT provisions that govern supplies made in the UK and illustrates the importance of careful consideration before concluding that supplies are VAT exempt.

Reliance on the Financial Services Exemption by entities other than banks is not out of the question but it will require careful examination of the services in question to ensure that they fit within its narrow scope. It should also not be forgotten that the debt collection exclusions, although not ultimately relevant to the Supreme Court decision, narrows that scope further.

Processing and outsourcing businesses, and banks using these services, may want to reconsider whether the correct VAT treatment has been applied. 

Incorrect treatment of supplies for VAT purposes can be costly and lead to considerable compliance issues so it is important to be able to rely on robust analysis. If you are unsure of the correct treatment of your supplies, please speak to our Tax team who will be happy to help.

Further Reading