EDS has scored a victory in the Court of Appeal which, relying very heavily on European Court of Justice (ECJ) case law, has held that outsourced loan arrangement and execution services (in practical terms, representing the contact point between the bank and actual or potential customers) were exempt financial transactions.
Had the services been held to be taxable, their heavily partially-exempt recipient, Lloyds TSB, would have incurred such a significant amount of irrecoverable input tax that the economic viability of the outsourcing arrangement could have been threatened and it might have been forced to transfer the relevant functions back in-house. Other arrangements in the burgeoning sector of financial services outsourcing in the UK would have suffered a similar fate.
The key issue in the case was the meaning to be placed on the phrase "transactions...concerning...payments [and/or] transfers..." in article 13(B)(d)(3) of the Sixth Directive. While observing that the effect of the ECJ's decision in Stichting Uitvoering (case 348/87) is that such exemptions in the VAT code must be interpreted strictly, the court held that this does not mean approaching them in a rigid, formulaic way, but instead purposively.
Relying on the ECJ's ruling in Card Protection Plan (case C-351/96), the court then held that it was necessary to determine whether there was a single or core supply, which it found there was in the present case, namely the provision of a package of administrative services in connection with the making of loans (including the making of payments and transfers of funds as an absolutely central component of this package). The court held that it would be thoroughly artificial to adopt the approach suggested by Customs of attempting to split the overall function performed by EDS into separate elements with the payment and transfer of funds being incidental to the main standard-rated administrative function of managing credit.
The court also referred to the ECJ's ruling in Sparekassernes Datacenter (case C-2/95), which established that:
— the term "transactions" in article 13B(D)(3) refers to the nature of the services provided, rather than to the party who supplies or (as the case may be) receives such services (so that Customs' argument that the supplies were not exempt because EDS was not a financial institution, were ill-founded); and
— for the provision to apply, the transactions in question must have the effect of transferring funds and resulting in a change in the "legal and financial situation" of the relevant parties (as opposed to simply being data processing or bookkeeping functions), which they clearly did in the present case.
On the basis that all the requirements established by the ECJ had been satisfied, the court held that the case clearly fell within the exemption.
Customs have sought leave to appeal this decision to the House of Lords (the highest domestic court in the UK), but this is unlikely to be granted in which case it will then become final, marking an end to a long period of uncertainty for those involved in outsourcing transactions.
Jasmine Shah (Jasmine.Shah@herbertsmith.com), London
