Flashback on ECJ Cases – C-175/09 (AXA UK) – No VAT exemption for collection and processing of payments on behalf of clients of the service provider

On October 28, 2010, the ECJ issued its decision in the case C-175/09 (AXA UK).

Context: Sixth VAT Directive – Exemption – Article 13B(d)(3) – Transactions concerning payments or transfers – Debt collection and factoring – Payment plans for dental care – Service of collecting and processing payments for the account of the service supplier’s clients

Article in the EU VAT Directive

Article 13B(d)(3) of the Sixth VAT Directive (Article 135(1)(d) of the EU VAT Directive 2006/112/EC).

Article 135
1. Member States shall exempt the following transactions:
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;

Facts

AXA is the representative member of a VAT group which includes Denplan. Denplan operates a range of services for dentists designed to support the operation of their practices, the main one of which is the operation of payment plans between dentists and their patients. Under such plans, dentists provide their patients with a particular level of dental care, including regular check ups and/or any necessary treatment, on a continuing basis against payment by those patients of a fixed monthly charge.
If a dentist’s patient wishing to take advantage of Denplan’s services opts for a payment plan, the patient will sign a contract with the dentist, the terms of which are set out in a standard form produced by Denplan which typically provides that the patient is to pay the monthly charge to Denplan, which acts as the dentist’s agent in receiving payments due to that dentist. At the same time, the patient completes and signs a standard form of ‘mandate’ in favour of Denplan under the United Kingdom’s ‘direct debit’ scheme. The direct debit mandate constitutes a standing instruction by a bank’s customer, in this case the patient, to the bank to make any payment requested by a particular third party, in this case Denplan. The mandate will include the name and address of the patient’s bank, as well as the patient’s bank account number.
Denplan, upon receiving a copy of the contract and the direct debit mandate completed by the patient, will record the patient’s details, including, particularly, his name and address, on its computer systems, and will lodge, by means of an electronic system, details of the mandate with the patient’s bank. That mandate will remain in force as a standing instruction to the patient’s bank until the patient notifies the bank that he wishes to cancel the mandate.
Each month, on a particular date, Denplan will seek to collect the payments due from dentists’ patients. To do so it creates for each patient an electronic file which it uses to transmit information to the Bankers’ Automated Clearing System (‘the BACS’), an automated inter-bank settlement system established and operated by a company all the members of which are major United Kingdom banks. The information which Denplan transmits to the BACS includes, in respect of each patient, the patient’s bank account number and the amount which Denplan is to collect from that account. The BACS will then transmit that information on to the processing centre of the relevant bank.
If the patient has not cancelled the direct debit mandate, and if the patient’s account remains open and is sufficiently in credit for the payment to be made, the bank will debit the patient’s account and notify the BACS accordingly. The BACS will then post a corresponding credit to Denplan’s bank for the credit of Denplan’s account. By this method, the amount requested is transferred from the patient’s bank account to Denplan’s bank account. The BACS sends Denplan reports as to which payments have been made and which have not. Denplan, in its turn, provides payment advices to the relevant dentists and contacts the patients whose payments it has not received.
About 10 days after it receives the payments into its account, Denplan accounts to each dentist for the payments it has received from the accounts of that dentist’s patients less certain agreed deductions. Denplan does this by instructing its own bank to transfer from Denplan’s bank account to the relevant dentist’s bank account a sum representing the total amount due to that dentist.
One of the deductions that Denplan retains from each payment it receives on behalf of a dentist is a fee which it charges the dentist. That deduction is calculated as a percentage of each payment received. According to the decision making the reference, a part of those fees deducted from the patients’ payments constitutes consideration for Denplan’s services in collecting payment for the dentists, which services consist in seeking payments from patients’ bank accounts via the direct debit system, and accounting to the dentists for them. It is the VAT status of that element which is in dispute before the referring court.
By a decision made in June 2006, the Commissioners refused a claim by AXA for overpaid VAT in respect of its VAT accounting periods from March 2002 to December 2004. By a second decision, of September 2006, the Commissioners raised an assessment for VAT on services supplied during the accounting periods from March 2005 to March 2006. Both decisions were based on a finding that the fees charged to dentists by Denplan were consideration for supplies of services that were subject to VAT.
In July and October 2006, AXA lodged appeals against those decisions before the London VAT and Duties Tribunal which decided that the fees were exempt from VAT on the basis that they constituted consideration for a financial service falling within Article 13B(d)(3) of the Sixth Directive. The Commissioners’ appeal against that decision was dismissed by the High Court of Justice of England and Wales (Chancery Division, Revenue List). The Commissioners then appealed to the referring court.
In the referring court’s view, the main issue before it is whether the exemption from VAT provided for in Article 13B(d)(3) of the Sixth Directive for ‘transactions … concerning … payments, transfers’ is applicable to a service, provided to a client, namely a dentist, who wishes to receive payments from third parties, namely patients, of collecting sums from those third parties’ bank accounts via the direct debit system, and accounting to the client for all the payments received.
In that regard, the referring court refers to the judgment in Case C‑2/95 SDC [1997] ECR I‑3017, in particular to paragraphs 53 and 66 thereof, where the Court held that ‘[f]or “a transaction concerning transfers”, the services provided must … have the effect of transferring funds and entail changes in the legal and financial situation’.

Questions

(1) What are the characteristics of an exempt service that has “the effect of transferring funds and entail[s] changes in the legal and financial situation”? In particular:

(a) Is the exemption applicable to services which would not otherwise have to be performed by any of the financial institutions which (i) make a debit to one account, (ii) make a corresponding credit to another account, or (iii) perform an intervening task between (i) [and] (ii)?

(b) Is the exemption applicable to services which do not include the carrying out of tasks of making a debit to one account and a corresponding credit to another account, but which may, where a transfer of funds results, be seen as having been the cause of that transfer?

(2) In the light of SDC, is a trader (which is not itself a bank) performing an exempt service in accordance with Article 13B(d)(3) [of the Sixth Directive] where the tasks he carries out for his client

(1) comprise the collection, processing and onward payment of monies due to the client from a third party; in particular, the tasks of:

(a) transmitting information to the third party’s bank calling for a payment from the third party’s bank account to the trader’s own bank account, in reliance on a standing authorisation given by that third party to the bank (pursuant to the “direct debit” scheme); and subsequently, if the bank makes that payment,

(b) giving an instruction to his own bank to transfer funds from his account to the client’s bank account

but (2) do not include tasks of (a) making a debit to one bank account, (b) making a corresponding credit to another bank account, or (c) performing any intervening task between (a) and (b)?

(3) Does it make a difference to the answer to Question 2 (above) if the service described in that question is performed by transmitting the information to an electronic system which then automatically communicates with the relevant bank, even if the transmission of the information may not always result in a transfer being made (e.g. because the third party has cancelled his standing authorisation to his bank or does not have sufficient funds in his account)?

AG Opinion

None

Decision

Article 13B(d)(3) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the exemption from VAT provided for by that provision does not cover a supply of services which consist, in essence, in requesting a third party’s bank to transfer to the service supplier’s account, via the direct debit system, a sum due from that party to the service supplier’s client, in sending to the client a statement of the sums received, in making contact with the third parties from whom the service supplier has not received payment and, finally, in giving instructions to the service supplier’s bank to transfer the payments received, less the service supplier’s remuneration, to the client’s bank account.

Summary

Debt recovery – Payment plan for dental care – Collection and processing of payments on behalf of clients of the service provider

The VAT exemption does not cover a service provision that mainly consists of asking the bank of a third person to transfer an amount owed by that person to the customer of the service provider via the direct debit system to the account of the third party. service provider, that an account statement is sent to the client, that the third person from whom the service provider has not received payment is contacted and, finally, that the service provider’s bank is instructed to pay the payments received, less the remuneration of the service provider, to the bank account of the client.

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