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ING Group Loses 'Banking Services' VAT Appeal

by Jason Gorringe,, London

19 December 2017

The UK Court of Appeal has dismissed an appeal brought by ING Group against rulings from the Upper Tribunal and the First-Tier Tribunal concerning the group's inability to recover VAT incurred on costs associated with providing what it considered was limited to a deposit-taking business for no consideration, which would fall outside the scope of VAT, and the UK tax authority, HM Revenue and Customs, instead arguing, successfully, that it was supplying exempt banking services, against which the taxpayer could not recover output tax.

The appeal focused on the recoverability of VAT incurred by members of ING's VAT group, namely on advertising campaigns, the construction of a head office and two call centers, IT systems and services, and employment of staff, including recruitment costs.

The case concerns, first, the nature of the company's supply of services, with the court deciding to disregard users' perceptions of the nature of the supply (they may consider they are receiving deposit-taking services for no fee, given the promotional advertising associated with the arrangement.)

ING's business model is notably different than traditional banks. The FTT had determined that ING provided a "normal retail banking service" but with two distinctions. These were that the members of the VAT group only offered deposit accounts and they had no walk-in branches. Instead the group offered a 24-hour telephone and internet banking service. It also attracted customers by offering higher interest rates than most or all of its competitors and by its marketing catchphrase of "no fees, no exceptions."

With the exception of account opening and deposits made by check (cheque), depositors could only interact with the bank and undertake transactions on their accounts by telephone or on the internet. A limited number of facilities were made available. Depositors could not receive check books, debit or credit cards, or overdraft facilities.

Although transfers to the account could come from any other bank account, including by a check payable to a depositor which was drawn by a third party, there was no ability to make a payment from the account to a third party. Instead withdrawals had to be made via a transfer to another account operated by a member of the VAT group or to a linked account held by the depositor at another bank. Depositors were required to have a current account with another UK bank or building society which acted as the linked account.

The trade comprised taking cash deposits from private individuals and using the funds to acquire bonds and securities

The appellants sought to argue there was no supply subject to VAT, relying on the European Court of Justice's ruling in BLP Group v Customs and Excise Commissioners (Case C-4/94), in which it held that to take out a loan does not involve a VATable transaction by the borrower at all, even if he pays interest: he is the mere recipient of a service provided by the lender.

HMRC contended, and did so successfully before both the Upper Tribunal and First-Tier Tribunal, that it is more than a deposit-taking business and involved the provision of banking services.

The appellant had sought to argue that any banking services provided by the company as a result of its deposit-taking business was an ancillary supply, being the provision of interest plus the promise to repay, being a non-supply under the ruling in BLP. Failing such, it attempted to argue there was not a supply of banking services for VAT purposes because those supplies were not for consideration or, if such failed, because a monetary value could not be calculated for the consideration received.

Not only did it agree with the earlier Tribunals' ruling that the services constituted a supply of exempt banking services, the Court of Appeal agreed that consideration was implicitly given by the depositors in the form of their agreement to the contractual terms and conditions, including the interest rate which served both as a return on the deposit and as a payment for the banking services, and that consideration was capable of being expressed in a monetary form.

In its argument, HMRC said the terms and conditions give the customer a number of rights, such as the ability to use his account on a 24-hour basis, to make transfers and to receive interest and to receive statements online. The bundle of rights makes it clear that a user has a deposit account. It argued that while it is not an account on which checks can be drawn and there are no ATM services, from the perspective of both parties, the underlying product is the same. It follows that the consideration, so far as the customer is concerned, is not just the promise to pay interest; it is also the provision of a bank account.

The ruling in ING Intermediate Holdings Limited v. HMRC ([2017] EWCA Civ 2111) was released on December 13, 2017.

TAGS: individuals | court | tax | investment | business | mining | interest | VAT legislation | law | banking | insurance | United Kingdom | fees | tax authority | internet | legislation | construction | retail | trade | services | VAT case law | Europe

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