UK: A UK Update On Recent VAT Changes

Last Updated: 17 August 2011
Article by Arun K. Birla, David Mallett and Jiten Tank

Set out below is a snapshot of some of the key VAT developments that have arisen so far in 2011 and a summary of their impact in the UK.

VAT in Respect of Services Following the European Court of Justice ("ECJ") Judgment in AXA UK PLC (CASE REF C-175/09) ("AXA")


AXA was primarily concerned with the application of the exemption from VAT at Article 135(1)(d) of the EU VAT Directive for "transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection," which is implemented into UK law as the exemption for 'payments and transfers' at Item 1, Group 5 of Schedule 9 to the Value Added Tax Act 1994. The point in question being whether the services concerned fell within the scope of 'debt collection' and would therefore be liable to VAT at the standard rate.

Whilst this case had progressed through both the VAT Tribunal and the High Court in favour of AXA with findings of a separate exempt supply of payment services falling within Article 135(1)(d), upon reaching the Court of Appeal, it was determined that the issue was not clear and that the matter should be referred to the ECJ. Explicit consideration was therefore given to the specific functions of a business that would bring it within the VAT exemption.

The ECJ subsequently held that the supply present in AXA (which it summarised as the collection, processing and onward payment of sums of money due from third parties) was specifically excluded from the Article 135(1)(d) exemption as 'debt collection'. In reaching this position, it was noted in the judgment that the phrase 'debt collection' in Article 135(1)(d) covers "the collection of debts of any nature, without limiting their application to debts which were not paid on their due date" and also cover "debts which have not yet become due and which will be paid on the due date."


As such, 'debt collection' is not to be confined solely to the service of chasing and recovering overdue payments; as all services principally concerned with the collection of payments for the benefit of the creditor, regardless of whether those payments are received before, on, or after their due date, fall within the 'debt collection' exclusion and are consequently liable to VAT at the standard rate.

However, it has been noted by the UK Revenue ("HMRC") that supplies which involve the collection of payments as a minor or ancillary function but which are principally concerned with other payment related transactions that fall within the Article 135(1) exemptions (e.g., the movement and settlement of payments between bank accounts) will not be affected by the AXA judgment and will continue to fall within the VAT exemption.

The implications for the VAT treatment of outsourcing arrangements and servicing and cash management arrangements in the context of securitisations, covered bond transactions and similar arrangements are matters that should be considered carefully. While historically exemption from VAT may have been claimed in respect of these areas under the 'payments and transfers' exemption, or by virtue of the exemption for 'management of credit by the person granting it,' it may be the case that the supply of these services will now be subject to VAT at the standard rate. However, servicing provided by the originator of the finance should arguably still be treated as exempt under the scope of management of credit by the person granting it.

Finally, it should be noted that HMRC confirmed that the status of the supplier is irrelevant in determining whether the service is taxable or exempt. As such, there is no presumption of banks being favoured as exempt in this regard.

VAT on Distressed Debt

Following referral to the ECJ by the German courts, the recent case of Finanzamt Essen-NordOst v GFKL Financial Services AG ("GFKL") (C-93/10) saw an Advocate-General (the "AG") take the view that GFKL, a German company, should not have to pay VAT on its acquisition of distressed debt. In reaching this view, the AG considered that the purchase of a portfolio of defaulted debts did constitute a service (by virtue of the fact that GFKL was taking the debts off the bank's hands and relieving it of the problems associated with collection) and by virtue of a service arising, so an economic activity was also present, which would therefore make GFKL subject to tax under the scope of the EU's Sixth VAT Directive.

However, the AG went on to state that in his view there was no direct link between the service provided and the consideration received and therefore the directive should not apply. The AG justified this on the basis that GFKL paid a lower than face value price for the debt portfolio because of the risk attached to recovering the debts, not for the cost of the service it was providing to the bank, so there was no direct link.

In addition to ascertaining if a service and economic activity was present, the ECJ also considered whether the assumption of the risk of loss is exempt from tax and if the recovery of the debts is exempt from tax as a single service. It was also queried if the consideration should be determined by the recovery costs agreed between the parties or the actual recovery costs.

The AG noted that having giving his opinion on the question raised by the German courts about consideration and economic activity, he did not have to answer the other queries. Despite this, he determined that the situation in the case amounted to debt collection and was therefore not exempt from VAT. He also voiced the opinion that the consideration should be based on the difference between the amount of debt that is actually recovered by GFKL and the price paid by it in acquiring the debt from the bank.

This case will now go back to the German courts, where, if the court agrees with the AG on point, there should be no vatable supply by the transferee to the transferor on performing the transfer of the debt/loan receivables in connection with the purchase of a debt portfolio. As such, no VAT concern should arise. If the German courts disagree, however, then the supply is likely not to have the benefit of any VAT exemption and will therefore be vatable.

In practical terms, the findings of the AG mean that although entities which are set up to acquire distressed debts from financial institutions might be providing debt collection services, the question of whether the acquisition of the distressed debt itself is vatable is likely to need to be determined on a case by case basis (namely, is there a direct link between the service provided and the consideration received for the acquisition of the distressed debt).

VAT and Transaction Costs

The recent case of HMRC v BAA Limited [2011] UKUT 258 (TCC) (the "BAA Case") before the UK Upper Tribunal has potentially restricted the ability of holding companies to recover VAT incurred on the costs of buying companies.

The BAA Case was concerned with a newly formed company ("Bidco") being set to acquire BAA plc. In the process of this acquisition, Bidco incurred expenditure on advisers' fees. Following completion, Bidco joined the BAA VAT group, and the representative member of the group sought to claim a deduction for the VAT that Bidco had incurred on the advisers' fees.

However, whilst initially successful, upon HMRC's appeal, the Upper Tribunal has recently found that BAA was not entitled to recover VAT on Bidco's advisers' fees. In reaching this decision, it was noted that while economic activity was present on the part of Bidco (a requirement), it was considered that Bidco neither made nor intended to make taxable supplies. BAA had sought to impute the BAA group's taxable supplies to Bidco (following an ECJ precedent in respect of a partnership); however, the Upper Tribunal held that it was not possible to rely on a combination of the VAT grouping rules and the ECJ decision to impute BAA's taxable supplies to Bidco.

Having established an economic activity (although no taxable supply), the Upper Tribunal held that the time to test whether VAT is recoverable is the time when VAT is incurred. In connection with this, the Upper Tribunal did not accept that at the time that VAT on the advisers' fees was incurred there was a direct and immediate link between the VAT and the taxable supplies made by the BAA VAT group, because Bidco was not then part of the BAA VAT group.

Should this decision continue to be upheld, this will make VAT recovery on the costs which relate to a company acquisition much more difficult. However, it is expected that either BAA will appeal the decision, or that one of the similar cases that are currently on hold pending this decision will be heard by the courts.

As such, taxpayers who are likely to be involved in acquisitions should seek to ensure that strategies to maximise VAT recovery are in place at an early stage of a takeover.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.