Target Group Ltd - Court of Appeal rules that third-party loan servicing is subject to VAT



In Target Group Ltd v HMRC [2021] ECWA Civ 1043 (Target), the Court of Appeal (CoA) has found unanimously that outsourced loan servicing is not exempt from VAT when the servicing is only performed by a third party loan servicer after the loan has been granted.



Target Group provided loan servicing to Shawbrook Bank. Once Shawbrook Bank had originated a loan, it arranged for Target Group to perform the following:

  • Setting up a “loan account” including the balance of the loan and repayment dates (including interest);
  • Interacting with the borrower to facilitate repayment;
  • Creating direct debit instructions to be applied at the borrower’s bank;
  • Reconciling amounts paid into Shawbrook Bank’s bank account with the loan accounts;
  • Processing other repayments made;
  • Placing accounting entries into the loan account and recalculating amounts due to be paid, if required;
  • Maintaining information related to the loans (e.g. sending correspondence, maintaining borrower details); and
  • Closing the account at the end of the loan.

The First-tier (FTT) and Upper Tribunals (UT) both concluded the services were taxable, and not VAT exempt either as transactions concerning payments or debts, or as the operation of a bank account.

CoA judgment

Target Group appealed the UT decision, contending it had interpreted the exemption too narrowly in respect of both exemptions, considering applicable UK and EU case law.

In considering the issue, the CoA was required to consider the broad body of case law on the matter, some of it EU case law (from SDC through to BookIt, DPAS and Cardpoint) and some of it UK case law (such as FDR and EDS).

In this area the CoA followed arguments put forward by HMRC, that it should adhere to the most recent CJEU decisions, now reflected in UK law in accordance with the European Union (Withdrawal) Act 2018 following Brexit. Whilst the legislation allows the CoA to depart from such retained EU case law, it should do it only in narrow circumstances (see para 97) and in this case the CoA decided to apply EU case law.

Therefore, the CoA closely followed CJEU judgments, most notably DPAS, which it felt clarified that Target Group could not rely on FDR (indeed, para 93 of the judgment suggests that FDR should no longer to be relied on in the UK) and instead it needed to be considered if Target Group’s services, as a whole, fulfilled the essential functions of a financial transaction. The CoA concluded that they did not, citing four main areas (para 98 onwards):

  • Target Group did not assess credit worthiness and was not involved in originating the loan.
  • The functions performed by Target Group did not involve it crediting or debiting an account holder directly.
  • The execution of the payments were made by third parties, that acted on Target Group’s instruction.
  • Target Group was not responsible or liable for achieving a transfer or payment; the third parties took on this responsibility. The CoA has followed the CJEU here in drawing out this point as a key indicator of whether the supply was exempt.

The CoA also made clear it felt that it was irrelevant that DPAS’ arrangements may have been tax motivated, and also irrelevant that Target Group was operating in financial services.

The judgment would also seem to limit the extent to which an agent might be able to provide an exempt payment processing service, on the basis that the role of such an agent is unlikely to form a distinct whole with the characteristic of the transfer of a sum of money.

Finally, the CoA also dismissed Target Group’s arguments that it was making an exempt transaction concerning debt, and that it was operating a bank account.

Next steps

It is currently unclear whether Target intends (or will receive permission) to appeal to the Supreme Court. Target applied prior to the hearing to argue that the CoA should depart from retained EU law in this case. Given the CoA’s application of CJEU case law, as set out above, it remains to be seen whether Target will be successful in obtaining permission to advance this argument now.

In the absence of any appeal, this CoA judgment will stand as precedent law in the UK, so taxpayers with similar services will need to review their own facts and consider if they should treat similar supplies as taxable in light of this judgment.

It was interesting that the CoA was clear that, in its view, had Target been involved in loan origination, this would have been a factor to support exemption. This is consistent with the outcome in the CoA judgment in EDS and HMRC’s VAT manuals (see VATFIN3135). Consequently, the CoA judgment in Target would appear to be supportive that arrangements aligned with EDS should continue to fall within the exemption.

Finally, this is yet another example of the VAT exemption being construed narrowly especially for payment related outsourced services. More generally, businesses supplying or receiving such services should review these and consider the strength of any VAT position being taken in light of the potentially narrowing exemption as set out in Target. This will be of particular interest for businesses involved in payment services and fintech, where functions within the payment chain are becoming more fragmented between legal entities and therefore it is arguably becoming harder to identify the transaction that is a ‘distinct whole’ that has the character of a transfer of money.