UK and International Tax news

Deductibility Of Input VAT Incurred By Bank In Providing Deposit Accounts

Tuesday 23rd August 2016

The Upper Tribunal has recently heard the appeal from the FTT of a case involving the deductibility of input tax of over £6m incurred by a bank in providing deposit accounts [ING Intermediate Holdings Ltd v HMRC – UT/2016/0298].

The VAT claims related to a business known as ING Direct which took cash deposits from retail customers and used the funds raised mainly by acquire and hold  investments.

Up to 31 December 2003 the business was carried on by ING Direct (UK) NV. After that date and following a statutory merger under Dutch law the business was carried on by its parent company ING Direct NV [‘IDUK’].

IDUK incurred significant expenses in its deposit taking activities, including  expenditure on advertising campaigns, construction of a head office and two call centres, IT systems and services, employment of staff and recruitment costs.

A proportion of the VAT incurred on these costs was the subject of the dispute and whether IDUK made exempt supplies for consideration to the depositors. In particular, the key issues before the FTT and UT were:

  1. Whether the deposit taking activity involved a supply of services by IDUK or was merely the lending of money to IDUK in a way that did not involve a supply by IDUK for VAT purposes;
  1. If there was a supply by IDUK, whether that supply was for consideration for VAT purposes which was capable of being expressed in monetary form;
  1. If there was no supply by IDUK or no supply for consideration, whether the use by IDUK of the funds raised was an economic activity for VAT purposes;
  1. If there was an economic activity, whether and if so how a proportion of the input tax could be attributed to “specified supplies” made in the course of that activity and so qualify as deductible; and
  1. Whether the VAT recovery could extend to input tax incurred before the statutory merger, relying on Reg 109 VAT Regs 1995 (SI 1995/2518).

It was accepted before the FTT and UT that if IDUK had made supplies for consideration (issues1 and 2), HMRC had correctly denied recovery of input tax on the basis that the expenses incurred had a direct and immediate link with exempt supplies made in the course of the deposit taking activities.

The FTT decided that IDUK had made supplies for consideration, it did not strictly need to deal with the other points, but did however express the view that IDUK would not have being carrying on an economic activity if it had not been making supplies to depositors and it would also have failed on the regulation 109 issue.

With regard to issue 1, the UT held that the provision of information by IDUK to depositors, together with the facility to make withdrawals and deposits, were not only contractually described as services but in reality amounted to services, and went well beyond what might be expected in a mere borrowing transaction. As a matter of contract and in reality IDUK provided banking services in the form of deposit accounts.

The UT held that the FTT had correctly concluded that there was consideration which was capable of valuation [issue 2] and whilst the deposit taking was an economic activity and the investment activities were a direct extension of that activity, they would not have comprised an economic activity on their own [issue 3].

Re issue 4, the UT held that all the input tax claimed by IDUK was attributable to the exempt deposit taking supplies.

With regard to issue 5, the UT stated that Reg 109 could only apply where there was a change of intention before the goods or services were first used, but in this case ING’s argument was that it had made supplies in the form of loans to EU parties (exempt) and later to non EU parties.

As this case involved input tax of over £6m, an appeal is thought likely.

If you would like to discuss the case in more detail, please contact Keith Rushen on 0207 486 2378.

 

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