The VAT exemption applying to services supplies by intermediaries in finance transactions requires specifically that the intermediary is ‘bringing together’ the parties involved and ‘performing works preparatory to the conclusion of contracts’. When this exemption was first considered it would have been with regard to the bringing together of parties to a transaction in a traditional sense and the intermediaries role would have been clearly defined and visible.
The recent case of Dollar Financial UK Limited (DFUK) highlights that VAT law is not particularly well suited to deal with the fact that supplies taking place via the internet are very different from those contemplated when the legislation was originally drafted. The efficiencies of modern technology mean that much of the work carried out by intermediaries, such as gathering information and sifting through applications to sort the ‘wheat from the chaff’ before passing on to lenders , is now carried out online, very quickly and seems therefore to be a lesser role, particularly in the eyes of HMRC.
The background to this particular case is that DFUK submitted a VAT claim in respect of certain supplies made to it by overseas suppliers on which it had accounted for VAT under the reverse charge. The claim was made on the basis that the reverse charge had been paid incorrectly because the supplies received were VAT exempt (supplies of intermediary services). HMRC refused the claim.
DFUK’s business is the making of small, short-term loans to private individuals (commonly referred to as pay-day loans). Its business was accepted as being exempt from VAT.
The supplies at issue were made to two DFUK companies by suppliers based outside the UK. Two supplies were in dispute: supplies by lead generators and certain tasks undertaken by an outsourcer. It is the services provided by the lead generators that we consider in this article.
A borrower using a lead generator’s website would complete an online application form giving fairly simple information such as personal details, monthly income, residency and bank account details. Once the application form was submitted the lead generator would electronically (and normally within a matter of seconds) pass on the application to one of its customers (one of which was DFUK). If DFUK chose to accept and pay for the lead (a process which also occurred electronically and in a matter of seconds) the borrower would be presented with a page of DFUK’s website offering the loan and the terms of the loan.
The lead generator decided which of its customers it would refer to the borrower by identifying all of the customers for whom the borrower met the loan criteria. The lead generator would then refer the borrower to the customer that would pay it the highest referral fee. HMRC was of the view that DFUK’s lending criteria was so general that the lead generator was merely selling the lead to the highest bidder. The Tribunal found that other customers may apply different criteria so the lead generator’s application forms asked more questions than the criteria required by the appellant.
The tribunal considered in the first instance it was necessary that the lead generator provided services that were more than simply acting as a mere conduit or advertising.
HMRC felt the following facts indicated that the lead generator was not doing anything more that this:
- The online referral process took ‘a millisecond’ and the criteria applied were not complex
- There was no legal relationship between the lead generator and the borrower.
However, the Tribunal discounted these arguments.
On the first point it was held that the speed of the transaction was irrelevant as this was simply because computers are much quicker than humans at assessing the criteria. The Tribunal also felt that the information requested was sufficient to allow DFUK to assess if its lending criteria were met and the fact that the lead generator acted only as a partial filter was not critical.
On the second point the Tribunal dismissed HMRC’s argument as irrelevant and stated that it was only necessary for there to be a legal relationship between the intermediary and either the borrower or the lender.
Importantly the Tribunal felt there is no clear line between acting as an intermediary or not. The product offered will have an impact on the level and the more complex the product the more involvement an intermediary would be required to have.
In determine whether an introducer is providing a VAT exempt intermediary service this case is helpful in finding it important that:
- the level of filtering applied is relevant to the lender; and
- the introductions provided resulted in the offering of finance to the borrower (proving that a valuable intermediary service is being provided).
This case provides useful pointers when considering the VAT liability of intermediary services and demonstrates that the fact that technology allows these services to be carried out so quickly that they are almost discounted is not necessarily relevant if the outcome is the same as if a person were fulfilling the role.