Introduction

The case of ING Intermediate Holdings Ltd v. Revenue & Customs ([2017] STC 320) presents a significant judicial examination of Value Added Tax (VAT) deductibility as it pertains to banking activities in the United Kingdom. Heard by the Upper Tribunal (Tax and Chancery Chamber) in July 2016, this appeal centered on whether the provision of deposit accounts by ING involved a supply of services subject to VAT, thereby affecting the deductibility of input tax amounting to £6,032,280. The parties involved were ING Intermediate Holdings Limited, representing a VAT group engaged in deposit-taking activities, and Her Majesty's Revenue and Customs (HMRC). The appellant sought to overturn HMRC's refusal to accept voluntary disclosures of VAT periods, challenging the classification of their banking activities for VAT purposes.

Summary of the Judgment

The Upper Tribunal upheld the First-tier Tribunal's (FTT) decision, dismissing ING Intermediate Holdings Ltd's appeal against HMRC's refusal to accept their VAT input tax deductions. The core of the judgment rested on the determination that ING's deposit-taking activities constituted a supply of services for VAT purposes, thus rendering the associated input tax non-deductible due to their direct and immediate link to exempt supplies. The Tribunal meticulously analyzed whether ING's deposit accounts represented a taxable supply, the existence and valuation of consideration, the economic activity involved, and the attribution of input tax. Ultimately, the Tribunal concluded that the deposit-taking activities were indeed economic activities falling within taxable supplies, thereby justifying HMRC's refusal to allow the input tax deductibility claimed by ING.

Analysis

Precedents Cited

The Tribunal's decision drew extensively on established case law to underpin its findings. Key among these was MBNA Europe Bank v HMRC [2006] STC 2089, which clarified that not all transactions undertaken for consideration constitute a supply of services under VAT law. The judgment also referenced the ECJ’s decisions in cases like Le Crédit Lyonnais v Ministre du Budget [2014] STC 245, Régie Dauphinoise-Cabinet A Forest SARL v Ministre du Budget [1996] STC 1176, and Floridienne SA v Belgian State [2000] STC 1044, which collectively reinforced the interpretation of "economic activity" and the criteria for what constitutes a taxable supply of services.

These precedents were instrumental in elucidating the scope of VAT liabilities related to banking services, particularly in distinguishing between mere financial transactions and those involving taxable supplies of services. The Tribunal also considered the principles from Secret Hotels2 and Edwards v Bairstow, which emphasized the importance of aligning contractual terms with economic reality in determining VAT applicability.

Legal Reasoning

The Tribunal undertook a comprehensive legal analysis to address the appellant's arguments. The primary legal issue revolved around whether ING’s deposit accounts constituted a supply of services for consideration under VAT law. The Tribunal applied the principles from the Principal VAT Directive (PVD) and relevant UK legislation, emphasizing that a "supply of services" under Article 24(1) of the PVD is broadly defined as any transaction not constituting a supply of goods.

The Tribunal assessed whether there was consideration for the services provided, determining that the interest paid on deposits and the associated banking services amounted to reciprocal performance, thus satisfying the criteria for a taxable supply. The concept of "economic activity" was also scrutinized, affirming that ING's banking operations, including deposit-taking and fund management, were integral to its economic activities and thus subject to VAT.

Additionally, the Tribunal evaluated the methods for valuing consideration, considering approaches such as the cost of supplying services, the bank's gross margin, economic cost of funds, and alternative sources of funding. While acknowledging the complexity of valuation, the Tribunal concluded that consideration was capable of being expressed in monetary terms, further reinforcing the VAT liability.

Impact

The judgment has profound implications for the banking sector and VAT treatment of financial services. By affirming that deposit-taking activities constitute a supply of services subject to VAT, the Tribunal set a clear precedent that banks must account for VAT on such services, potentially limiting input tax deductions on related expenses. This decision underscores the importance of accurately classifying financial transactions and ensures that VAT obligations are appropriately met, thereby influencing future VAT assessments and compliance requirements within the financial industry.

Furthermore, the judgment highlights the necessity for financial institutions to delineate clearly between taxable and exempt activities, particularly in complex operations involving multiple forms of financial services. It may prompt banks and other financial entities to reassess their VAT strategies and ensure robust documentation to support the classification of their services.

Complex Concepts Simplified

Supply of Services for VAT Purposes

Under VAT law, a "supply of services" refers to any transaction that does not involve the transfer of goods. For a service to be subject to VAT, it must be supplied for consideration, meaning that there is a reciprocal exchange of value between the provider and the recipient. In this case, ING's provision of deposit accounts was deemed a service because it involved managing deposits and providing related banking facilities.

Consideration Capable of Quantification

Consideration for VAT purposes must be expressible in monetary terms. This means that the value received or to be received for a service must be quantifiable financially. The Tribunal examined various methods to value the consideration ING received for its deposit services, ensuring that it met the VAT requirement for monetary expression.

Economic Activity

"Economic activity" is a fundamental concept in VAT law, encompassing any activity undertaken by a person as part of a business or trade. It includes the production, distribution, and provision of services for profit. In this case, ING's deposit-taking and fund management were classified as economic activities since they constitute core banking operations aimed at generating profit.

Conclusion

The judgment in ING Intermediate Holdings Ltd v. Revenue & Customs serves as a pivotal affirmation of the applicability of VAT to deposit account services provided by banks. By establishing that such activities constitute a taxable supply of services for consideration, the Tribunal enforces a stringent interpretation of VAT obligations within the financial sector. This decision not only clarifies the VAT treatment of banking services but also reinforces the necessity for financial institutions to meticulously classify their transactions and ensure VAT compliance. The judgment's reliance on established precedents and its thorough legal reasoning underscore its significance in shaping future VAT-related jurisprudence.