[2010] UKFTT 297 (TC)

TC00585

Appeal number: TC/2009/09740

VAT – Financial services exemption – Appellant provided a service of managing the foreign currency exposure of a multi-currency loan provided to its client by a third party (a Lender) – whether the essential aims and features of the service were the execution of foreign exchange transactions – held, they were – whether the service was properly characterised as transactions concerning payments, transfers or currency within article 135(1)(d)(e) VAT Directive and item 1, Group 5, Schedule 9, VATA – held, it was– where the transactions were effected using a Prime Broker, held the service also fell within the exemption on the basis that it was the provision of intermediary services within item 5, Group 5, Schedule 9, VATA – appeal allowed

FIRST-TIER TRIBUNAL
TAX 

	THE ECU GROUP PLC	Appellant
	
	-and-
	
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

		TRIBUNAL: 	JOHN WALTERS QC (TRIBUNAL JUDGE)		
				MS. SONIA GABLE						

Sitting in public at 45 Bedford Square, London WC1 on 12 and 13 April 2010

Greg Sinfield, Lovells LLP, for the Appellant 
Anna Markham, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This appeal, brought by The ECU Group plc (“the Appellant”) on 31 March 2009, is against a decision of the Respondents (“HMRC”) given by one of their officers, Mr. David Potter, that certain services provided by the Appellant in respect of multi-currency mortgages are not exempt for VAT purposes.  Mr. Potter’s decision was upheld on review by another officer of HMRC, Mr. Steve Doherty, in a letter dated 11 March 2009.  The Appellant contended in its grounds of appeal that the services were indeed exempt from VAT for one or both of the following reasons: (a) the services are supplies of currency exchange and/or of currency management services and are exempt from VAT; (b) the services are financial intermediary services in relation to currency exchange and are exempt from VAT.
2.	We were referred to extensive documentary evidence.  We also received a Witness Statement, and oral evidence, from Mr. Paul Wheldon, the Appellant’s Head of Finance.
The facts  
3.	A document, being a type of brochure, produced by the Appellant for clients and potential clients, gives a description of the services the Appellant offers. They are described in the document’s introduction section as a multi-currency debt management programme, with the objectives of reducing the size of a client’s debt by borrowing in currencies which fall in value against sterling, and reducing the cost of servicing the debt, by borrowing in currencies which have a lower interest rate than sterling.
4.	Under the heading “The need for professional management”, the document has the following narrative:
“Bridging the gap between borrowers’ needs and their capabilities.  
It must be pointed out that achieving interest rate savings and debt reductions and, more importantly, maintaining them over the term of a loan is a much more complex [sic] than any simplified example may suggest.
For most private individuals, the reality of trading the many available currencies coupled with the need for extensive analysis and monitoring, has meant that controlling foreign exchange risk extends beyond the scope of their resources.
To ensure that interest rate differentials and exchange rates can be used to the borrower’s best advantage, a professional currency management company is strongly recommended.  Indeed many lending banks will not extend a multi-currency loan facility unless an approved currency management company has been engaged.
A currency debt manager’s role is to seek to maintain debt in currencies that are expected to weaken against (or, at least, remain stable against) sterling, whilst achieving an interest rate advantage.  Given sterling’s long-term propensity for weakness, this is not a simple task.  The ECU Group plc’s currency debt management programme was created in 1988 specifically to fulfil this need.”
5.	When a client engages the Appellant, he or she enters into a “Private Client Agreement for Discretionary Multi-Currency Debt Management Services”.  The main provisions of this agreement are as follows:
•	By clause 2.2, the client appoints the Appellant to manage the foreign currency exposure of a loan (“the Loan”) which is provided to the client by a stated lender (“the Lender”), which is not the Appellant.  The Loan is provided to the client by the Lender under a document called “the Facility Letter”.  
•	The management of the foreign currency exposure of the Loan is to be conducted by the Appellant with the following objectives (set out in clause 2.4).  
•	The Appellant will monitor the major deliverable international currencies on a spot basis and seek to denominate the Loan on a spot basis in the currency or currencies, permitted by the Lender, and notified to the Appellant from time to time, which in the opinion of the Appellant and in the Appellant’s absolute discretion, are considered to be appropriate and likely to provide benefit to the client by way of debt reduction and/or interest saving.
•	To that end, the Appellant will use its reasonable endeavours to instruct the Lender, or any prime broker or counterparty with whom the Appellant effects foreign exchange transactions, to change the currency exposure and denomination of the Loan as and when the Appellant in its absolute discretion considers it appropriate or desirable to do so.
•	By clause 2.6, the client agrees to execute a power of attorney in a standard form in favour of the Appellant to enable it to change the exposure and denomination of the Loan at any time.  The power of attorney is only revocable by the client on receipt by the Appellant and the Lender of notice in writing terminating it, but it is automatically revoked on the termination of the agreement.
•	By clause 2.7, the client agrees to pay the Appellant a monthly management fee, which is not refundable.  It is calculated on the amount of the Loan and is effectively at a rate declining from 1% per annum to 0.65% per annum depending on the size of the Loan.  The monthly management fee cannot be at a rate less than £2,500 per annum (exclusive of any VAT).
•	In addition, by clause 2.8, a performance fee may be payable.  This is 20% of any “Net Profit” (as defined) achieved during the course of the agreement.  The performance fee is in principle chargeable annually.  We understand that for the purposes of calculating “Net Profit”, credit is given for any “Net Profit” on which a performance fee has already been charged.
•	The client is made aware in the agreement of UK regulation and risk warnings.
•	The form of power of attorney authorises the Appellant to instruct a Lender (or any prime broker or counterparty with whom the Appellant effects foreign exchange transactions) to convert and reconvert the Loan, or part thereof, into any currencies acceptable to the Lender, and to instruct it to cooperate generally with the Appellant in the provision of its (the Appellant’s) services.
6.	Mr. Wheldon said, and we accept, that the service is provided by the Appellant as “an optional add-on to a standard bank loan”.  There are two aspects to the Appellant’s service: (1) the Appellant predicts the direction of movements in foreign exchange rates, looking for currencies which will weaken against the base currency in which the loan is made; and (2) the Appellant gives instructions on behalf of its client to various execution banks to carry out a series of foreign exchange trades over a period of time, which alter the currency denomination of a client’s loan facility.
7.	The client’s debt (the Loan) takes the form of a standard bank loan advanced by a Lender to the client for whatever purposes they agree.  The most common situation is a mortgage to purchase a primary residence or a buy-to-let property.  The Appellant is not a party to the Loan.  The Lender provides and administers a multi-currency loan account which allows the debt balance to be denominated in a combination of major currencies.  All the banks allow the facility to be denominated in at least three currencies simultaneously, but some permit no more than this.
8.	The redenomination of a Loan is achieved by trading in the foreign exchange markets to buy one currency while selling another.  The trade is then applied to the multi-currency facility, which has the effect that the loan is repaid in the buy currency and instead advanced in the sell currency.
9.	The frequency of trading depends on market conditions, with a rapidly changing volatile market providing increased opportunity to enter positions.  The Appellant groups together all loan facilities denominated in a particular base currency and managed by it in a “book”, which is, generally speaking, traded as a unit. Historically, there have been periods when there was no trading, or minimal trading – the Loans being advantageously denominated in a particular currency (or currencies) through the period. However, during 2004, the Appellant’s book was traded on 14 separate occasions.  During 2009, at the time Mr. Wheldon’s Statement was made (2 November 2009), there had been 67 trades – at the hearing, Mr. Wheldon updated this to 74 trades.
10.	The Appellant does not physically move the money itself.  It executes all the trades, but does so as agent for the Prime Broker or Lender (see: below) and issues instructions for the movement of money between the various banking counterparties on behalf of its clients.
11.	Trading operates in one of two ways, depending on whether the Lender has agreed to operate through a “Prime Broker” or whether trading is carried out through the Lender’s own treasury. The bulk of the trading (89% by value and 92% by number of client accounts) is carried out through a Prime Broker. 
12.	 Trading through a Prime Broker involves the Appellant dealing with (a) execution banks, which carry out trading on global foreign exchange markets; (b) the Prime Broker, which acts as a central hub for processing the trading; and (c) the Lenders.  The Prime Broker involved is RBS Prime Brokerage.
13.	There is a “Prime Broker Agreement” between the Appellant and the Prime Broker.  There are also “Reverse Give-Up Agreements” between the Appellant, the Prime Broker and the various Lenders. 
14.	The Prime Broker Agreement provides for the Appellant to issue trading instructions to, and execute trades with, the various execution banks as agent for the Prime Broker on behalf of the client.  The Appellant is authorised to act as agent for the Prime Broker, and it will bind the Prime Broker as one party to a trade, with the execution bank as the other party.
15.	The Reverse Give-Up Agreements have the effect of passing the trade on to the Lenders. They expressly provide that where a trade has been executed under the Prime Broker Agreement, the Lender will then enter into a back-to-back trade on identical terms with the Prime Broker, except that the Prime Broker’s position as buyer or seller of such currencies will be the reverse of its position with the execution bank.  In the Reverse Give-Up Agreements, the Appellant acts as agent for the Lender and binds the Lender as principal, with the Prime Broker being the counterparty.  In essence, the original trade between the Appellant and the execution bank is reversed and “given up” in a back-to-back transaction with the Lender.
16.	Until the Prime Broker arrangement began to be used in 2006, trading was conducted by a Lender’s treasury team.  This method of trading now accounts for only 8% of the Appellant’s client accounts.  
17.	The actions required of the Appellant in order that it should carry out its obligations under the Client Agreements, when the Prime Broker’s services are used, can be summarised as follows.  It must:
•	Bring together the Prime Broker and a variety of execution banks as parties to a currency exchange contract;
•	Enter into trades with a variety of execution banks as agent for the Prime Broker;
•	Prepare detailed break-downs of how the trade “book” is divided between the Lenders for the Prime Broker, for the purposes of its trade with the Lenders;
•	Prepare detailed break-downs of how the trade “book” is divided between the various client accounts for a Lender, for the purpose of allocating the results of its trade with the Prime Broker;
•	Bring together the Prime Broker and a variety of Lenders as parties to a currency exchange contract;
•	Enter into trades with the Prime Broker as agent for the Lenders;
•	Verify details of the trades at various stages on behalf of the Prime Broker and the Lenders concerned; and
•	Create and send notices to clients informing them of trades, and prepare statements of performance.
18.	Where a Prime Broker’s services are not used, the Appellant’s actions are simpler.  In this case, the Appellant instructs the Lender’s treasury team to trade the relevant currencies.  Having done so, the Lender simply adjusts the cash position of the client’s Loan and informs the Appellant of the rate obtained, so that the Appellant can update its own records of the client balances.
The relevant provisions of the VAT Directive and the domestic legislation
19.	The governing law on the financial exemptions from VAT is contained in Directive 2006/112/EC of 28 November 2006 (“the VAT Directive”).  The relevant exemptions are contained in article 135(1), which provides as follows:
“Member States shall exempt the following transactions:
...
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
(e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender ...;”
20.	The VAT Directive replaced EC Council Directive 77/388 of 17 May 1977 (the Sixth Directive) with effect from 1 January 2007.  The wording of the relevant exemptions is the same in both Directives. 
21.	The exemptions in article 135(1)(d) and (e) of the VAT Directive are implemented in the United Kingdom by the VAT Act 1994 (“VATA”).  Section 31(1) VATA provides for the exemptions specified in Schedule 9 VATA, of which items 1 and 5 of Group 5 are relevant.  They provide as follows:
“1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.”
5. The provision of intermediary services in relation to any transaction comprised in item 1 ... (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity.”
22.	The relevant Notes to Group 5 are as follows:
“(1A) Item 1 does not include a supply of services which is preparatory to the carrying out of a transaction within that item.
...
(5) For the purposes of item 5 “intermediary services” consist of bringing together, with a view to the provision of financial services –
(a) persons who are or may be seeking to receive financial services, and
(b) persons who provide financial services,
together with (in the case of financial services falling within item 1 ...) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities.
(5A) For the purposes of item 5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries between–
(a)	a person who provides financial services, and
(b)	a person who is or may be seeking to receive financial services.
(5B) For the purposes of Notes (5) and (5A) “financial services” means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6.”
23.	Item 1 and item 5 of Group 5 of Schedule 9 to the VATA must be interpreted in conformity with article 135(1) of the VAT Directive.  This is common ground.  The Appellant argues that insofar as the relevant provisions of the VATA fails to give effect to the relevant provisions of article 135(1), the Appellant is entitled to rely on the direct effect of those latter provisions.  The Appellant cites Bookit Ltd. v Revenue and Customs Commissioners [2006] EWCA Civ 550, [2006] STC 1367 at [7], and Revenue and Customs Commissioners v Axa UK plc [2008] EWHC 1137 (Ch), [2008] STC 2091 at [26] in support.  HMRC’s position is that the relevant provisions in the VATA fully implement the relevant provisions of article 135(1) of the VAT Directive, and earlier Directives, and so there is no room for any reliance on the direct effect of the VAT Directive.  As the debate developed at the hearing, it appeared to us that nothing actually turned on this point. 
The Appellant’s case
24. The Appellant’s case is that its services are exempt because they are: 
•	“transactions ... concerning currency” (art. 135(1)(e)) – to which “the issue, transfer or receipt of, or any dealing with, money” (item 1, Group 5, Sch. 9, VATA) corresponds; or
•	“transactions ... concerning ... payments, transfers” (art. 135(1)(d)) – to which item 1, Group 5, Sch. 9 VATA also corresponds; or
•	“negotiation concerning currency” (art. 135(1)(e)) – to which “the provision of intermediary services in relation to any transaction comprised in item 1 ... by a person acting in an intermediary capacity” (item 5, Group 5, Schedule 9, VATA) corresponds; or
•	“negotiation concerning payments or transfers” (art. 135(1)(d)) – to which item 5, Group 5, Sch. 9, VATA also corresponds.
	HMRC’s case
24.	HMRC argue that the Appellant’s services are not exempt because objectively they are a discretionary multi-currency debt management service, which is taxable – not exempt – unless it is a service supplied by the person who has granted the credit being managed, in which case the specific exemption in item 2A of Group 5, Schedule 9, VATA applies – “the management of credit by the person granting it”.  HMRC contend that on the evidence the Appellant does not deal with any money, payments or currency, neither does it provide any relevant intermediary services, because it is not concerned in bringing together (with a view to the provision of financial services) a person who provides financial services and a person seeking to receive them.  This is because the relevant contract for financial services to which the client is a party (namely the Loan) already exists before any currency switch takes place.
The authorities and the submissions based on them
25.	We were referred to a number of authorities.  Both sides relied on Swiss Re Germany Holding GmbH v Finanzamt München für Körperschafter (Case C–242/08) [2010] STC 189.  The transaction in issue in that case was a sale of a portfolio consisting of 195 life reinsurance contracts.  The Court of Justice stated (at [45]) that 
“in order to be regarded as exempt transactions for the purposes of art. 13B(d) of the Sixth Directive [now relevantly replaced by art 135(1)(b),(d) and (e) of the VAT Directive], the services provided must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in that provision”.
26.	Focussing on article 135(1)(e) of the VAT Directive (“transactions, including negotiation, concerning currency”), the Appellant contends that the “specific, essential functions” of such a service include the provision of the facility to exchange amounts in one currency for the counter value in another currency.  Mr. Sinfield argues that the specific, essential functions of transactions concerning currency do not include the actual payment or transfer of currency, as that would already be exempt under article 135(1)(d), which refers to “transactions, including negotiation, concerning deposit and current accounts, payments, transfers debts, [etc.]”. 
27.	Ms. Markham, for HMRC, submits that the service provided by the Appellant is properly described as the discretionary management of the client’s Loan and does not in part or taken as a whole amount to an activity constituting transactions concerning currency. 
28.	Mr. Sinfield cited Customs and Excise Commissioners v First National Bank of Chicago (Case C–172/96) [1998] STC 850 (“FNCB”) for the proposition that (although the Court of Justice has never defined “transactions concerning currency”), the transactions actually carried out by FNBC were recognised as being transactions concerning currency.  The Tribunal accepts that the Court regarded FNCB’s transactions as “currency transactions” (see: ibid.  [33]), but it did so in the context of determining whether or not FNBC’s services constituted supplies of services effected for consideration within the meaning of art. 2(1) of the Sixth Directive.  
29.	The Court in FNCB described FNCB’s services as characterised by both the actual exchange transaction and FNCB’s preparedness to conclude such transactions in the currencies in which it specialises (ibid. [29]).  
30.	Mr. Sinfield contended that from the Court’s description a supply of services with the following elements is a transaction concerning currency.  The elements are (a) a willingness to exchange currencies; (b) a legal relationship; and (c) an actual exchange of currencies.
31.	Mr. Sinfield went on to submit that the Appellant’s activities contain these elements, relying specifically on the Client Agreement, the Prime Broker Agreement and the Reverse Give-up Agreement.                                                                  
32.	There is no doubt that the actual exchanges of currencies with which this appeal is concerned take place between an execution bank and the Lender directly (in the minority of cases where trading is conducted by the Lender’s treasury team) and between an execution bank and the Prime Broker as principal, and between the Prime Broker as principal and the Lender in other cases.  The Appellant’s activities are confined to giving instructions and facilitating the transactions through their agency.  
33.	The Appellant alternatively contends that its services are exempt under article 135(1)(d) of the VAT Directive as “transactions concerning payments [or] transfers”.  Mr. Sinfield submits that the effect of the Appellant’s services is that funds are transferred and changes in the legal and financial situation of the payer and payee and, where relevant, third parties (banks) are made.  He says: “Put simply, [the Appellant] makes the payments and transfers happen”, relying on the evidence of Mr, Wheldon. 
34.	Mr. Sinfield cites Sparekassernes Datacenter (SDC) v Skatteministeriet (Case C–2/95) [1997] STC 932 (“SDC”).  SDC was an association most of whose members were savings banks.  The Court of Justice recorded that it provided to its members and to certain other customers (banks) services relating to transfers, advice on, and trade in, securities, and management of deposits, purchase contracts and loans (ibid.  [8]).  
35.	The Court of Justice emphasised that services constituting a ‘transaction concerning transfers’ must have the effect of transferring funds and entail changes in the legal and financial situations, and is to be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank (ibid.,  [66]).
36.	Mr. Sinfield submits that the Appellant’s services must be characterised as exempt transactions concerning transfers and payments because (applying [66] of SDC):
•	viewed broadly, the Appellant’s services form a distinct whole, namely the exchange of one currency for another, which involves the transfer of payment of money;
•	the services have the effect of transferring funds in the same way as SDC’s services when it acted in accordance with a standing order;
•	the services entail changes in the legal and financial situation of clients and banks;
•	the Appellant does much more than provide a mere physical or technical service, such as making its systems available to a client or bank (in fact the Prime Broker makes its systems available to the Appellant);
•	the Appellant is solely responsible for all aspects of the currency exchange transaction which necessarily includes those aspects which are distinct in character and are specific to, and essential for, the exempt transactions concerning transfers and payments.
37.	He acknowledges that the Appellant does not effect execution of any transfers (other than as agent for other parties) but asserts that this is not fatal to its claim for exemption.  For this assertion he cites the authority of Bookit Ltd. v Revenue and Customs Commissioners in the High Court [2005] STC 1481, and in the Court of Appeal [2006] STC 1367.
38.	Thus, in the High Court at [49], the Vice-Chancellor said: 
“[art. 13B(d)(3) of the Sixth Directive] exempts, not merely payments and transfers but ‘transactions ... concerning ... payments, transfers ...’.  Accordingly the fact that Bookit does not itself make the transfer in the sense of effecting the debit and credit is not fatal to its claim for exemption.” 
39.	And in the Court of Appeal at [44], Chadwick LJ (with whom the other members of the Court agreed) said, commenting on the Tribunal’s decision in that case:
“It was the failure to appreciate that the fourth component of the services which they had identified, in the light of further evidence, did have the effect of transferring funds and did entail changes in the legal and financial situation – or, perhaps, the failure to appreciate that the transfers of funds which that component of the services provided by Bookit did not need to be a transfer of funds by Bookit itself – which led the tribunal to err ...” (original emphasis)
40.	To understand this passage from Chadwick LJ’s judgment it is necessary to know that the fourth component of the services referred to was the transmission by Bookit of a customer’s card information, the security information and the card issuers’ authorisation codes to Girobank.  Girobank was the bank which processed the payment for cinema seats by means of a customer’s debit or credit card and credited Bookit with the aggregate of the price of the seats and the card handling charge, prior to Bookit accounting to Odeon for the sums received for the tickets.  
41.	Mr. Sinfield also referred on this point to Revenue and Customs Commissioners v Axa UK plc [2008] STC 2091.  Henderson J, commenting on SDC and Bookit said at [71] and [72]:
“[71] It is important to remember at this point that the exemption under art. 13B(d)(3) [of the Sixth Directive] is not confined to transactions which themselves constitute transfers or payments of money.  On the contrary, the exemption extends to transactions ‘concerning’ transfers or payments.  The degree of connection which must exist between the transaction for which the exemption is claimed and the underlying transfer or payment was explored in paras. 61 and following of the judgment of the ECJ in SDC, and the answer given in para. 66 was that the services provided must ‘form a distinct whole’ which fulfils ‘the specific, essential functions’ of a transfer.  Thus to qualify as a transaction concerning transfers, the service provided must ‘have the effect of transferring funds and entail changes in the legal and financial situation’.  Whether the services in any particular case have such an effect is in my judgment essentially a question of causation.  In the interests of clarity, I would stress that the question is not what has caused the transaction which effects the transfer, which is irrelevant (see [1997] STC 932, [1997] ECR I-3017, para. 53 of the judgment, ‘irrespective of its cause’) but whether the transaction carried out by the service provider has truly effected, in the sense of brought about, a transfer.  The causal nature of the test is brought out both by the use of the verb ‘effect’, which has a strong causal connotation, and by the reference in para. 54 [of SDC] to cases where a customer ‘causes a transfer to be effected’ (my emphasis).
[72] Bookit seems to me to be a good example of a case where the causal test was applied and answered in the taxpayer’s favour, even though the taxpayer operated wholly outside the banking system, and even though it was not the taxpayer itself which actually made the transfer.  What mattered was that the information supplied by Bookit to Girobank inevitably brought about (although it did not itself constitute) a transfer of sums of money from Girobank to Bookit.  The person who actually made the transfer was Girobank, pursuant to its obligations under the MSA.  It did not make the transfer as agent on behalf of Bookit.  Nevertheless, Bookit effected the transfer, because within the contractual framework established by the parties the information transmitted by Bookit to Girobank was all that was needed to trigger the making of the transfer by Girobank to Bookit.”
42.  Henderson J’s decision in Axa UK was appealed to the Court of Appeal which has made a reference to the Court of Justice for a preliminary ruling (Case C–175/09).  The ruling (when it is made) may well be material to the ultimate decision in this appeal.  However neither party has asked this Tribunal to make a reference to the Court of Justice in this case.  Ms. Markham, for HMRC, submitted that if the Tribunal was minded to decide this issue in the Appellant’s favour we should reserve our decision until the ruling in Axa UK is available.  However, in the light of the fact that this course would entail significant delay, we have decided (in agreement with Mr. Sinfield’s submission on the point) to deal with the appeal on the basis of the materials available to us.
43.  Mr. Sinfield also referred the Tribunal on this point to CSC Financial Services Ltd. v Customs and Excise Commissioners (Case C–235/00) [2002] STC 57 and Customs and Excise Commissioners v Electronic Data Systems Ltd. [2003] STC 688 (“EDS”).  He sought to contrast the position of CSC with that of the Appellant, because the Appellant has contractual authority on behalf of the Prime Broker and a Lender to effect transfers and payments.  Further, he submitted, by such transfers and payments, the legal and financial situations of both Lenders and the Appellant’s clients are changed.
44. Ms. Markham submitted that the true analysis of the Appellant’s essential aim and the essential features of its supplies shows that those supplies are supplies of a debt management service.  This is how the Appellant itself described its services to its actual and potential clients. She cited HBOS plc v Revenue and Customs Commissioners [2009] STC 486 at [45] for the proposition that the Tribunal’s task must be to decide what is the objective character of the Appellant’s supply, having regard to its essential aim or essential features. Therefore, she submitted, an examination of the currency trades which take place between parties other than the Appellant will not demonstrate that the Appellant’s supplies attract an exemption.
45. But even if those currency trades were examined, although accepting that the Appellant operates in the sphere of financial transactions (cf.  Velvet & Steel Immobilien und Handels GmbH v Finanzamt Hamburg-Eimsbüttel (Case C–455/05) [2008] STC 922), she submitted that that was not sufficient and the Appellant was too distant from the transactions whereby the transfers or payments were made to entitle it to exemption for effecting those transfers or payments.
46.  In particular, she submitted, the Appellant does not, on the facts, do everything necessary to cause the payments or transfers to be made.  It only gives an instruction to the Lender or the Prime Broker.  That instruction needs to be acted on by those parties in order for the payments or transfers to be made.
47. The Appellant in the further alternative contends that its services are exempt under article 135(1)(d) and (e) of the VAT Directive as “negotiations” concerning currency payments or transfers.  Mr. Sinfield submits that the activity of the Appellant on behalf of its client in buying or selling currency are such negotiations and that activity (rather than the giving of any advice or application of expertise) is the principal service which the Appellant supplies to its clients.  It is the exchange of currencies which generates for clients adjustments in the capital value of a Loan or the amount of interest payable on a Loan. The fees received by the Appellant from clients, both the flat-rate management fee and the performance fee, are, he submitted paid for the currency-switching service and not for advice (as no advice was provided to clients).  He commented that if there were no currency switches, clients would not consider that they had received any service in return for their payments.
48. Ms. Markham submitted that the evidence does not support exemption under the head of “intermediary services” or “negotiation”.  She said that the Appellant was not concerned in bringing together (with a view to the provision of financial services) a provider and a potential user of financial services, nor does the Appellant perform any relevant work preparatory to the conclusion of any contract for the provision of financial services.  This is because the relevant contract for financial services (namely the Loan) already exists before any currency switch takes place.  The currency switch is not, in her submission, the provision of financial services to a person seeking to receive them and accordingly the Appellant is not providing intermediary services in providing the services which it supplies.  The Appellant’s role in causing others (banks) to effect a currency switch is a mechanical one involving no mediation or negotiation as understood in ordinary language. It is ancillary to its role of managing a client’s debt, which is centred upon the Appellant’s having expertise in, and performing expert analysis of, the currency markets in order to obtain financial advantage for its clients.  Ms. Markham contended that the client pays the Appellant for bringing its expertise to bear in managing the mortgage debt.  She observed that performance fees are based on the success of that management, and not on either the number or value of currency switches which may have taken place.
49. Both parties referred in this connection to CSC and Ludwig v Finanzamt Luckenwalde (Case C–453/05) [2008] STC 1640.
50. In CSC the Court of Justice held (at [39]) that in the context of article 13B(d)(5) (which referred to securities rather than currency or payments or transfers, but that does not affect its relevance to the present issue):
“[‘negotiation’] refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product, and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts.  Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation.  It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side.  The purpose of negotiation is therefore to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of the contract.”
51. In Ludwig, a self-employed financial adviser acted as sub-agent of a company (DVAG) in making available to private persons a range of financial products. Mr. Ludwig both advised potential clients and proposed to them the financial products appropriate to their needs.  The Court of Justice held (at [20]) that the fact that a taxable person analyses the financial situation of clients canvassed by him with a view to obtaining credit for them does not preclude recognition of the service supplied as being a negotiation of credit which is exempt under article 13B(d)(1) of the Sixth Directive. 
52. Mr. Sinfield argues that in this case it is the currency exchange rather than any advice given (he says no advice is in fact given to clients) or expertise applied by the Appellant that is the principal service supplied to clients.
53. Ms. Markham, on the other hand submits that contrary to the facts in Ludwig, the role played by the Appellant in initiating or co-ordinating a currency switch is ancillary to its management role, which (though not involving explicit advice to the client in advance of any decision to give instruction for a currency switch) is centred upon its having expertise in, and performing expert analysis of, the currency markets in order to obtain financial advantage for its clients.  She contends that the client pays the Appellant for bringing to bear its expertise in managing mortgage debt.  She reiterates that performance fees are based upon the success of that management, and are not based upon either the number or the value of currency switches which may have taken place.
Discussion and Decision
54. The parties agree that the Appellant makes single, and not mixed, supplies and it is (as Ms. Markham submitted) for the Tribunal to decide what is the objective character of the supplies, having regard to their essential aim or essential features.  Although, as noted above, the Appellant describes its services to clients and potential clients as a ‘multi-currency debt management programme’, we must consider what services the Appellant actually supplies, in pursuance of its “Private Client Agreement for Discretionary Multi-Currency Debt Management Services”, for the consideration it receives.  It is certainly relevant that the Appellant has described its services in the way it has, but we are not constrained by that description in determining the objective character of the supplies it makes.  In adopting this approach we are following the guidance of the Court of Session in HBOS plc (see: ibid. at [45] and [46]).

55. HMRC contend that the Appellant’s services should be characterised as a debt management service.  It is pertinent to note that by the Private Client Agreement (clause 2.2) the Appellant is appointed by the client to manage not the Loan, but the foreign currency exposure of the Loan.  The purpose of this appointment is made clear by clause 2.3 (Client Objectives) which states that the client “is seeking over the projected term of the Loan to reduce the capital value of the Loan, as a result of beneficial foreign exchange rate movements and/or varying interest rates”.

56. Ms. Markham contended that the Appellant’s services were ‘centred upon having its expertise in, and performing expert analysis of, currency markets in order to obtain financial advantage for its client’.  Although we accept that the Appellant’s expertise and analysis equip it to offer its services, we regard the analysis and exercise of expertise as preparatory to the functions which a client pays the Appellant to carry out.  Ms. Markham submitted that ‘the client pays [the Appellant] for bringing to bear its expertise in managing mortgage debt’. We disagree.  In context Ms. Markham was suggesting that the client pays the Appellant to bring its expertise to bear as opposed to procuring by means of foreign exchange transactions a reduction in the capital value of a Loan. 

57. We conclude that the essential aim and essential features of the services supplied by the Appellant are the use of its best endeavours in the procurement for the client by means of foreign exchange transactions of the reduction in the capital value of a Loan.  The Appellant does not, of course, guarantee that its services will indeed procure a reduction in the capital value of the Loan.  The Private Client Agreement makes this clear at clause 2.13 (Limitation of Liability).  The result of the provision of the Appellant’s services in any case is not indicative of their essential aim or essential features.  The purpose of its appointment to carry out its services is however indicative of their essential aim and essential features.

58. For this reason we consider that the exchange of one currency for another is of the essence of the services provided by the Appellant even though it does not actually make any such exchanges.  The essence of its services informs their essential aims and features and, thus, the objective character of the supplies made by the Appellant.

59. Following SDC, as applied in the cases following it, we consider whether the services provided by the Appellant “form a distinct whole” which fulfils “the specific, essential functions” of - adopting the article 135(1)(d) and (e) formulations - “transactions concerning currency” and/or “transactions concerning payments, transfers” and/or negotiations concerning currency, payments or transfers”.

60. In the minority of cases where trading is conducted by a Lender’s treasury team, the Appellant’s role is to instruct the Lender’s treasury team to trade the relevant currencies.  We were told that this instruction is made by telephone and confirmed by fax. Ms. Markham submitted that the issuing of such an instruction is not doing everything necessary to ensure that the transaction takes place. She argued that the instruction needed to be acted upon by the person instructed, i.e. the Lender. The giving of an instruction, which is all that the Appellant does, does not, in Ms. Markham’s submission, bring about a relevant change in the legal and financial situation of any party (cf. SDC at [53]).

61. We respectfully adopt Henderson J’s analysis of the SDC test in Axa  at [72].  Whether a service provided has the effect of transferring funds and bringing about changes in the legal and financial situation depends on whether it has ‘truly effected, in the sense of brought about, a transfer’.  Even applying the correct strict interpretation to exemption provisions, it is right to recognise that ‘transactions concerning’ currency, transfers or payments is a wider concept than transactions which themselves constitute currency transactions, transfers or payments.  

62. In the legal and factual context in which the Appellant’s services are provided, we are satisfied that the only realistic answer to the question posed by that test is that they do indeed bring about currency transactions and, more generally, payments or transfers.

63. We conclude, therefore, that the Appellant’s services, when trading is conducted by a Lender’s treasury team, form a distinct whole which fulfils the specific essential functions of transactions concerning currency and/or payments or transfers.

64. We reach the same conclusion for the same reasons in regard to the Appellant’s services when a Prime Broker is used to conduct foreign exchange trading.

65. It follows that we hold that the Appellant’s services fall within both article 135(1) (d) and (e) of the VAT Directive and item 1 of Group 5 of Schedule 9 VATA as it falls to be interpreted in conformity with article 135(1) of the VAT Directive.

66. So far as the Appellant’s case concerning negotiation is concerned, we reject HMRC’s contention that article 135(1) and item 5, Group 5, Schedule 9 VATA cannot be in point because the Loan by the Lender to a client is already in place when the Appellant agrees to supply its services to the client.  The financial transactions relative to which negotiations are or may be relevant are the foreign exchange transactions which, we have held, are of the essence of the services supplied by the Appellant.

67. In the minority of cases where trading is conducted by a Lender’s treasury team, and the Appellant’s role is to instruct the Lender’s treasury team to trade the relevant currencies, we do not identify any service of negotiation being provided.  The Appellant is not involved in bringing together the parties involved in the foreign exchange transaction.

68. However, where the Prime Broker’s services are used, the situation is different.  There the Appellant does bring together the Prime Broker and the relevant execution banks and the Prime Broker and the various Lenders involved.

69. We therefore conclude that the Appellant’s services to a client where the relevant foreign exchange trading is conducted by a Lender’s treasury team do not fall within the specific exemption in item 5, Group 5, Schedule 9 VATA for the provision of intermediary services, but that they do where the Prime Broker’s services are used.

70. In the result, we allow the appeal, on the basis that the Appellant’s services are exempt for one or more of the reasons given in this Decision.

Costs
71. The parties were in agreement that it was appropriate to direct that the old provisions relative to costs in the VAT Tribunals Rules 1986 should apply to this appeal and we do so direct.  In consequence we direct the Respondents to pay the Appellant’s costs to be assessed (if not agreed) pursuant to rule 29(1)(b) of the VAT Tribunals Rules 1986.

Right to apply for permission to appeal
72.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN WALTERS QC

TRIBUNAL JUDGE
RELEASE DATE: 1 July 2010