This is a complex case concerning both VAT recovery and the concept of consideration. ING Intermediate Holdings Ltd (ING) incurred significant amounts of UK VAT in setting up its deposit taking business. It advertised the savings accounts as being fee free and customers were not charged for using these savings accounts. It then invested the deposited sums to generate returns. The taxpayer argued there was no supply to the depositors and the look through principle should be applied to the VAT. That would allow the VAT to be deducted to the extent the deposited funds were invested with non EU counterparties (the income from such bond investments being specified supplies). The Upper Tribunal (UT) disagreed, finding all the VAT was irrecoverable because it was used in making exempt supplies, for non-monetary consideration to UK depositors.
Whilst services were being provided to the customers, the key was whether these services were provided free or for non-monetary consideration. The earlier First-tier Tribunal (FTT) decided that the bargain between the parties was that if a deposit was made the depositor would obtain an obligation from ING to provide the facilities and to repay the sums deposited, subject to the terms of the account, would be paid interest, and would receive the banking services. Despite not charging a fee in money, ING would be looking to profit from the deposits (by investing the sums to generate more income than the amounts it paid the depositors). Essentially the earlier FTT agreed with HMRC (in what seems to be a contradiction in terms) that the cash deposits formed non-monetary consideration for banking services and interest. The UT has supported this analysis. It declined to accept the counter argument that all the depositor received was interest. The banking services were not an optional extra. The depositor has to use the phone or the internet service to deposit and withdraw funds and obtain information about the account. Interestingly the customer’s point of view is considered irrelevant here (the customer may well have thought he was not ‘paying’ for any service when he made a deposit).
Unlike the FTT, the UT has not looked at the question of the value of the exempt supplies, saying it did not need to do so, since they were exempt and the mere fact they arose was enough for ING to lose the appeal. The service simply had to be capable of being given a monetary value and the UT agreed with the FTT that this was possible, though not straightforward. The FTT did try to value them but its approach (based on the cost to ING of providing the services) was criticised as ING’s costs would reduce significantly over time while the benefit of the services to the customer would not.
Finally, the UT considered economic activity questions. One of HMRC’s arguments had been that if ING made no supplies to depositors it was not in business as the activity of investing the deposited funds was not an economic activity (see Wellcome Trust). Had the UT not found that supplies were made to the depositors it would have made a reference to the Court of Justice of the European Union (CJEU) on this point. However, as it agreed that supplies were made to depositors, the investments were a direct extension of that economic activity. Therefore, the issue of whether or not they were economic activities in isolation did not arise. To access the decision click here.
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