ING Intermediate Holdings Ltd v HMRC, [2017] EWCA Civ 2111

The relevant companies in the ING group ("IDUK") carried on a retail banking trade which comprised taking cash deposits from private individuals, who were provided with a 24-hour telephone and internet banking service. Expenses IDUK incurred in its deposit-taking activities included significant expenditure on advertising campaigns, construction of a head office and two call centres, IT systems and services and employment of staff, including recruitment costs. The taxpayer wished to recover (via deduction against the outputs of a separate investment business) a proportion of VAT expenses incurred in connection with the deposit-taking business. It contended that this did not involve any VATable supply at all.

Arden LJ stated (at paras 11 and 12):

...BLP Group … held that to take out a loan does not involve a VATable transaction by the borrower at all, even if he pays interest: he is the mere recipient of a service provided by the lender… .

By contrast, banking business is an exempt business. Article 135 PVD provides that member states must exempt … "(b) the granting and the negotiation of credit and the management of credit by the person granting it;" and "(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;…". It follows that inputs are irrecoverable.

Arden LJ further stated (at para 18):

In the FTT, Judge Mosedale made clear findings that IDUK provided banking services. She specifically held that the banking services were not peripheral to its deposit-taking business. …

She concluded (at para 61):

… I would dismiss this appeal. IDUK's deposit-taking business constituted the exempt business of banking services.

Although accepting (per BLP) that a mere borrowing by a company is not a supply by it, Arden LJ confirmed the finding below that the services provided by ING to its on-line depositors (including 24-hour access to their deposits) were more than merely “peripheral” to the borrowing represented by the deposits, so that ING was engaged in an exempt banking business. In finding that ING was also making such supplies for consideration notwithstanding that it advertised itself as providing “no fee” banking, she stated (at para. 46, adopting findings below):

[T]he contract was one of barter. The bank provided the banking facilities and interest payments in exchange for the making of the loan. … The provision by the customer of the loan was the consideration for both the payment of interest and the provision of the banking services.

Although accepting (per BLP) that a mere borrowing by a company is not a supply by it, Arden LJ accepted the finding below that the services provided by ING to its on-line depositors (including 24-hour access to their deposits) were more than merely “peripheral” to the borrowing represented by the deposits, so that ING was engaged in an exempt banking business. After referring (at para. 27) to a submission of taxpayer’s counsel that “the additional service was not one of the economic purposes of the transaction” (para. 27) she stated (at paras 29, 37):

…[O]n Mr Prosser's submission, the Upper Tribunal erred in law in not seeking to determine and apply the economic purpose of the contract of deposit. …

I accept that, when determining the nature of a transaction for VAT purposes, the court must look at the economic purpose of the transaction. However, the starting point is to determine what the parties have agreed. … [T]he court only goes behind the contract if the contract does not reflect the true agreement between the parties.

Although accepting (per BLP) that a mere borrowing by a company is not a supply by it, Arden LJ confirmed the finding below that the services provided by ING to its on-line depositors (including 24-hour access to their deposits) were more than merely “peripheral” to the borrowing represented by the deposits, so that ING was engaged in an exempt banking business.