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HMRC internal manual

VAT Finance Manual

Money (including transfer of money) and related services: interpreting item 1: basic principles

A supply is exempt under Schedule 9 Group 5, item 1 of the VAT Act 1994 when a business:

  • deals in money, ‘securities for money’ (see VATFIN2800) or the note/order for the payment of money as a principal; and
  • receives a consideration for the services provided.

To fully understand what falls within Item 1 you will first need to consider the actual wording of the item itself. VATFIN2200 will assist you in doing this.

Before going on to consider the wording of item 1 it is useful to look at some basic principles set out by the European Court of Justice (‘ECJ’) in the case of Sparekassernes Datacenter (‘SDC’ - Case C-2/95 - [1997] STC 932). The ECJ made the following statements with regard to Article 135.1 (d) and in particular to ‘transactions … concerning … transfers, payments …’ (looked at more fully in VATFIN2260), which have relevance when looking at the UK exemption:

  1. the transactions exempted under Article 135.1 d are defined according to the nature of the services provided and not according to the person supplying or receiving the services
  2. the specific manner in which the service is performed, electronically, automatically or manually, does not affect the application of the exemption. Accordingly, the mere fact that a service is performed entirely by electronic means does not in itself prevent the exemption from applying to that service
  3. in order to be characterised as exempt transactions for the purposes of Article 135.1 d; the services provided must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in the exemptions
  4. if, on the other hand, the service entails only technical and electronic assistance to the person performing the exempt service, it does not fulfil the conditions for exemption and
  5. the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt.

It is important to bear the above in mind as many financial institutions that outsource some of their functions try to gain exemption by stating that because there are payments and/or transfers involved exemption applies. The question of outsourcing is dealt with in see VATFIN2500, whilst payments and transfers are looked at in VATFIN2000.