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HMRC internal manual

VAT Finance Manual

Money (including transfer of money) and related services: interpreting item 1: what is meant by ‘transfer’

The question of ‘transfer’ has been the subject of debate before the Courts. The ECJ judgment in Sparekassernes Datacenter (‘SDC’ - Case C-2/95 - [1997] STC 932) (see VATFIN2210) gives a useful precedent in determining what a transfer is.

The judgment states that a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. It is characterized in particular by the fact that it involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks. Moreover, the transaction which produces this change is solely the transfer of funds between accounts, irrespective of its cause. Thus, a transfer being only a means of transmitting funds, the functional aspects are decisive for the purpose of determining whether a transaction constitutes a transfer for the purposes of the sixth directive.

The judgment goes on to say, For a transaction concerning transfers, the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation. A service exempt under the directive must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank.

Thus we see that the transfer of money is a means of transmitting funds. This activity is not restricted to banks and other financial institutions.

Furthermore, the expression, change in the legal and financial situation is a useful test in determining what actual service or supply effects the transfer of money. A good question to ask is - does the actual service result in a change to the debtor/creditor relationship, or does that occur because of another supplier’s service?


This was tested in the Court of Appeal in the case of FDR Ltd (‘FDR’ - [2000] STC 672).

FDR was a company that supplied credit card services to either ‘issuers’ (banks who issued credit cards to cardholders), ‘acquirers’ (banks who paid merchants, normally retailers, in exchange for vouchers accepted by those merchants in payment for goods or services), or banks who acted in both capacities (see VATFIN3140 for more details on issuers and acquirers).

On being notified that a credit card transaction had occurred, FDR:

  • posted a credit to the merchant account
  • made an entry on a magnetic tape which was supplied on a daily basis to BACS Ltd instructing it to post a credit in the merchant’s own bank account and to create a corresponding debit in the acquirer’s central accounts
  • reconciled the accounts between issuers and acquirers on a daily basis by establishing the net position of each client bank and the net amount that needed to be transferred from or to that bank
  • made a payment out of its own funds to each client bank that was a net claimant and received (later the same day) a payment from each bank that was a net debtor and
  • posted a debit to the cardholder account (to which it also posted credit entries when the cardholder paid his or her monthly bill). If the cardholder had arranged to pay his bill by direct debit, it also provided for BACS to debit the cardholder’s ordinary bank account, and credit the issuer’s account, with the relevant sum.

FDR also calculated at the end of each month the aggregate fee that the merchant owed to the acquirer by way of commission on transactions, and sent a statement of the merchant account to the merchant.

The Court of Appeal found that:

  • the term ‘transfer’ of money, apart from transfers in specie (meaning in the form of coins rather than bank notes or bullion), meant no more nor less than the entry of a credit in the payee’s account and the entry of a corresponding debit in the payer’s account, and that the credit and debit entries constituted the transfer
  • for the same reasons, the netting-off procedure and the operation of the cardholder and merchant accounts also constituted transfers. For a transfer to take place there did not have to be anything over and above a change in the relevant parties’ legal relationship constituted by corresponding credit and debit entries in their respective bank accounts.

Thus a transfer can be as simple as creating a credit and corresponding debit entry, the effect of which is the alteration in the legal and financial situation between the parties.

Remember, the exemption for a transfer can also include the movement of rights to a security for money (by onward sale, for example), but see VATFIN2800, and if in doubt contact the Financial & Commodities VAT UoE.