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HMRC internal manual

VAT Finance Manual

Credit, debts and related services: credit and related services: outsourcing


Only the management of credit by the provider of that credit falls to be exempt (see VATFIN3110). If the person providing the credit outsources the management of that credit, the supply from the outsourced third party will be taxable at the standard rate.

Loan arrangement and execution services

Supplies of loan arrangement and execution services where the payment or transfer of funds is central to the supply are exempt. Although the service would not fall within item 2 or 2A it would fall within item 1, but it is still related to credit. This follows the Court of Appeal’s decision in the case of Electronic Data Services Ltd (‘EDS’ - [2003] STC 688).

EDS provided loan arrangement and execution services to banks in relation to the granting of personal loans. The services included the provision of a staffed call centre, the printing and despatch of loan agreement documentation, the transfer of funds via the BACS system on the release of loans and the administrative work related to handling loan accounts and repayments.

HMRC ruled that the service provided by EDS to banks did not fall within the scope of the VAT finance exemption because the predominant element of the package of services was the taxable supply of clerical and administrative functions. EDS appealed, claiming that it was making exempt supplies either as the grantors or negotiators of credit or alternatively as supplying a service of making payments and transfers. The Court of Appeal agreed with HMRC that the core supply was one of administrative services but found that, as the making of payments and transfers was central to this core supply, the services were exempt.

As a result of the Court of Appeal decision, supplies such as those made by EDS are accepted as payment transfer services and therefore exempt from VAT.

To qualify for exemption, a business making a supply that consists of services to a loan provider prior to and after the granting of a loan must be undertaking all of the following functions as a central part of that supply:

  • the operation of bank accounts on behalf of the credit provider and
  • arranging the transfer of funds to the borrower and
  • the processing of loan repayments (and any additional charges or fees) received by direct debit or cheque.

Following the ECJ judgment in AXA (C-175/09), the outsourcing of the administration and collection of payments due under a closed loan book portfolio will be taxable debt collection services regardless of whether the loan is in default.

Where a complete end-to-end loan operation is outsourced which meets the criteria for exemption outlined above, any payment collection service within that supply will not constitute, of itself, the essential aim of the overall supply and the outsourced service will continue to be exempt under item 1.

You should read VATFIN3255 for further details.