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HMRC internal manual

VAT Finance Manual

HM Revenue & Customs
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Credit, debts and related services: debts and related services: securitisation

Description of service

Securitisation is a capital-raising process whereby the credit risk of an asset or pool of assets is transferred to an external undertaking (the securitisation Special Purpose Vehicle - SPV”). 

There are a number of varieties of securitisation and a number of different structures. However, there is a common theme to all of these transactions. A very simple structure is described below.

  • Company A (sometimes known as the ‘Originator’) has a large number of assets (for example, debts consisting of mortgages, loans or credit card debts) that it funds on its balance sheet.
  • Company A gathers these assets together into a portfolio and assigns the right to receive future money (“the receivables”) from the portfolio to a third party (a Special Purpose Vehicle (SPV’, which has been formed specifically for this purpose. The SPV is sometimes owned by a trust, or even, on occasions, by the Originator.)
  • Company A agrees to service the receivables on behalf of the SPV. In order to fund the purchase of the asset portfolio the SPV issues tradable securities. The performance of these securities is directly linked to the performance of the assets - and there is no recourse (other than in the event of breach of contract) back to Company A.
  • Investors purchase the securities and the amount raised by the SPV is used to pay Company A for the receivables.
  • The SPV agrees to pay any surpluses that arise during its funding of the receivables back to Company A. Company A retains its existing relationships with its customers.
  • As cash flows arise on the assets, these are passed from the originator to the SPV and used by the SPV to repay funds to the investors in the securities.

As stated above, this is a very simple description of securitisation. More often than not the securities will be issued by another separate company in the chain, rather than the SPV. There may also be other companies involved that will act as trustees to the asset portfolio on behalf of the investors. The investors in the securities may be either external investors or the institution that originated the underlying assets

Supply and liability

The VAT treatment of securitisations has been the subject of two appeals:

  • *Capital One Bank (Europe) Ltd (COBE) - tribunal decision 19238 *and
  • MBNA Europe Bank Ltd (MBNA) - tribunal decision 19413 and High Court judgment [2006] EWHC 2326 (Ch)

The principles arising from these cases are as follows:

The assignment of the assets by the originator

The assignment of the receivables by the originator to the SPV is not a supply for VAT purposes. It is simply the fulfilment of a pre- condition so that the SPV can provide its ‘securitisation’ service.

The issue of securities to fund the purchase of the assets

The issue of a security for the purposes of raising capital is not a supply for VAT purposes (see VATFIN4250).

The administration of the assets

The servicer is the entity that deals with the receivables on a day to day basis, administering and collecting them and transferring the funds to the SPV, normally whilst maintaining the original contract with the underlying debtors.  The servicer will receive a fee for this service from the SPV which is generally set at a percentage of the aggregate balance of the loans/receivables or the funds collected. The servicer services are supplies to the SPV in the course of an economic activity and the servicer fee is consideration for that supply.

In most typical securitisations, the originator of the loans/receivables undertakes the servicer role. In these situations the liability of the servicer fee will be exempt as management of credit by the person granting the credit (ref item 2A, Group 5, Schedule 9 VAT Act 94).

Alternatively, a third party can be appointed as the servicer. In circumstances where the legal title to the debts has been transferred from the originator to that third party along with the risk/burden of the loans/receivables, e.g. by novation, the liability of the servicer fee will also be exempt as management of credit by the person granting the credit.

The liability of services provided by a third party without legal title to the debts will depend upon whether the loan book is closed or open: 

  • Where the loan portfolio is closed (i.e. where third party’s role is limited to collecting the income stream arising from the credit granted by the originator), the services will be taxable following the ECJ judgment in AXA. 
  • Services provided in relation to the management of an open loan book will be exempt if they meet the conditions set out in VATFIN3135.

Services provided in respect of an underlying income stream that isn’t credit (e.g. operating leases or season ticket sales) will be taxable. 


Partial exemption

HMRC officers involved with reviewing or agreeing a partial exemption special method that involves securitisation should contact a Finance PESO for advice and assistance.