Revenue And Customs v AXA UK Plc

This adjourned appeal is from the order of Henderson J dated 22 May 2008 and it concerns the effect of the “finance exemption” from VAT contained in Group 5, item 1 of schedule 9 to the Value Added Tax Act 1994 (“the VATA”). The provision of the Sixth VAT Directive (Council Directive 77/388/EEC, “the Directive”) from which Group 5, item 1 is derived contains a limitation, or (as counsel have termed it) a “carve out”, from that exemption for “debt collection” but that carve out does not form part of the wording of Group 5, item 1.

This appeal has had a most unusual history. At the first hearing, this court (Rix, Jacobs and Lawrence Collins LJJ) made an order, dated 8 April 2009, referring certain questions for a preliminary ruling to the Court of Justice for the European Communities (“the Court of Justice”). That order sought the answers to certain specific questions about the exemption (other than the carve out) addressing doubts which this Court had as a result of certain jurisprudence of the Court of Justice concerned with the wording of the exemption in relation to the transfer of payments. In its answer, the Court of Justice treated the questions as raising the general issue of the applicability of the exemption and it answered the questions by holding that the exemption did not apply in circumstances in which certain features of the supply of services in this case were present. It is now common ground that it was open to the Court of Justice to reformulate the question, but the result of the ruling was that the respondent (“Axa”), which had won below, was by this ruling cast into the role of an appellant. Axa complains that this was unfair since the carve out was not raised before the Court of Justice by the parties and had not been relied upon by HMRC at any point in the domestic proceedings. The carve out had been raised initially by other governments, which filed submissions on the reference. Axa had had only a limited opportunity, of which it availed itself, to put in oral submissions on the point. Axa does not, however, suggest that it has any remedy in respect of that alleged unfairness in this court. No doubt that is one of the risks which parties face when there is a reference.

However that may be, this court has received the answer to the questions which it referred to the Court of Justice and the points at issue are now different ones. I shall set those out in this judgment and proceed on the basis as if the respondent were the appellant and the appellant (“HMRC”) were the respondent, not least because the parties took on that role-reversal before us at the hearing.

We have not been taken to any part of the judgment of the judge, and accordingly, without intending any disrespect, I shall take the unusual course of not referring to it in any detail. Likewise I shall not be referring to any of the lengthy grounds of appeal originally filed by HMRC.

Under Article 2(1) of the Directive, “the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such” is to be subject to VAT.

The finance exemption is contained in article 13B(d)(3) of the Directive, which provides:

The Directive has been superseded by Council Directive 2006/112/EC (known as the “Principal VAT Directive”), which came into force on 1 January 2007, but the taxable events in issue on this appeal precede that date. The Principal VAT Directive largely restates the provisions of the Directive. Article 135 (1)(d) contains the finance exemption. This is in the same terms save that in the English version the words "and factoring” are omitted. In Case C-305/01 Finanzamt Groß-
Gerau v MKG-Kraftfahzeuge-Factoringthe Court of Justice held that this omission was not material and that factoring was within the expression "debt collection".

The exemption provided for in Article 13B(d)(3) of the Directive was implemented in the United Kingdom in the form of Group 5, item 1 in schedule 9 to the VATA. This does not simply copy out the finance exemption but transposes it in the following terms:

“The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.”

As I have already indicated, nothing is stated in Group 5, item 1 about either debt collection or factoring.

Axa is the representative member of a VAT group of which Denplan Ltd ("Denplan") is a member. The dispute arises from HMRC’s refusal of a claim for overpaid VAT for the periods of March 2002 to December 2004, and assessments raised by HMRC in respect of the periods from March 2005 to March 2006.

It is sufficient for the purposes of this judgment to take the outline of facts contained in Axa's skeleton argument.

“10.

Denplan’s services fall into four categories. First, Denplan operates a membership scheme (“Membership”) under which dentists pay a one off membership fee (taxable at the standard rate) in order to become entitled to a number of benefits (and also subject to certain obligations) (Tribunal Decision, paragraph 3 (3)).

11.

Second, Denplan provides a registration service (“Registration”) under which dentists pay a one-off fee (Taxable at standard rate) to Denplan for setting up and administering a register of patients on behalf of the dentist (Tribunal Decision, paragraph 3 (4)). Under the Registration scheme, Denplan maintains a comprehensive database of all dentists’ patients and provides information from the list as and when requested by the dentists. Denplan also assists in recording the patient’s name, address, dental records and other necessary details in a database and keeping these up-to-date with amendments as and when they arise.

12.

Third, Denplan provides payment handling services (“Payment Handling”) in respect of payment plans. Under these plans a patient will agree with his or her dentist to pay particular monthly amounts in return for a certain level of dental care each year. Denplan agrees with the dentist to collect the payment from the patient and transfer the payment to the dentist. Denplan charges the dentist a fee (on average 71p per monthly payment) for collecting and paying over such sums (Tribunal Decision, paragraph 3(5), (6)): this is the fee in dispute for VAT purposes.

13.

In return for this fee, paid by the dentist, it is now common ground that Denplan: (1) obtains and retains the authorisation to take money from the patient’s account via the direct debit authorisation forms; (2) validates the patient’s bank account data via its internal systems; (3) instructs the patients’ banks, via BACS, to pay monthly charges directly to Denplan on behalf of the dentists: (4) verifies and reconciles the records of each BACS transfer: (5) allocates the payments to the relevant dentist and produces monthly reports and statements of accounts for the dentist to ensure he/she is aware of their financial position: (6) instructs its own bank, via BACS, to make payment from Denplan to each of the dentists; and (7) informs patients and dentists of failed or unpaid fees (Tribunal Decision, paragraph 3 (5), (8)).

14.

Fourth, Denplan provides other, primarily advisory, services to dentists in return for specific fees, again taxable at the standard rate.”

Denplan contends that the provision of the Payment Handling service (see paragraph 12 set out in paragraph 9 above) to dentists in return for a separate fee of, on average, 71p per transaction falls under the finance exemption.

HMRC contend that this is not so on the basis that the Payment Handling service is not exempt.

By its decision dated 12 September 2007 the Tribunal (Dr John F Avery Jones CDE and Ruth Watts Davies MHCIMA FCIPD) decided that, at least in large part (subsequently agreed to be 90.18%), the fee charged by Denplan was exempt from VAT. Henderson J endorsed the conclusion of the Tribunal and, subject to minor qualifications not now material, also the reasoning of the Tribunal. HMRC appealed from his decision to this court.

As already explained, at the original hearing of this appeal this court made an order dated 8 April 2009 for a reference for a preliminary ruling to the Court of Justice. There was an oral hearing before the Court of Justice on 3 June 2010 and the Court of Justice gave judgment of 28 October 2010 (judgment in Case C-175/09).

The Court of Justice held that the various questions referred by this court sought in essence a ruling as to whether Article 13B(d)(3) had to be interpreted as meaning that the supply of a service such as that in question in this case was or was not exempt from VAT.

Like the Tribunal, the Court of Justice held that there was a single supply of the services in this case (paragraph 23).

The Court of Justice held that the expressions used in the exemption constituted independent concepts of European Union law (see paragraph 24). The exemption had to be strictly construed, but not so as to deprive the exemption of its intended effect (see paragraph 25). Furthermore, the exemption was expressed in terms of the nature of the services, not in terms of the function of the person carrying out services (see paragraph 26). In order to fall within the exemption, the service in question had, “viewed broadly, to form a distinct whole, fulfilling the specific, essential functions of the service described in that provision” (see paragraph 27).

The Court of Justice then turned to the nature of the services provided by Denplan and held as follows:

“28      As regards the service in question in the main proceedings, it is appropriate to point out that its purpose is to benefit Denplan’s clients, namely dentists, by the payment of the sums of money due to them from their patients. Denplan is, in return for remuneration, responsible for the recovery of those debts and provides a service of managing those debts for the account of those entitled to them. Therefore, as a matter of principle, that service constitutes a transaction concerning payments which is exempt under Article 13B(d)(3) of the Sixth Directive, unless it is ‘debt collection or factoring’, a service which that provision, by its final words, expressly excludes from the list of exemptions.

29      In the absence of a definition of the term ‘debt collection and factoring’ in the Sixth Directive, it is necessary to view the final words of Article 13B(d)(3) of the Sixth Directive in their context and to interpret them in the light of the spirit of the provision in question and, more generally, of the scheme of that directive (MKG-Kraftfahrzeuge-Factoring, paragraph 70; see to that effect, also, Case 173/88 Henriksen [1989] ECR 2763, paragraph 11; and Case C-16/93 Tolsma [2004] ECR I-743, paragraph 10).

30      Although, as observed in paragraph 25 of the present judgment, the exemptions under Article 13 of the Sixth Directive, as derogations from the general application of VAT, are to be interpreted strictly, the term ‘debt collection and factoring’ is to be interpreted broadly as it is an exception to such derogation, with the result that the transactions which it covers are subject to tax in accordance with the fundamental rule forming the basis of the Sixth Directive (see MKG-Kraftfahrzeuge-Factoring, paragraphs 72, 73 and 75, and, by analogy, Case C-171/00 P Libéros v Commission [2002] ECR I-451, paragraph 27).

31      According to the Court’s case-law, the term ‘debt collection and factoring’ in Article 13B(d)(3) of the Sixth Directive refers to financial transactions designed to obtain payment of a pecuniary debt (see MKG-Kraftfahrzeuge-Factoring, paragraph 78).

32      It follows from that case-law that the service in question in the main proceedings supplied by Denplan to dentists is covered by the term ‘debt collection and factoring’ in Article 13B(d)(3) of the Sixth Directive.

33      In fact, the object of that service is to benefit Denplan’s clients, namely dentists, by payment of the sums of money due to them from their patients. That service is therefore intended to obtain the payment of debts. By undertaking the recovery of debts for the account of those entitled to them, Denplan frees its clients of tasks which, without its intervention, those clients, as creditors, would have to perform themselves, tasks consisting in requesting the transfer of the sums due to them, via the direct debit system.

34      Contrary to the Commission’s submission, it is irrelevant that such service is supplied at the time when the debts concerned become due. The final words of Article 13B(d)(3) of the Sixth Directive cover the collection of debts of any nature, without limiting their application to debts which were not paid on their due date. Moreover, factoring, all forms of which are included in the terms ‘debt collection and factoring’ (see MKG-Kraftfahrzeuge-Factoring, paragraph 77), is not limited to debts in respect of which the debtor has already defaulted. It can also have as its object debts which have not yet become due and which will be paid on the due date.

35

In addition, in view of the interpretation of the exception to the derogation from the application of VAT given by the case-law cited in paragraphs 30 and 31 of the present judgment, it is also irrelevant to the treatment of the service in question in the main proceedings as ‘debt collection and factoring’ that it does not provide for coercive measures for the effective payment of the debts concerned.

36

Having regard to the foregoing considerations, the reply to the questions referred is that Article 13B(d)(3) of the Sixth Directive is to be interpreted as meaning that the exemption from VAT provided for by that provision does not cover a supply of services which consist, in essence, in requesting a third party’s bank to transfer to the service supplier’s account, via the direct debit system, a sum due from that party to the service supplier’s client, in sending to the client a statement of the sums received, in making contact with the third parties from whom the service supplier has not received payment and, finally, in giving instructions to the service supplier’s bank to transfer the payments received, less the service supplier’s remuneration, to the client’s bank account.”

The points now in issue between the parties are (1) whether Group 5, item 1 in schedule 9 to the VATA, on its true interpretation, provides that “debt collection”, for the purposes of article 13B(d)(3), should be outside the exemption; (2) whether the Court of Justice was entitled to hold that the supply in this case constituted “debt collection”, and (3) whether there should be a further reference to the Court of Justice to clarify its reasons for holding that the supply of services in this case was to be so categorised.

The first submission of Mr Jonathan Peacock QC, for Axa, is that the United Kingdom has not in fact in Group 5, item 1 transposed the carve out to the exemption in Article 13B(d)(3). He submits that the clear effect of paragraph 28 of the judgment of the Court of Justice (paragraph 17 above) is that payments of the kind that took place in this case are within the exemption and also within the carve out. For this purpose, he relies particularly on the last sentence of paragraph 28 of the ruling. He also submits that the expression “debts due” in the second sentence is inaccurate since the patient of the dentist was free to cancel his standing order and not to make a payment of his monthly instalment. Mr Peacock submits that, if the United Kingdom has not transposed a provision of the Directive, no VAT can be levied under that provision.

Mr Peacock submits that Group 5, item 1 represents a transposition only of the exemption and not the carve out. He notes in particular that the word “debt” is not used and that the words “any dealing with money” would be wide enough to include debt collection. Debt collection would, therefore, have to be specifically excluded from Group 5, item 1 in order for the carve out to take effect in English domestic law.

Moreover, submits Mr Peacock, there is no indication that Parliament intended to transpose the carve out as well as the exemption. He observes that in Barclays Bank plc v HMRC [2008] UKVAT V20528, the VAT Tribunal interpreted the finance exemption and the carve out so as to cover different transactions. They accepted that the carve out in Article 13B(d)(3) should not be construed so widely so that there was no scope left for the transactions within the exemption. Mr Peacock submits that this is no longer the correct approach in the light of the judgment of the Court of Justice in this case.

Furthermore, Mr Peacock submits that the United Kingdom has incorrectly implemented the Directive by adopting the ‘transposition approach’ rather than the ‘copyout approach’ in this instance. There was an intention to implement the Directive but this has simply not been achieved.

Mr Peacock accepts that it is well established that the courts have an obligation to interpret domestic legislation implementing European Union legislation, so far as possible, so that it complies with the requirements of European Union law, that is, to adopt what is termed a ‘conforming interpretation’. He submits that those principles are comprehensively set out in paragraphs 37 and 38 of the decision of this court in VodafoneNo.2 v HMRC [2009] STC 1956:

“37 We were referred in the parties' respective written arguments and orally to a number of reported cases on the principles to be observed in looking for a conforming interpretation in either the European Community or Human Rights contexts. In chronological order they are Pickstonev Freemans plc [1989] AC 66; Marleasing SA v La Comercial Internacional de Alimentación SA [1990] ECR I-4135; Litster v Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546; Imperial Chemical Industries plc v Colmer (No 2) [1999] 1 WLR 2035; Ghaidan v Godin-Mendoza [2004] 2 AC 557; R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs [2006] STC 1252; Revenue and Customs Comrs v EB Central Services Ltd [2008] STC 2209 and the Fleming/Condé Nast cases [2008] 1 WLR 195. The principles which those cases established or illustrated were helpfully summarised by counsel for HMRC in terms from which counsel for V2 did not dissent. Such principles are that:

In summary, the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular: (a) it is not constrained by conventional rules of construction (per Lord Oliver of Aylmerton in the Pickstone case, at p 126b); (b) it does not require ambiguity in the legislative language (per Lord Oliver in the Pickstone case, at p 126b and per Lord Nicholls of Birkenhead in Ghaidan's case, at para 32); (c) it is not an exercise in semantics or linguistics (per Lord Nicholls in Ghaidan's case, at paras 31 and 35; per Lord Steyn, at paras 48-49; per Lord Rodger of Earlsferry, at paras 110-115); (d) it permits departure from the strict and literal application of the words which the legislature has elected to use (per Lord Oliver in the Litster case, at p 577a; per Lord Nicholls in Ghaidan's case, at para 31); (e) it permits the implication of words necessary to comply with Community law obligations (per Lord Templeman in the Pickstone case, at pp 120h-121a; per Lord Oliver in the Litster case, at p 577a); and (f) the precise form of the words to be implied does not matter (per Lord Keith of Kinkel in the Pickstone case, at p 112d; per Lord Rodger in Ghaidan's case, at para 122; per Arden LJ in the IDTCard Services case, at para 114).

38 Counsel for HMRC went on to point out, again without dissent from counsel for V2, that:

The only constraints on the broad and far-reaching nature of the interpretative obligation are that: (a) the meaning should 'go with the grain of the legislation' and be 'compatible with the underlying thrust of the legislation being construed': see per Lord Nicholls in Ghaidan v Godin-Mendoza [2004] 2 AC 557, para 33; Dyson LJ in Revenue and Customs Comrs v EB Central Services Ltd [2008] STC 2209, para 81. An interpretation should not be adopted which is inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment (see per Lord Nicholls, at para 33, Lord Rodger, at paras 110-113 in Ghaidan's case; per Arden LJ in R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs [2006] STC 1252, paras 82 and 113); and (b) the exercise of the interpretative obligation cannot require the courts to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate: see the Ghaidan case, per Lord Nicholls, at para 33; per Lord Rodger, at para 115; per Arden LJ in the IDT Card Services case, at para 113."

Mr Peacock submits that it is apparent from paragraph 38 of the Chancellor’s judgment in Vodafone 2 that there are limits on the extent to which the courts can adopt a conforming interpretation. More significantly, the need to adopt a conforming interpretation does not require the court to make policy judgments so as to extend the area of taxable transactions. That, he submits, is a matter for Parliament since the courts are ill-equipped to make such a decision. So, in this case, not only has the court no clear indication that Parliament intended to implement the carve out but also it has no yardstick by which to define the transactions which ought to be brought within the carve out. In this particular case, the definition of those transactions involves questions of policy. Mr Peacock submits that there are a vast number of transactions involving payments which could fall within the carve out. There is no clear divide, and in those circumstances there is a major policy decision which it is appropriate for Parliament to reflect on and not a matter for the court to read into Group 5, item 1.

These policy considerations are important and finely balanced. Mr Peacock makes the point that, applying the judgment of the Court of Justice in this case, it is apparent that no VAT may be exigible when a person pays a bill direct to a utility company for consumption of a supply whereas if he pays the same bill in his newsagents there may be VAT to be paid on the fee charged by the newsagent to the utility company.

Mr Peacock relies on the description of the carve out given by the Court of Justice in MKG. The Court of Justice held:

“78.

Moreover, the term “debt collection” refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemption set out in the first part of Article 13B(d)(3) of the Sixth Directive.”

Mr Peacock criticises the Court of Justice for setting out only a part of this paragraph in paragraph 31 of its judgment in this case (paragraph 17 above). But his principal point here is that the “clearly circumscribed financial transactions” are completely undefined. In Paymex Ltd v Revenue and Customs Commissioners [2011]UKFTT 350, the VAT Tribunal, distinguishing the judgment of the Court of Justice in this case, concluded that a service of collecting debts had to be provided for the creditor. The supply in question was of the services of an insolvency practitioner acting under a creditor’s voluntary arrangement. He had authority on behalf of the insolvent to negotiate with creditors of the insolvent. It was held that this could not be debt collection in any event. Debt collection by its nature could only be performed by or on behalf of the creditor. Mr Peacock submits that this decision is correct. He cites this as an example of the lack of clarity in the exemption. He submits that it is difficult to see why the service provided by Denplan in this case was within the carve out. It is difficult to see what transactions fall within the exemption and what transactions fall within the carve out.

Mr Raymond Hill, for HMRC, submits that this court has to interpret Group 5, item 1 so as to implement the whole of Article 13B(d)(3). He submits that this court decided in IRC v IDT Card Services Ireland Limited [2006] STC 1252 that in a case such as this there are two different levels of interpretation. The first level is that of the underlying European Union legislation, i.e. what does the European legislation mean. The second level is that of the national implementing legislation, which, so far as national law allows, must be interpreted in conformity with the European Union legislation (see paragraphs 68 to 82 of my judgment in IDT). Furthermore, this court also held in IDT that it was not a precondition of the court’s obligation to apply a conforming interpretation that Parliament should have given some specific indication in the statute in question that it intended to implement European Union law. In this regard he relies particularly on the concluding sentence of paragraph 90 of my judgment (with which Pill and Latham LJJ agreed) which states:

“[90] Lord Nicholls also makes it clear that there is no need to find that the statutory language should be ambiguous before interpreting the legislation so as to be compatible with Convention rights. He does not deal expressly with the possibility of Parliament making express provision in contravention of Convention rights. Mr Lasok refers to such a possibility in the context of legislation designed to implement Community legislation in his argument before us (para 60, above). So he submits that Parliament might use language which made it clear that it did not intend VAT to be imposed in a situation in which it was chargeable under the Sixth Directive. The situation which he postulates is not one in which Parliament has specifically stated that it is legislating in a manner which departs from the Sixth Directive. In the situation postulated, as it seems to me, the court's interpretative duty, whether arising under Community law or arising under s 3, is not excluded. In determining whether the solution is one of interpretation or impermissible law-making, the relevant test remains whether the interpretation that would be required to make the statute in question Convention-compliant or in this case, EU law-compliant, would involve a departure from a fundamental feature of the legislation.

As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity.”

Mr Hill submits that, applying a conforming interpretation, it is clear that Group 5, item 1 has to be construed as reflecting the whole of Article 13B(d)(3). The United Kingdom has not given a wider scope to the exemption simply because it has not expressly implemented the carve out. The effect of the words which the United Kingdom has used is that it has exempted simply those transactions that fall within the exemption and are not excluded by the carve out. Accordingly, debt collection is not within Group 5, item 1. Item 1 does not, either expressly or by implication, exempt transactions concerning debts.

Mr Hill submits that the court has extensive tools with which to apply a conforming interpretation and relies particularly on paragraphs 90, 92 and 113 of my judgment in IDT. Mr Hill points out that at paragraph 143 Pill LJ expressly agreed with my description in paragraph 92 of the interpretative technique as “robust”. Indeed Mr Hill submits that the result in that case required a much more robust interpretation than was sought in the present case. As to the argument that the courts would have to define the yardstick for the transactions falling within the carve out, Mr Hill submits that all that has to be established is that Parliament was intending to implement the carve out required by European Union law, which Mr Peacock has accepted was Parliament’s intention.

Mr Peacock then moved to his alternative submission. He submits that, if he was wrong in saying that there was no “dislocation” between Article 13B(d)(3) and Group 5, item 1, the court cannot simply conclude that the Payment Handling by Denplan was subject to VAT because of the ruling of the Court of Justice. He points out that the Court of Justice has provided an interpretation of the carve out in answer to rather different questions. However, he does not submit that that was not a possible course that the Court of Justice could take. However, he stresses that the application of an interpretation is a matter for the domestic court. He cites in this regard Case 6/64 Costa v ENEL [1964] ECR 585, Case C-162/06, International Mail Spain, SL v Administración del Estado and Correos [2007] 1 ECR 1-9911and Arsenal FC v Reed [2003] EWCA Civ 696, [2003] 2 CMLR 25 at paragraphs 25-26 and 31.

Mr Peacock submits that it is for this court, and not for the Court of Justice, to determine the real nature of the supply made by Denplan in this case. This depends on the precise facts and on the true interpretation of the exemption. He cites HBOS v IRC [2009] STC 486. This is a decision of an Extra Division of the Inner House of the Court of Session. The Inner House had to consider whether, where the taxable supply was essentially the supply of a service of debt collection, it was taken outside the carve out by the fact that it was also given power to negotiate with debtors. The Inner House rejected that argument. It added at paragraph 47 of its judgment:

“what the agent is doing is recovering some at least of the debt; and any negotiation concerning “the debt” is no more than incidental to its recovery.”

Accordingly, on Mr Peacock’s submission, the question to be determined in this case is: what is the essence of the supplies made by Denplan? The Tribunal found that its activity was that of Payment Handling, that is, of arranging for the payment by patients of the monthly amounts referable to contracts with their dentists that were to be paid to Denplan, which in turn accounted for those sums to the dentist entitled to them. The essence is to effect a payment from patient to dentist, and not to recover or to manage a debt. The patient agrees a monthly amount with the dentist but the patient can cancel his contract at any time. The patient might agree a plan for a year and have a large amount of treatment in, say, month six but then nonetheless proceed to cancel in month seven. Therefore, submits Mr Peacock, the service in question is not about debts at all. It is not about amounts due or a debt payment obligation or the collection of debts. What happened in the ruling of the Court of Justice was that there was a shift of language from payments and payment handling to the collection of debts. In this regard, Mr Peacock relies particularly on paragraph 32 of the ruling, which I have set out in paragraph 17 above.

Mr Peacock submits that payment through the operation of the banking system is not debt collection. The fact finder has to stand back and find the essence of the supply. Here the Tribunal said that it was Payment Handling, and the HMRC have not appealed that finding. Denplan are acting for the dentists, who are the creditors. The carve out can only apply where the taxable person is acting for the creditor: see Paymex Ltd v Revenue and Customs Commissioners, above, paragraph 27.

Mr Peacock submits that it follows from MKG (above, paragraph 26) that taxable transactions are distinct from those which are exempt. In the present case, the true nature of the transaction was that of payment handling not of debt collection, and, therefore, this court should hold that, notwithstanding the ruling of the Court of Justice, it is the exemption, and not the carve out, which applies.

Mr Hill agrees that it is for the national court to ascertain the essential aim of the transaction. He makes six short propositions. First, the terms used in the finance exemption have autonomous meanings under European Union law and are, therefore, not to be interpreted as they would be in an English statute (see Case C-498/03 Kingcrest Associates Ltd v Customs and Excise Commissioners [2006] STC 1547 at [24]). Secondly, in ruling on the independent meaning in the finance exemption in the Directive, the role of the Court of Justice is to give a meaningful answer: see for example International Mail Spain at paragraph 20. Thirdly, this court specifically set out the primary facts in its reference and then asked whether the transactions in question were exempt. In principle, therefore, the reference sought guidance on the whole of Article 13(B)(d)(3). Fourthly, the decision of the Court of Justice that the services fell within the carve out was a function of the wide definition of the words “debt collection”. What the Court of Justice held was that those words excepted transactions of a particular nature from the scope of the exemption, whether they would, as a matter of English law, be termed the collection of debts or the handling of payments. Fifthly, the ruling of the Court of Justice is binding in respect of matters of European Union law. Sixthly, the Court of Justice has only limited power to find facts. In the present case the Court of Justice did not make any finding of primary fact. Nor did it make any inferences from facts. It merely imposed a legal categorisation as a matter of law.

Mr Hill submits that it is an established principle of interpretation of European Union legislation that exemptions have to be kept within their proper scope. Taxing provisions, on the other hand, could be given a larger meaning in order to achieve their purpose. Furthermore, on Mr Hill’s submission, it was a matter for the Court of Justice to say whether it had misunderstood its own decision in MKG. In the present case, the Court of Justice concluded in paragraph 32 that the service in question was covered by the carve out. In doing so, it was applying its holding at paragraphs 70 to 75 of its judgment in MKG:

“70 It is therefore necessary to view the final clause of Article 13B(d)(3) in its context and to interpret it in the light of the spirit of the provision in question and, more generally, of the scheme of the Sixth Directive.

71 As derogations from the general application of VAT, the exemptions envisaged in Article 13B(d)(3) of the Sixth Directive must be interpreted in a manner which limits their scope to what is strictly necessary for safeguarding the interests whose protection those derogations allow (see, to that effect, paragraph 63 of this judgment).

72 By contrast, as already stated in paragraph 58 of this judgment, exceptions to a rule derogating from the general application of VAT must be interpreted broadly.

73 Under all the language versions, debt collection is an exception to the exemptions listed in Article 13B(d)(3) of the Sixth Directive.

74 The English and Swedish versions of that provision also refer in this respect, on an equal footing with debt collection, to factoring.

75 In view of the requirement to interpret broadly those exceptions to a derogating provision — whose effect is to render the transactions covered by them subject to tax in accordance with the fundamental rule forming the basis of the Sixth Directive — first, factoring as referred to in the final clause of Article 13B(d)(3) in the English and Swedish versions of that directive must be understood as covering both true factoring and quasi-factoring”.

On this basis, helping people to pay amounts to other parties could be within the carve out even if the debt was not due. It was for the Court of Justice to carry out this characterisation. Payment Handling, therefore, is a form of debt collection for the purposes of the Directive, as a matter of European Union law.

Mr Hill accepts that this court held in Arsenal that it was for the national court to find the facts:

“[25] There was no dispute between the parties that on a reference under art 234 EC (formerly art 177 of the EC Treaty), the purpose of the ECJ is 'to decide a question of law and that the ruling is binding on the national court as to the interpretation of the community provisions and acts in question' (see Benedetti v Munari Flli SAS Case 52/76 [1977] ECR 163). Even so, the ECJ has jurisdiction to review the legal characterisation of facts found by the national court (see European Commission v Camar Srl Case C-312/00 (2002) Transcript (judgment), 10 December 2002). Also the ECJ has in the past provided guidance in order to enable the national court to give judgment (see Kutz-Bauer v Freie und Hansestadt Hamburg Case C-187/00 (2003) Transcript (judgment), 20 March 2003). On occasions it has 'steered' the national court for the purpose of unified application of the law. However, as the House of Lords made clear in R v Secretary of State for Transport, ex p Factortame Ltd [1999] 4 All ER 506 at 927, [2000] 1 AC 524 at 550, the English court is not bound by that steer and therefore, with hesitation, could conclude the case in a different way. It is the national court alone that must find the facts.

[26] It follows that the judge was entitled to disregard any conclusion reached, in so far as it was based upon a factual background inconsistent with his judgment. Thus, upon his perception of the ECJ's judgment, he was entitled to disregard the conclusion in the ruling and decide the case upon the legal principles stated in the judgment of the ECJ.”

But this court in Arsenal accepted that the Court of Justice could apply the necessary legal characterisation to the facts:

“[31] Of course the ruling of the ECJ is binding in so far as it is a ruling upon interpretation. However I reject the submission of Mr Thorley that the national court should confine its attention solely to the ruling. Strictly speaking the judgment is the explanation of the ruling, but as Advocate General Warner explained in Robert Bosch GmbH v Hauptzollamt Hildesheim Case 135/77 [1978] ECR 855 at 861: ‘… the operative part of a Judgment of this Court should always be interpreted in the light of the reasoning that precedes it.’ That is particularly apt in the present case as the ruling uses the words ‘in circumstances such as those in the present case’. To ascertain what the ECJ believed the circumstances were, it is necessary to have recourse to the preceding paragraphs of the judgment. I therefore turn to consider the ECJ judgment with the submissions of the parties in mind.”

Mr Hill cites the decision of the Court of Justice in Case C-356/98 Arben Kaba v Secretary of State for the Home Department [2000] ECR 1-2623. There the Court of Justice held that it was for it to determine who the comparator was in a case of discrimination for the purposes of European Union law. Likewise in Case C-41/04 Levob Verzekeringen BV v Staatssecretaris van Financiën [2006], the court characterised the supply in question in that case as a single supply. The Court of Justice was not precluded from doing this by the prior determination of that question by the national court. All that remained for the national court to do was formally to give judgment. There was no other conclusion that it could have reached. Furthermore, in Case C-350/10 NordeaPankki Suomi Oy [2011] STC 1956, this court again set out a broad test as to services within the exemption and then effectively decided whether the SWIFT messaging system fell within the exemption or not.

Mr Peacock’s final submission is on the question of a further reference back to the Court of Justice. He submits that it is both permissible, and not uncommon, for the referring court to refer a question back to the Court of Justice where clarification of its ruling is needed. He submits that such a course may be appropriate where the Court of Justice has misunderstood relevant facts or not provided sufficiently clear guidance to allow the referring court to determine the matter before it. In support of this submission he refers to Case 69/85 Wünsche v Federal Republic of Germany [1986] ECR 947 at [15].

In the present case, submits Mr Peacock, there has been no clear guidance from the Court of Justice. It must have misunderstood the facts. In those circumstances there can be a further reference. This is not a course which Axa particularly wish to pursue, but it is accepted that it is one which is open to the court if it finds that the ruling is simply not clear enough to enable it to decide this case.

As to this submission, Mr Hill submits that there was no misunderstanding by the Court of Justice, the Court of Justice did not fail to answer the questions put to it and there is no other reason to refer back. Although Mr Peacock criticises the use of the word “due” in paragraph 28, he notes that this word was in fact used in the agreed facts put to the Court of Justice in this court’s reference. In any event, there was no finding by the Tribunal to the effect that the patient could decide not to pay the next monthly instalment without cancelling the contract according to the contract terms. Nor was any such fact incorporated into the agreed order for reference. Furthermore, the Court of Justice set out the facts in its judgment in some detail. In particular, the Court of Justice recorded at paragraph 8 of its ruling that it had understood that Denplan would lodge the direct debit mandate with the patient’s bank and that “that mandate will remain in force as a standing instruction to the patient’s bank until the patient notifies the bank that he wishes to cancel the mandate”. Further, the Court of Justice also recorded that “Denplan’s services … consist in seeking payment from patients’ bank accounts via the direct debit system, and accounting to the dentist for them”. It is thus clear from this that the Court of Justice properly understood that Denplan would collect payments from the patients and account for these, until the patient informed his bank that he wished to cancel the direct debit mandate.

In any event, submits Mr Hill, the question whether the debts were “due” was irrelevant since the words “debt collection” had an autonomous meaning in the Directive, which was not necessarily the same as the meaning in the United Kingdom implementing legislation. The Court of Justice stressed that the related activity of factoring was not limited to debts in respect of which the debtor had already defaulted. It could also have as its object debts which have not yet become due and which were not paid on the due date. Therefore, on his submission, the European Union law concept of “debt collection” did not depend on whether the patient was required to pay the schedule payments into the future or could choose to cancel his instruction to his bank.

Furthermore, submits Mr Hill, nothing turned on the fact that the Court of Justice used the term or a cognate of the term “collecting” or “managing” or “recovering” or “obtaining payment of” debts. It was quite clear from the statement of facts in the ruling that the Court of Justice had correctly understood the facts that had been found by the Tribunal. Indeed, the Court of Justice specifically made the point that this was a service provided for the benefit of dentists (see paragraph 33 set out above). The Court of Justice also said that it was unnecessary for the putative debt collector to have power to enforce payment of any amount. In these circumstances there is no good reason to make a further reference.

Mr Peacock submits in reply that in Kaba, the Court of Justice was defining the relevant comparator and this was an analytical tool of European Union law. In Levob it merely said that it agreed with the national court. In Nordea the Court of Justice answered a specific question by reference to the facts of the exemption and by the nature of the services. But in that case, it is apparent that the contractual position was clearly before the court. Thus, the cases cited by Mr Hill are distinguishable because in this case the Court of Justice has answered a question that was not asked of it. In the present case, by implication, the Court of Justice was not asked about debt collection. That is what has led to the present state of affairs. It decided the matter against Axa and this case, therefore, raises a relevant question as to the relationship between the Court of Justice and the United Kingdom.

In my judgment it is clear that Group 5, item 1 implements the whole of article 13(B)(d)(3). This court is obliged to read Group 5, item 1 as correctly transposing the whole of that provision in accordance with the United Kingdom’s Treaty obligation as a member of the European Union. For the reasons given by Mr Hill, the court does not have to find some specific indication that Parliament intended to implement the carve out. That follows from the VATA, read with the European Communities Act 1972. There is no question of the court having to make some policy decision as to the scope of the carve out which ought to be left to Parliament.

It is apparent that the precise scope of the exemption and carve out is unclear, and will require further definition in the future. However, the authoritative determination of what falls within the exemption and the carve out is within the jurisdiction of the Court of Justice. If there is any ambiguity, therefore, it can be cured by a further reference to the Court of Justice in a future case. Therefore, this lack of clarity is not a reason for not giving the finance exemption a conforming interpretation in the present case.

As to the effect of the ruling in the present case, in my judgment, it is clear that the Court of Justice concluded that the words “debt collection” in the carve out have a meaning capable of being applied to "transactions concerning payments" within the exemption in article 13B(d)(3) (judgment, paragraph 28, last sentence). It then has to be decided whether the actual transaction in question falls within the exemption or the carve out, and this will depend on its precise facts. If it falls within the exemption it will fall outside the carve out, and vice-versa (see final sentence of paragraph 28). The Court of Justice does not define the purpose of the exemption. It is unnecessary to decide on this appeal what the full scope of the exemption might be. However, for the purposes of this judgment it may hypothetically be taken to be normal retail banking activities (and indeed that is one way of reading paragraphs 24 to 27 of the judgment of the Court of Justice in Nordea). On that hypothesis, the carve out takes out of the scope of the exemption any separate supply of services which is more properly regarded as a service of debt collection.

In my judgment, it is also evident that the Court of Justice understood that the service in the present case was purely Payment Handling and not debt collection in the usual sense of the word: see for example paragraphs 28 and 33 to 35 of the judgment of the Court of Justice. It concluded that the supply in this case, therefore, fell outside the exemption: see paragraphs 32 and 36. On the conclusions drawn by the Court of Justice as to the true interpretation of the carve out, there was no other conclusion which it, or this court, could draw. All the facts had been found by the Tribunal, and the material facts were summarised both in the agreed reference from this court and in the judgment of the Court of Justice. Accordingly, I do not consider that there is any case here for further adjudication by this court, nor for a further reference to the Court of Justice.

I would, therefore, allow the appeal by HMRC and substitute for the order of the judge an order that no part of the services in question fell within the finance exemption.

In some cases, when the answer of the Court of Justice to a reference is received, it is apparent which way the appeal must be decided and in those cases the parties will generally come to an agreed disposition. In other cases, the issues will be reduced or, as in this case, altered to a greater or lesser extent. In the present case, the parties dealt with the situation by simply agreeing between themselves to have a sequential exchange of skeleton arguments, which were filed for the adjourned hearing of this appeal. In my judgment, it would be desirable in future for this court to be instrumental in deciding how the appeal should proceed after receipt of the response from the Court of Justice, unless it is clear that it is a case which will not need to proceed to a further hearing. The court can then give directions as to a list of issues and have a sequential exchange of skeleton arguments, or give such other directions as seems appropriate to the case. This course is likely to be a sensible course in any case where a ruling has been received from the Court of Justice in response to a reference for preliminary ruling. In the present case, through no one's fault, no list of issues was prepared, even though the grounds of appeal were completely superseded by the ruling of the Court of Justice, and the hearing might have been shorter had there been one.

I have had the advantage of reading Arden LJ’s judgment in draft and gratefully adopt her account of the background to the restoration of this appeal. I respectfully agree with her that the consequence of the decision of the Court of Justice is that HMRC’s appeal should be allowed.

I do, however, reach that conclusion by a route that may in part differ slightly from Arden LJ’s. Whilst I agree that Group 5, item 1 effectively implemented article 13B(d)(3), I regard it as having done so by the technique of simply transposing the exemptions, which was all that it needed to do. Transactions within the ‘carve out’ of article 13B(d)(3) do not enjoy an exemption and so there was no need for Group 5, item 1 to refer to them. The exemptions transposed by Group 5, item 1 must, however, be interpreted in conformity with the exemptions in article 13B(d)(3) and as not, therefore, including transactions in the nature of ‘debt collection and factoring’.

I regard the theory of the operation of article 13B(d)(3) as clear although how it applies to any particular transaction may in practice raise questions of some difficulty. The theory must be that any particular transaction will either be within or outside the exemptions; and that will depend upon its correct characterisation. The sense of the ‘carve out’ cannot be other than that, whatever the width of the exemptions, they do not include transactions in the nature of ‘debt collection and factoring’.

In my view, the substance of what the Court of Justice was saying in the last sentence of paragraph 28 of its judgment was simply that, if the Denplan service was not debt collection or factoring, it would be within the article 13B(d)(3) exemptions. What the court then proceeded to do was to apply its case law to the facts relating to that service as found by the VAT & Duties Tribunal. The outcome was that it held that their correct characterisation was that of ‘debt collection’, a concept that, for the purposes of article 13B(d)(3), is an autonomous one for the purposes of European Union law. The making of that characterisation was properly a matter for the Court of Justice.

I can understand Axa’s dismay about the course of events that unfolded in Luxembourg. The suggestion that Denplan’s service was ‘debt collection’ had not been uttered in the domestic proceedings. Whilst Axa had asserted that Denplan’s service fell within the exemptions and HMRC had argued the contrary, it was no part of HMRC’s case that that was because it was a ‘debt collection’ service. I can, however, see no reason why the Court of Justice was not entitled, as it did, to hold that the true legal nature of Denplan’s service was in fact ‘debt collection’ within the meaning of the carve out.

I too would therefore allow HMRC’s appeal.

I have had the advantage of reading the judgments of Arden LJ and Rimer LJ in draft with which I find myself in complete agreement.  I also respectfully agree that the consequence of the decision of the Court of Justice is that HMRC’s appeal should be allowed.