Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE VICE CHANCELLOR
Between :
Bookit Ltd | Appellant |
- and - | |
Her Majesty's Revenue and Customs | Respondents |
Mr Jonathan Peacock QC (instructed by Deloitte & Touche LLP) for the Appellants
Mr Peter Mantle (instructed by HMRC Solicitor) for the Respondents
Hearing dates: 12th and 13th July 2005
Judgment
The Vice Chancellor:
Odeon Ltd (“Odeon”) is the holding company of a group which owns and operates almost 100 cinemas. It attracts about 673,000 customers a week. In the year 2002 its turnover was £202m. Bookit Ltd (“Bookit”) is another company in the Odeon Group which, since 28th June 2002, has operated a call centre through which an intended cinemagoer (“the Customer”) may book and, by the use of a debit or credit card, pay for a seat for a given future performance at a specified cinema in the chain. For the service it provides to the Customer Bookit charges a handling charge of 50p per ticket with a maximum of £2.
By a decision dated 18th September 2002 the Commissioners of Customs and Excise (“C/E”) held that the supply of services by Bookit to the Customer was liable to VAT at the standard rate and required Bookit to account to them for VAT on the handling charges it received. Bookit disagreed and appealed to the VAT and Duties Tribunal (Mr Theodore Wallace and Mrs Lynneth Salisbury JP)(“the Tribunal”). It contended that the supply by Bookit to the Customer was exempt pursuant to the provisions of Item 5, Group 5 of Schedule 9 to the VAT Act 1994.
This claim to exemption was rejected by the Tribunal in its decision dated 28th May 2004 (“the First Decision”). In paragraph 94 the Tribunal noted that one aspect of the matter had not been clearly explained in the evidence and gave liberty to either party to apply for permission to adduce more evidence. Bookit took the opportunity to do so and there was a further hearing before the Tribunal. On 7th December 2004 the Tribunal handed down a second decision (“the Second Decision”) in which it found certain additional facts and modified some of the conclusions in the First Decision but did not alter its determination that the supplies by Bookit to the Customer were not exempt under item 5 of Group 5 of Schedule 9 to the VAT Act 1994.
This is the appeal of Bookit from the decision of the Tribunal. It lies pursuant to s.11 Tribunals and Inquiries Act 1992 to the High Court on a point of law only. Bookit contends that the Tribunal was wrong in law to conclude that the supplies made by Bookit to the Customers in return for the 50p per ticket card handling charge are not exempt supplies of financial services within Group 5 Schedule 9 to the VAT Act 1994 when interpreted in accordance with Article 13(B)(d) Sixth EC VAT Directive. It relies:
(1) in relation to Group 5 of Schedule 9 to the VAT Act 1994 on:
(a) item 1 “dealing with money”;
(b) item 5 “intermediary services” in relation to item 1 ;
(c) item 5 “intermediary services” in relation to item 2 “making of an advance or the granting of credit”; and
(2) in relation to Article 13(B)(d) Sixth Directive EC VAT Directive on:
(a) 1 “the negotiation of credit”;
(b) 3 “transactions concerning...payments, transfers...”;
(c) 3 “negotiation concerning....payments, transfers...”.
The Facts
The Tribunal set out the facts in some detail in paragraphs 1-44 of the First Decision and paragraphs 1-9 of the Second Decision. I can take the matter more shortly. There are four parties to the relevant series of events, namely (1) the Customer, (2) Girobank plc, (3) Bookit and (4) Odeon. In a typical transaction there are the following steps:
1. The Customer contacts Bookit by, say, telephone to ask if there are any seats available for a particular film in a particular cinema at a particular time on a particular day.
2. Bookit checks such availability with Odeon.
3. Odeon confirms to Bookit the availability of the required seats.
4. Bookit informs the Customer of such availability, the cost of the tickets and that it will make an additional charge for handling payment by debit or credit card.
5. Bookit takes the Customer’s card details (“payment information”) and verifies its right to use the card (“security information”).
6. Bookit transmits the payment information and security information to Girobank.
7. Girobank processes the payment for the seats by means of the Customer’s debit or credit card and credits Bookit with the aggregate of the price for the seats and the card handling charge.
8. Bookit confirms the purchase of the tickets to Odeon.
9. Bookit confirms the booking and payment to the Customer and informs him that the tickets may be collected from the relevant cinema.
10. The Customer collects the tickets.
11. Odeon admits the Customer to the relevant showing.
12. Bookit accounts to Odeon for the sums received for the tickets but retains the card handling charge.
13. Bookit pays Girobank for the services it provides out of the card handling charges it has retained.
As between Bookit, Girobank and Odeon the procedure is regulated, with effect from 1st February 2002, by a Merchant Services Agreement (“the MSA”) dated 15th August 2002 and made between Girobank plc (1), Odeon (2) and Bookit (3). MSA recites that
“A. Girobank is a member of the MasterCard, Visa and Switch card schemes and is authorised under the regulations governing membership of these schemes to acquire data in respect of all MasterCard, Visa and Switch transactions from merchants who have signed a Girobank Merchant Agreement.
B. This Agreement sets out the terms on which Odeon Ltd will accept agreed financial plastic cards as a means of payment for cinema tickets, and on which card transactions will be authorised by and presented by Odeon to Bookit, and by Bookit to Girobank.”
Clause 1 contains a number of definitions. I should refer to the following:
““Advanced Card Transaction” means any advance payment made by telephone, internet or other such media by the Cardholder for debit to the Cardholders account in respect of the card in question including, for the avoidance of doubt, both sums payable to Odeon for Supplies and any Handling Fee payable by the Cardholder to Bookit.
“Card Transaction” means any payment (other than an Advanced Card Transaction) made by the Cardholder for debit to the Cardholder’s account in respect of the Card in question including sums payable to Odeon for Supplies.
“Card Transaction data” means details of a Card Transaction or Advanced Card Transaction in a form approved by Girobank.
“Floor Limit” means the total value of the sales (as notified to Odeon or varied from time to time by Girobank), including any Bookit Handling Fees, that Odeon may make to a Cardholder on any one occasion without the authorisation of Girobank.
“Merchant” means Odeon and Bookit together jointly and severally.
“Supplies” means the products and services offered by Odeon.”
Clause 2 provides:
“2. Girobank acknowledges that in relation to Advanced Card Transactions for the purchase of Supplies, the following arrangements shall apply between Odeon and Bookit
2.1.1 It shall be a condition of Odeon accepting Card Payment for Advanced Card Transactions that the Cardholder agrees that Bookit will provide card-handling services to the Cardholder.
2.1.2 Bookit will be required to pay Odeon the amount due to Odeon from the Cardholder and require the Cardholder to pay Bookit a fee (“Handling Fee”) for which Bookit shall accept payment by card.
2.1.3 Subject to paragraph 3.1.1 the price payable to Odeon by a Cardholder shall be an amount equivalent to the full price of the Supplies and the price payable to Bookit shall be the amount of the said Handling Fee.
2.1.4 In relation to each Advanced Card Transaction Girobank shall pay to Bookit under clause 3.1.1 an amount equivalent to the aggregate of the Handling Fee due to Bookit and the amount due from the Cardholder to Odeon and payable by Bookit to Odeon, provided that such amount shall not in any case exceed the amount received by Girobank from the Card Issuer for that Advanced Card Transaction.”
Clause 2.2 contains similar provisions in relation to Card Transactions, as defined.
Clause 3, so far as relevant, provides:
“3.1 Girobank shall:
3.1.1 credit Bookit with the amount of all Card Transactions and Advanced Card Transactions effected by Odeon and in respect of which the relevant Card Transaction Data is presented to Girobank in accordance with the terms of this Agreement by crediting a Girobank account within the United Kingdom, nominated by Bookit or such other account as may be agreed between the parties; and
[3.1.2...]
3.2 For the avoidance of doubt, Girobank’s payments are made to Bookit for and on its own account and Girobank shall be under no obligation to make any payment to Odeon under this Clause 3.
[3.3 – 3.5]
3.6 Subject to Clause 3.7, Girobank shall use reasonable endeavours within one Banking day of receipt of a credit into Bookit’s Girobank account under Clause 3.1.1 to transfer such credit by BACS transfer to any bank account within the United Kingdom nominated by Bookit, or such other account as may be agreed between the parties.
3.7 Where payment of charges due to Girobank under Clause 8.4, or any other sums due to Girobank under this Agreement, are to be made by debit from Bookit’s Girobank account, then Girobank shall be entitled to debit such charges in accordance with Clause 8.4 and such sums in accordance with its rights under this Agreement, prior to making any BACS transfer under Clause 3.6.”
Clause 4 contains what are described as the “Merchant’s Obligations”. So far as relevant it provides that:
“4.1 Odeon shall:
4.1.1 honour all Cards [defined in clause 1 as exclusive of “cards which Odeon is unable to accept as payment”] presented by accepting them as a means of payment for Supplies.
[4.1.2]
4.2 Bookit shall:
4.2.1 provide or procure that Girobank is provided with Card Transaction Data in respect of Transactions within the time period, if any, stipulated by Girobank;
4.2.2 ensure that Girobank is provided with Advanced Card Transaction Data in respect of Transactions within the time period, if any, stipulated by Girobank;
[4.2.3]
4.3 In accordance with the relevant procedure guide or Operating Manual, Odeon or Bookit, as applicable, shall:
4.3.1 obtain authorisation from Girobank at the time for a Card Transaction if the Cardholder in question requires Supplies:-
4.3.1.1 the value of which (in the case of Advanced Card Transactions being the amount due to Odeon for the supplies plus the amount due to Bookit as Handling Fee) is in excess of the Floor Limit; or
4.3.1.2 for an amount falling within a range notified by Girobank to Odeon from time to time.
[4.3.2-4.3.5]
[4.4-4.14]
Clause 7 prescribed what are described as Charge Back Rights. They entitle Girobank to withhold payment to Bookit or to require Bookit to reimburse Girobank in various specified events. Clause 8 provides that Bookit
“shall pay the charges (plus Relevant Tax) specified in Schedule 1 for and on its own account in consideration of the provision by Girobank to it of services under this Agreement.”
Clause 12.4 required the Merchant, as defined, to check each Card Transaction or Advanced Card Transaction which does not require authorisation against any current card transaction decline and recovery listing or notice and to notify Girobank of any card appearing on it. Clause 15 deals with Invalid Card Transactions.
Schedule 1 set out the scale of charges payable by Bookit to Girobank. It provides that it is the Merchant’s responsibility to strip out unauthorised transactions below the Floor Limit and provided for a higher charge to be paid to Girobank if that was not done. Schedule 2 set out the Floor Limits and prescribed certain types of card which are not authorised for the purposes of the Agreement.
By a letter dated 2nd July 2002 from Odeon to C/E the former described to the latter the service provided by Bookit to the Customer. In their response dated 18th September 2002 C/E stated:
“...it is apparent that Bookit are in fact providing a package of supplies to the customer namely:
1. Checking availability of seats at requested screening;
2. Taking card details from customer and transmitting to Girobank for processing, and
3. Sending notification to Odeon’s computer system that those seats are taken.”
Later the writer added:
“Bookit are supplying a separate service to the customer for which they receive the 50p per ticket consideration. The essential nature of this service is of booking reserved seats for customers. The taking of the credit or debit card details is not an aim of the customer in itself, but part of the process of obtaining enjoyment of the reserved seat in the cinema. The principal service is thus the booking service and the taking of the credit card details is ancillary to this.
Conclusion
Bookit are making a single supply of cinema seat booking services to the customer. The consideration is the 50p booking fee paid by the customer. The booking fee does not feature in the zero rate, reduced rate or exempt schedules, and must therefore be regarded as a standard rated supply for VAT purposes.”
The relevant legislation
In their appeal to the Tribunal, and initially in their appeal to me, Bookit relied primarily on the provisions of Group 5 Schedule 9 to the VAT Act 1994. But it is common ground that those provisions are designed to implement the provisions to be found in Article 13(B)(d) Sixth EC VAT Directive. As those provisions have direct effect and as the Court is required to construe the equivalent provisions in the VAT Act 1994 in the light of the requirements of the Article there is nothing to be gained by considering the provisions of the Act first. Only if Bookit claims, which it does not, to be entitled to an exemption under the Act which is not available under the Article is it necessary to consider the Act at all. Indeed I would repeat the observation I made in Commissioners for Customs & Excise v BAA plc [2003] STC 35, para 46. What is the point of the draftsman of the Act setting out in his own elaborate language what he understands to be the effect of the Sixth Directive? In cases where the Sixth Directive is mandatory and of direct effect to do so is, at best, unnecessary and at worst gives rise to a breach of the United Kingdom’s obligation not to afford any exemption wider or narrower than that allowed by the Sixth Directive.
The Sixth Directive was promulgated on 17th May 1977 in furtherance of the policy first introduced by the First Council Directive made on 11th April 1967 for the harmonisation of legislation in Member States concerning turnover taxes. It recites that
“a common list of exemptions should be drawn up so that the Communities’ own resources may be collected in a uniform manner in all Member States;”
and
“the obligations of taxpayers must be harmonised as far as possible so as to ensure the necessary safeguards for the collection of taxes in a uniform manner in all the Member States;”
Title X deals with exemptions. Article 13 deals with exemptions within the territory of the country and is divided into two parts, A and B. A confers exemptions for certain activities in the public interest. B is entitled “Other Exemptions”. So far as relevant it provides:
“Without prejudice to other Community Provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:
[(a)-(c)]
(d) the following transactions:
1 the granting and negotiation of credit and the management of credit by the person granting it;
[2]
3 transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;
[4-6]
For completeness I should set out the relevant provisions in the VAT Act 1994. S.31 provides that a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 to the Act. Group 5 in Schedule 9 is entitled “Finance” and contains a number of items. The following are the relevant items:
“1 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.
2 The making of any advance or the granting of any credit.
[2A-4]
5 The provision of intermediary services in relation to any transaction comprised in item 1, 2....(whether or not such a transaction is finally concluded) by a person acting in an intermediary capacity.”
Group 5 contains a number of notes by reference to which, as provided in s.96(9), the items in the Schedule are to be interpreted. Notes 5 and 5A are in the following terms:
“(5) For the purposes of item 5 “intermediary services” consist of bringing together, with view to the provision of financial services –
(a) persons who are or may be seeking to receive financial services, and
(b) persons who provide financial services,
together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities.
(5A) For the purposes of item 5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries, between –
(a) a person who provides financial services, and
(b) a person who is or may be seeking to receive financial services.
(5B) For the purposes of notes 5 and 5A “financial services” means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6.”
It is convenient at this stage to refer to certain authorities on the interpretation of Article 13(B). In Stichtung Uitvoering Financiele Acties v Staatssecretaris van Financien (Case 387/87)[1989] ECR 1737 (“SUFA”) the Advocate-General considered (paragraph 11) that
“any exemptions, as exceptions to the general rule that VAT is levied on all economic activity are to be interpreted strictly and must not exceed what is expressly and clearly provided for.”
Limitations to that proposition have emerged in subsequent cases. The principle to be applied is now clearly expressed by Jonathan Parker LJ in Commissioners of Customs and Excise v Electronic Data Systems Ltd [2003] STC 688 at paragraphs 125 to 129 where he said:
“125. I begin by considering the guidance which the Court of Justice has given as to the general approach to the interpretation of the exemptions contained in Article 13B.
126. The starting-point is SUFA. I agree.... that SUFA establishes the general proposition that exemptions must be construed strictly. However, that does not mean, in my judgment, that context and surrounding circumstances are to be left out of account. As the Court of Justice said in SUFA (at paragraph 11), the exemptions "constitute independent concepts of Community law which .... should be placed in the general context of the common system of VAT introduced by the Sixth Directive". I take this to mean they are not to be interpreted in a rigid formulaic way, regardless of context, but rather in a manner which gives effect (for example) to the objective of the common system of VAT identified in Muys, viz. that of securing equal treatment for taxable persons.
127. Thus, in SDC (to which further reference will be made below) the Court of Justice adopted a purposive approach to the interpretation of the expression 'transactions .... concerning'. Other examples of a purposive approach to the interpretation of the exemptions are the decisions of the Court of Justice in Lubbock Fine and in Muys. Examples of the adoption of a similar approach in this jurisdiction are CSMA, FDR,Lloyds TSB and BAA.
128. Moreover, the fact that the exemptions in Article 13B are expressed in wide and general terms means that, as Chadwick LJ explained in Expert Witness, a restricted interpretation is inappropriate.
129. There is, as it seems to me, a degree of inherent tension between on the one hand the need to interpret the exemptions strictly and on the other hand the adoption of a purposive approach to the interpretation of wide and general words. In my judgment, that tension falls to be resolved by interpreting the exemptions in a way which does not have the effect of extending their scope beyond their fair meaning, as ascertained by adopting a purposive approach to their interpretation.”
The Decisions of the Tribunal
In paragraphs 7 to 44 of the First Decision the Tribunal set out their findings of fact. In paragraphs 17 to 23 they referred to provisions of the MSA. In paragraphs 24 to 30 they referred to evidence and documents concerning specific bookings made by a customer through Bookit. In paragraphs 31 to 44 they considered the role of Bookit in the overall procedure. In paragraphs 45 to 61 the Tribunal considered the submissions of counsel for the parties. Paragraphs 62 to 90 the Tribunal expressed their conclusions.
The Tribunal noted (paragraph 65) that there was no evidence of payments by Odeon to Bookit for its services as agent of Odeon for the sale of cinema tickets. The Tribunal concluded (paragraph 66) that “when accepting payment by card for a ticket Bookit is acting as agent for Odeon”. In addition, the Tribunal considered (paragraph 69) that “when Bookit is finding out the customer’s requirements and checking the availability of seats in accordance with those requirements, it is not in our judgment performing any service for a consideration for the customer”. In paragraph 72 the Tribunal recorded that it was not suggested by C/E that “when Bookit takes the customer’s card details and transmits them to Girobank it is not performing a service for the customer..”.
In paragraph 73 of the First Decision the Tribunal stated:
“We have already concluded that in providing information prior to the customer’s decision to book tickets for a specific performance Bookit is acting as agent for Odeon on whose behalf it is selling the tickets. We have also concluded that when accepting payment by means of the customer’s card for the tickets Bookit is also acting as agent for Odeon. As a matter of contract, Bookit is accepting the payment offered by the customer, it being a term of the contract that payment would be by card.”
The Tribunal then considered the final component of the booking service, namely notification of the booking to both Odeon and the Customer. In paragraph 75 the Tribunal concluded that both those functions were performed by Bookit as agent for Odeon and “neither constitutes a service supplied by Bookit to the customer”.
The Tribunal’s overall conclusion, expressed in paragraph 76 was that:
“The result is that the only supply by Bookit to the customer is of card handling services...... The fact that the card handling services would if made by Odeon be ancillary to the sale of the tickets is not relevant since the card handling services were supplied by Bookit as principal.”
In paragraph 92 of the First Decision the Tribunal noted that the actual means of transmission of information between Bookit and Girobank was not clearly explained, though they assumed that it was by means of encryption and a computer. Accordingly they gave liberty to either party to apply for permission to adduce further evidence. Bookit sought and obtained such permission.
The effect of the further evidence is summarised paragraphs 2 to 9 of the Second Decision as follows:
2. Once the Bookit call centre employee has identified the performance sought by the customer, the customer’s card number, expiry date and security code are taken, together with his name, postcode and house number. This is keyed onto Bookit’s computer to check against the hot list. Assuming the card is not on the hot list and the seats are available the customer is told that the booking is confirmed.
3. No mention is made to the telephone customer of Odeon’s terms and conditions. On-line purchasers are informed of the existence of terms and conditions and can click onto icons to see those terms. The terms and conditions are exhibited near the box offices at cinemas. Paragraph 36 thus falls to be modified.
4. Apart from checking against the hot list, customer’s card details are not verified until after the booking has been confirmed.
5. At 1.30am in the morning following the booking all Bookit’s card transactions are batched together on Bookit’s computer system. These batched transactions are then sorted down by reference to the separate card issuing banks (“the Card Issuers”) and the details are transmitted on a secure line to each relevant Card Issuer to seek authorisation for the transactions.
6. The Card Issuers apply their own criteria and issue a code for each transaction denoting that it is authorised or rejected. When authorisation is refused the reason is notified, for example, “wrong expiry date”, “out of funds”, “account closed” or “card stolen”. If the reason is “out of funds”, Bookit may present the transaction again on the next day in the hope that this time there will be sufficient funds.
7. Bookit then collates the authorised transactions for transmission to Girobank delivering them in a single file by secure line still in the early hours of the morning following the booking. At this point no sums have been debited to customers’ accounts with Card Issuers and no sum has been credited to Bookit.
8. Within 1 to 2 days Girobank credits Bookit with the sum for the tickets plus card handling fees debiting the Card Issuer which in turn debits the account of the particular customer. In the event that the customer’s bank rejects the debit, for example because the account is in overdraft, then Girobank re-credits the Card Issuer and charges back the debit to Bookit.
9. By obtaining authorisations from Card Issuers Bookit was able to negotiate lower charges by Girobank. Clauses 4.5 to 4.8 of the August Agreement (paragraphs 18 to 22 of the Decision) provided for Bookit to present Card Transaction Data in accordance with the rules laid down from time to time by the Card Issuers. These rules were not exhibited.”
Those are the factual findings by reference to which the Tribunal’s conclusions were reached in the First Decision and the Second Decision. In paragraphs 77 to 79 of the First Decision the Tribunal noted that the card issuers and Girobank each make exempt supplies to the Customers. They considered that the issue, therefore, was whether Bookit is itself making exempt supplies. In paragraphs 80 to 81 the Tribunal concluded:
“80. It is necessary to focus upon the specific services provided by Bookit to customers for the 50 pence fee. These services start with obtaining the customer’s card number and details including postcode. This information is transmitted to Girobank which gives authorisation where this is required as exceeding a specified limit. The processing by Girobank of the transaction is not part of any supply by Bookit to the customer. Nor in our judgment is either the confirmation by Bookit that the card payment is accepted, this being on behalf of Odeon, or the notification to Odeon of the purchase, this again being part of the agency service to Odeon. Again we do not consider that the act of informing the customer that he should collect the ticket from an automatic machine using the card is part of the supply by Bookit to the customer, this again being a service performed as agent for Odeon, the vendor of the ticket.
81. The actual components of the supply by Bookit to the customer are therefore limited to obtaining the card information with the necessary security information and transmitting this to Girobank. It does not even include any decision by Bookit whether to transmit that information, since in deciding whether to accept a payment by card not requiring authorisation from Girobank Bookit is not performing a service for the customer but is acting as agent for Odeon.”
In paragraph 10 of the Second Decision the Tribunal noted that paragraphs 80 and 81 of the First Decision require modification
“in that they omitted the obtaining by Bookit of authorisation from Card Issuers, which is separate from the prior authorisation required from Girobank where the specified limit or “Floor Limit” is exceeded, and the transmission of the Card Issuers’ authorisations to Girobank.”
The Tribunal’s conclusions are contained in paragraphs 85 to 90 of the First Decision. They were:
“85. The mere transmission of details to Girobank is essential to the completion of the transfer or payment by Girobank or the issuer, but that does not bring Bookit within item 1 [Group 5 Schedule 9 to the VAT Act 1994]. The Appellant company has not satisfied us on the evidence that Bookit in transmitting on behalf of customers the required card information is itself transferring funds or bringing about changes of a legal and financial character. The transfers and financial changes are effected by Girobank and the payments are effected by the bank issuing the card.
86. This leads to the question whether the Appellant is performing intermediary services within item 5 [Group 5 Schedule 9 to the VAT Act 1994].
87. If we were solely concerned with the interpretation of the words of the 1994 Act, Bookit is “bringing together” the customer wishing to use his card and the card issuer which is providing financial services as well as the customer and Girobank, although the customer will be unaware of Girobank’s involvement.
88. However the statute must be interpreted consistently with the Sixth Directive as interpreted by the Court of Justice. In CSC the Court of Justice said this at paragraph 39,
“Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation. It may consist, among other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of or on behalf of a client, the detail of the payments to be made by either side. The purpose of negotiation is therefore to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of the contract.”
89. Although the Court said that it was not necessary to consider the precise meaning of “negotiation” in Article 13B(d)(1)-(4), we accept Mr McKay’s submission that it does involve some “distinct act of mediation”.
90. In our judgment the services of the employees of Bookit in obtaining card information and transmitting the same to Girobank do not involve any act of mediation on behalf of the customer. The only matters mentioned in paragraph 39 of CDC which could be relevant are “making contact with another party” here Girobank. However it does not seem to us that the mere transmission of card information suffices for “negotiation” or it follows does such transmission come within “intermediary services” in item 5.”
The only qualification to these conclusions made in the Second Decision was:
“12. Our conclusion in paragraph 85 remains the same. While the transmission of the authorisation is an essential step, it does not itself bring about the payments or transfers. These are effected by Girobank.
13. It was not suggested that the additional material affected our conclusion that Bookit is not performing intermediary services within item 5.”
It is common ground that the statement in paragraph 13 of the Second Decision is wrong. Submissions to the effect that the additional material set out in the Second Decision did demonstrate that the decision in the First Decision that item 5 did not apply was wrong in law were made.
The Key Authorities
Both counsel referred me to a number of what they described as “key” authorities. It is convenient to consider them before referring to the submissions for the parties. In chronological order they are Sparekasernes Datacenter v Skatteministeriet (Case C-2/95)[1997] STC 932 (“SDC”), Commissioners for Customs & Excise v FDR [2000] STC 672 (“FDR”), CSC Financial Services v Commissioners of Customs & Excise (Case C-235/00)[2002] STC 57 (“CSC”) and Commissioners of Customs & Excise v BAA plc [2003] STC 35 (“BAA”).
SDC was a Danish association which provided to its members a data-handling service comprising the execution of transfers, the provision of advice on and trade in securities and the management of deposits, purchase contracts and loans. The various components together made up the service which a bank or its customers wanted. It undertook no legal obligation to those customers and was remunerated only by the banks. The question was whether those services came within the exemptions in Article 13(b)(d)(3) and (5). The ECJ pointed out that the exemption was conferred in relation to transactions answering the prescribed description irrespective of the manner by which the service is performed. In paragraph 37 the Court observed:
“It must be stated in regard to this point that the specific manner in which the service is performed, electronically, automatically or manually, does not affect the application of the exemption. The provisions in question make no distinction in this regard. 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. If, on the other hand, the service entails only technical and electronic assistance to the person performing the essential, specific functions for the transactions covered by points 3 and 5 of Article 13B(d), it does not fulfil the conditions for exemption. That conclusion follows, however, from the nature of the service and not from the way in which it is performed.”
In paragraphs 48 to 59 the ECJ concluded that if the nature of the transaction came within the exemption it could not be excluded because of the nature of the persons rendering or receiving the services. Thus it is not necessary (paragraph 49) that the service is rendered to the end customer of the Bank. In paragraphs 53 to 56 the ECJ said:
“53. On this point, it must be noted first of all 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 and, in some cases, between the 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.
54. In cases where the customer effects a transfer or causes a transfer to be effected without any action by the bank, the specific acts which constitute the transfer are carried out either by the data-handling centre and the customer or by the data-handling centre and a third party, the latter acting at the customer's request, or by the data-handling centre acting alone pursuant to a standing order from the customer.
55. The contractual links between the bank and its customer do not diminish the role of the data-handling centre. It is from those links that the customer derives the right to have transactions effected, even if they are invoiced as services provided to the bank and also alter the bank's financial situation.
56. Moreover, if point 3 of Article 13B(d) of the Sixth Directive covered only the service which a financial institution provides to the end customer, only certain acts concerning transfer transactions could be exempt. Such an interpretation would restrict the exemption in a way which is not supported by the wording of the provision in question. That wording does not restrict the exemption to that relation and it is sufficiently broad to include services provided by operators other than banks to persons other than their end customers.”
In paragraphs 61 to 68 the ECJ considered what went to make up a transfer or payment for the purposes of Article 13(B)(d)3. In paragraph 64 the ECJ rejected the view that a transfer could not be broken down into its constituent parts. Equally, as it observed in paragraph 65, the fact that a constituent element is essential to completion of the transfer as a whole is not necessarily enough. In paragraph 66 the ECJ held that:
“In order to be characterized as exempt transactions for the purposes of points 3 and 5 of Article 13B, the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points. 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. In this regard, the national court must examine in particular the extent of the data-handling centre's responsibility vis-à-vis the banks, in particular the question whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions.”
The second key authority is FDR. FDR supplied credit card services to banks. Its clients were issuers of credit cards called ‘issuers’, banks who paid the retailer in exchange for the ‘voucher’ issued on the use of a card called ‘acquirers’ and banks which acted in both capacities. The issue was whether the services supplied by FDR were exempt from VAT under Article 13(B)(d)(3). The Tribunal considered that they were. The Court of Appeal agreed.
FDR is of significance because of the light it throws on the concept of a ‘transfer’ of money for the purposes of Article 13(B)(d)(3). The issue, as described by Laws LJ at paragraph 26 was whether FDR made transfers within the meaning of the word in that context. He considered the decision of the ECJ in SDC and decisions in England. His conclusion in paragraphs 37 and 38, with which Ward LJ and Bell J agreed, was:
“The value of these statements (which have, according to counsel’s researches, never been doubted) is that they show that, if one leaves aside transfers in specie (of coin, goods or other property), a transfer of money means no more nor less than the entry of a credit in the payee’s account and the entry of a corresponding debit in the payor’s account. There may be - will be - problems in cases of error or fraud in the posting of entries to the accounts. But however those may fall to be resolved, there is no further, elusive, event by which the money is really transferred: no Platonic Form, of which day-to-day transfers are only shadows. The pro and con entries constitute the transfer. There is nothing else. I recognise, of course, that this reasoning boils down the reality to the simplest case. In truth, creditor and debtor may have accounts at banks A and B respectively; banks A and B may themselves have accounts at banks C and D respectively; and it may be only when one comes to banks J and K that one finds both of them having accounts at the Bank of England. But the logic is unaffected.
38 If this reasoning is right it is, I think, very significant for a sensible and intelligent understanding of SDC. It demonstrates that what the Directive imports by the term “transfer” inheres in the notion of a “change in the legal and financial situation” - an expression used in both paragraphs 53 and 66 - where that is a reference to the effects of the corresponding credit and debit entries in the accounts of the paying and receiving parties.”
The third key authority, CSC, relates to the interpretation of the word “negotiation”. CSC provided a call centre for financial institutions. Its clients included Sun Alliance. Sun Alliance entrusted to CSC all communications and contacts with the public in relation to a particular investment product in the nature of a unit trust scheme. CSC did not itself issue the units but provided and processed all the relevant paper-work. Exemption from liability for VAT on the value of such services was claimed on the basis of Article 13(B)(d)(5). That paragraph, so far as relevant, exempts
“transactions, including negotiation, excluding management and safe-keeping, in shares, interests in companies or other associations, debentures and other securities, excluding...”
The ECJ, to whom a reference for a preliminary ruling was made by the High Court in England, considered first whether the service supplied by CSC constituted “transactions....in shares...”. In that context it referred to the decision of the ECJ in SDC in relation to “transactions....concerning....payments, transfers..” within Article 13(B)(d)(3). It considered that:
“27. In principle, the same analysis applies, mutatis mutandis, with regard to transactions in securities within the meaning of Article 13B(d)(5) of the Sixth Directive.
28. As the Court emphasised at paragraph 73 of its judgment in SDC, trade in securities involves acts which alter the legal and financial situation as between the parties and are comparable to those involved in the case of a transfer or a payment. The supply of a mere physical, technical or administrative service, which does not alter the legal or financial situation would not, therefore, appear to be covered by the exemption laid down in Article 13B(d)(5) of the Sixth Directive.”
Having concluded that CSC was not providing services within the expression “transactions...in shares..” the ECJ then considered whether it was entitled to exemption on the alternative ground of “negotiation”. That claim was rejected too. The reasoning of the ECJ is apparent from paragraphs 38 to 40 of its judgment which are in the following terms:
“38. Clearly, the words “including negotiation” are not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation.
39. It is not necessary to consider the precise meaning of the word negotiation, which also appears in other provisions of the Sixth Directive, in particular, Article 13B(d)(1) to (4), in order to hold that, in the context of Article 13B(d)(5), it refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product, and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side. The purpose of negotiation is therefore to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of the contract.
40. On the other hand, it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject-matter of the contract. In such a case, the subcontractor occupies the same position as the party selling the financial product and is not therefore an intermediary who does not occupy the position of one of the parties to the contract, within the meaning of the provision in question.”
The fourth authority said to be a key authority is BAA. That case concerned what are known as ‘affinity cards’. The issues which arose included the questions whether the judgment of the ECJ in CSC provided a sufficient test of what is comprised in the concept of “negotiation” in the context of Article 13(B)(d) and if so what it was. In paragraphs 32 and 33 of my judgment, with which Mummery and Tuckey LJJ agreed I said:
“32. I turn then to the second submission of counsel for Customs & Excise. I accept that the judgment of the Court of Justice in CSC did not provide a precise and exhaustive definition of "negotiation"; that is what the court said in the first sentence of paragraph 39 which I have quoted in paragraph 22 above. But it does not follow that the judgment does not provide a sufficient basis for determining whether, as a matter of fact, the services of BAAE were or were not those of a negotiator. On the contrary the specific inclusions and exclusions indicated in paragraphs 39 and 40 go a long way to providing a precise and exhaustive test yet leaving room thereafter to include or exclude the unforeseen. Plainly the facts in CSC are distinguishable from those in this case; but whether the distinction is material depends on the application of the test to which the Court of Justice referred.
33. The third submission of counsel for Customs & Excise imports a test of independence from either party to the transaction. This is warranted by paragraphs 39 and 40 of the judgment of the Court of Justice in CSC. Thus the negotiator must not be a party or a subcontractor of a party to the grant of credit. Nor must the services he provides be those typically provided by such a party or sub-contractor. But this submission leads nowhere. It is quite clear that BAAE is not a party to the grant of credit by the issue of the co-branded credit card. Nor are its services those typically provided by a bank or card-holder. Of course, there is a contractual relationship between BAAE and BoS and for some purposes, no doubt, it may be accurately described as a joint venture. What matters is not the relationship but the services rendered by BAAE thereunder.”
The Submissions
Counsel for Bookit does not criticise the factual findings of the Tribunal. He accepts that the service supplied by Bookit to the Customer must be distinguished from (1) the services supplied by Bookit to Odeon as agent for the sale of tickets, (2) the services provided by Girobank to both Bookit and Odeon in procuring payment by the Customer through the use of his debit or credit card and (3) the service to the Customer supplied by Odeon in showing him the film.
Counsel for Bookit submits that the findings of the Tribunal in both the First Decision and the Second Decision show that Bookit provides to the Customer a ‘card handling service’ in return for the ‘card handling charge’. He contends that such service comprises the following elements (1) Bookit obtains the card details from the Customer, (2) Bookit verifies the validity of the card against (i) the hot list of stolen cards, (ii) the list of authorised cards contained in Schedule 2 to the MSA and (iii) the Floor Limits set out in the same schedule, (3) Bookit collates all transactions on a particular day in relation to a particular issuer and transmits them to that issuer for authorisation, (4) Bookit receives back from each issuer information as to which transactions are authorised and collates them into a single delivery file for transmission to Girobank, (5) investigates transactions rejected by the issuer (6) receives credit from Girobank in respect of completed transactions and (7) pays to Odeon the sums due for the ticket. Bookit retains the card handling fee and pays the charges due to Girobank, as set out in Schedule 1 to MSA, from that source.
Counsel for Bookit characterises the service rendered by Bookit to the Customer as the benefit of pre-payment for cinema tickets by remote means. He points out that the services provided to the Customer by both his card issuer and Girobank are exempt and contends that those provided by Bookit when properly regarded should be exempt too. He relies, in particular, on Article 13(B)(d)(3). He contends that the discharge of the debt due by the Customer to Odeon is a “payment” or “transfer”, that the activities of Bookit in procuring it constituted either “a transaction...concerning” or “negotiation...concerning” such payment or transfer.
Counsel for C/E disputes this analysis and conclusion. He contends that the components of the service supplied by Bookit to the Customer are limited to those to which the Tribunal referred in paragraph 81 of the First Decision with the addition of those mentioned in paragraph 10 of the Second Decision. They may, he submits, be summarised as:
“obtaining the card information with the necessary security information from the Customers and transmitting this to Girobank and/or the card issuers and transmitting Card Issuers’ authorisations to Girobank.”
Specifically he excepts card verification and the payment by Bookit to Odeon as being the actions of an agent performing his duty to his principal and not a part of the service provided by Bookit to the Customer.
Counsel for C/E contends that the service when so understood consists of obtaining and transmitting information and nothing more. Bookit does not evaluate or process that information, Bookit does not itself give any authorisation, Bookit is not required to make any decision on behalf of the Customer or anyone else, Bookit does not negotiate anything or effect any payment or transfer. He contends that the Tribunal was right for the reasons they gave.
Conclusions
As I indicated previously the claim for exemption must be considered against the provisions of Article 13(b)(d). Though Bookit relied on paragraph 1 its primary case lay under paragraph 3. Accordingly the first step is to identify any relevant payment or transfer. A payment or transfer for the purpose of paragraph 3 is the execution of an order to transfer a sum of money from one account to another so as to effect a change in the legal or financial situation. This is clearly established by the decision of the ECJ in SDC paragraph 53 and by the Court of Appeal in FDR paragraphs 37 and 38. In this case there are two payments or transfers, (1) the payment or transfer of the price of the ticket and the card handling fee from the Customer (or its card issuer in the case of a credit card) to the account of Bookit with Girobank (clause 3.1.1 MSA) and (2) the payment or transfer of the ticket price from Bookit’s account with Girobank to the account of Odeon (clause 2.1.2 MSA).
The key authorities to which I have referred at some length already throw light on the connection between the payment or transfer and the supplier of the service under consideration. Thus, although the method by which the payment or transfer is effected is immaterial the relevant service must be more than the provision of such technical or electronic assistance as that method dictates, see SDC paragraph 37. The court must examine the responsibility of the service provider vis a vis the bank making the transfer and in particular whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions, see SDC paragraph 66. These principles were reiterated in CSC paragraph 28. In that case CSC failed to qualify for exemption on the ground that the service it provided was a “transaction...in shares” because, although it carried out all the necessary paperwork, it did not itself issue the units.
But there is an important distinction between this case and CSC. In CSC the ECJ was concerned with Article 13(B)(d)(5). That paragraph refers to “transactions...in shares”. By contrast Paragraph (3) exempts, not merely payments and transfers but “transactions...concerning...payments, transfers...”. Accordingly the fact that Bookit does not itself make the transfer in the sense of effecting the debit and credit is not fatal to its claim to exemption.
“Transactions...concerning...payments, transfers” include “negotiation”. This term was considered by the ECJ in CSC. In paragraph 39 of its judgment in CSC the ECJ described “negotiation” as a service rendered by an intermediary to and remunerated by a contractual party as a distinct act of mediation, such as pointing out opportunities, making contacts or negotiating the details of the payment to be made. It distinguished the position of the intermediary from that of a party to the contract or a sub-contractor of one of the parties. I emphasised these features in my judgment in BAA paragraph 33.
Applying these principles I would reject the claim of Bookit insofar as it is based on the second payment to which I have referred in paragraph 47 above. The payment by Bookit to Odeon was the necessary consequence of the fact that it was the agent of Odeon for the purpose of selling the cinema tickets. But the same cannot be said of the first payment. As is emphasised in paragraph 3.2 MSA that payment was made to Bookit for and on its own account. It was a payment by or on behalf of the Customer. It did alter the legal and financial situation. The card handling services provided by Bookit to the Customer were more than technical or electronic assistance but were the essential preliminaries to any remote payment by the Customer being effected. They were not rendered as a party to the contract between the Customer and Odeon, nor as the sub-contractor of either of them. They were separately remunerated by the card handling fee paid by the Customer. They constituted activities distinct from those of any other party.
I have some doubt whether the services performed by Bookit for the Customer are strictly acts of mediation or negotiation so as to satisfy that part of Article 13(B)(d)(3) as includes “negotiation”. They seem to me to be more executive than that. But whether that is so or not the services rendered by Bookit to the Customer are properly to be regarded as “transactions...concerning...payments, transfers..” whether or not they are specifically included in that expression by reference to the word “negotiation”.
In my judgment the Tribunal arrived at the wrong conclusion. They did so because, having admitted further evidence, they did not sufficiently revisit their earlier conclusion. In particular whilst they recognised that their conclusions in paragraphs 80 to 81 of the First Decision required some modification they did not spell it out. Similarly the conclusion set out in paragraph 12 of the Second Decision assumes that the question is whether Bookit effected the payments. I do not think it is so limited. The service Bookit provided to the Customer constituted a transaction concerning such a payment, it was separately remunerated and it was not performed as agent or subcontractor of the Customer, Odeon or Girobank. As such, in my judgment, it came within Article 13(B)(d)(3).
The corresponding domestic legislation is to be found in Items 1 and 5 of Group 5 of Schedule 9 to the VAT Act 1994. In paragraph 87 of the First Decision the Tribunal concluded that if they were only concerned with that provision they would have found it to be satisfied. In the event they rejected it in paragraph 90 of the First Decision because, by reference to Article 13(B)(d)(1)-(4), they considered that some act of mediation on behalf of the Customer was required but was not present because the mere transmission of card information is not negotiation.
I share the Tribunal’s doubt about negotiation. But, as explained above, I do not think that is enough to justify the rejection of Bookit’s claim to exemption. Note 5 does not incorporate any reference to “negotiation”. Nor is it a necessary element of “intermediary services”, rather, for the purposes of Article 13(b)(d)(1)-(4), intermediary services are an essential element of negotiation. Once the concept of negotiation is removed then, as it seems to me, the services provided by Bookit to the Customer fall squarely within the words of item 5 interpreted in accordance with note 5.
Bookit also relied on Article 13(B)(d)(1) and Items 2 and 5 of Group 5 of Schedule 9 to the VAT Act 1994. In the light of my conclusions it is not necessary to consider these contentions.
For all these reasons I consider that the services provided by Bookit to the Customer are exempt under Article 13(b)(d)(3) and Item 5 of Group 5 of Schedule 9 to VAT Act 1994. Accordingly I allow this appeal.