Lloyds wins significant redundancy VAT case

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The first tier tribunal (FTT) has allowed Lloyds banking group’s appeal against a £5.6m VAT bill in a strange but significant victory.

The tax case stemmed from Lloyds’ 2010 closure of Bank of Scotland, Ireland (BOSI), a subsidiary of Bank of Scotland (BOS). To retain local administrative capabilities, historic knowledge and continuity of customer relationships, BOS entered into an agreement with an independent service company called Certus.

722 BOSI employees were transferred to Certus under TUPE rules. TUPE are regulations that preserve employees’ rights when a business or part of a business is transferred to a new employer. Those rights include compulsory redundancy payments.

While there was no doubt around the VAT on Certus’s service charges, HMRC determined that the money Lloyds paid to Certus for onward payment to former employees (ie redundancy pay) was also part of the taxable supply of services.

The FTT disagreed with HMRC’s interpretation, however, deciding that the redundancy money wasn’t a consideration for VAT. “It’s a confusing one, how this got to the tribunal stage,” said Neil Warren, an independent VAT expert. “HMRC must’ve thought they had a strong case if they took to tribunal.”

To Warren, the case seems rather clear: the money supplied for redundancy payments was compensation, not a taxable supply of services. By way of comparison, Warren pointed to a deposit you might pay on a vehicle rental. “If you damage the vehicle, the supplier keeps the money and that’s effectively compensation. It’s outside VAT because it’s not related to any services performed.”

HMRC’s line of attack focused on what it saw as a discord between commercial and economic reality. In VAT, as Warren explained, there are two key issues: what the contract says and what the commercial reality is. “If the commercial reality is different from what the contract says, the commercial reality always takes precedent.”

The tax authority argued the contract between Lloyds and Certus mislabelled a transaction. But again, the FT clearly disagreed with this assessment. “There was nothing artificial about these arrangements,” wrote the tribunal.

“No-one was trying to label a transaction as anything other than what it in reality was. Nor is there anything in the circumstances surrounding the making or implementation of the agreements to suggest that the contractual terms were inconsistent with the economic and commercial reality. On the contrary, the agreements reflected that reality.”

Another interesting aspect of the case was that at the time of Lloyds’ contract with Certus in 2010, the government was the banking group’s majority shareholder. It certainly adds an additional layer of intrigue into why the tax authority pursued what appeared to be a cut-and-dry case.

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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12th Dec 2017 18:02

Overall HMRC's general incompetence is by far the likeliest reason, why even bother looking elsewhere?

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13th Dec 2017 14:49

I think the problem is that HMRC is winning so many avoidance cases, the (mostly unjustified) success is going to their head and they see avoidance and naughtiness generally everywhere and it just encourages them (especially where the numbers are big) so that they expect to win even totally hopeless cases like this.

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13th Dec 2017 21:54

Does this mean Lloyd's may be entitled to a £5.6 billion or a 20% of £5.6billion tax refund if it won the appeal as it must have paid this VAT bill since 2010?
Does anyone know when the appeal will take place?

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to wizard12567
19th Dec 2017 14:27

Million is 10 to sixth power
Billion is 10 to ninth power in modern parlance
Bit different

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By I.Roxan
14th Dec 2017 12:00

Curiously, the parties managed to miss the main ECJ case on deposits, Societe Thermale d'Eugenie-les-Bains, which might have saved the Tribunal quite a bit of time.

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02nd Jan 2018 10:50

'722 BOSI employees were transferred to Certus under TUPE rules. TUPE are regulations that preserve employees’ rights when a business or part of a business is transferred to a new employer. Those rights include compulsory redundancy payments'.

Christ all that complicated nonsense just for 722 employees. Though it appears to have worked for Lloyds. The lengths some Companies will go to, is nothing straightforward theses days.

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