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
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