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As the VAT debate continues, has got its hands on a copy of what one accountant advises when it comes to whether mortgage clubs and packagers should be paying VAT.

Extracts from his verdict have been reprinted below:

Referring to marketing allowance, the verdict is:

I can say with some certainty that if a marketing allowance is paid to XXX, whether on a completed case basis or not, that would be a taxable supply of marketing services to the lender. The company would have to compulsorily register for VAT once the registration threshold was met (currently £64,000) and account for VAT on this income. Whilst there would be a positive effect in allowing VAT to be recovered on costs, this is almost certain to be detrimental overall as the VAT liability on the income could not be passed on to lenders who would be unable to recover this. For example a £15 per case fee would become a £12.77 per case fee for XXX once the VAT liability is met, rather than being able to charge the lender £15 plus VAT.

Consideration of basic VAT principles may lead one to wonder why this certainty cannot be placed on alternative models. Those principles tell us that it is not how something is paid for or even by whom, that dictates the VAT liability of the consideration received. It is the nature of the service being supplied in return for that consideration that matters. Marketing services in themselves, regardless of the product being marketed, do not fall within any of the Exemptions conferred by VAT Act 1994, Schedule 9. In fact Group 5 of those Exemptions – “Finance” – sets out in Item 5 – “finance commissions and making of arrangements” – that exempt financial intermediary services do not include market research, product design, advertising and promotional or similar services. The reason that other models could possibly qualify for the finance exemption lies partly in the “single or multiple supply” issue, so I will outline this before considering the alternative business model.

Single or multiple supplies

A simple example is that the hire of a car is standard rated for VAT. Included in the charge, however, is insurance which is exempt. Should there be two separate charges one without VAT? Neither UK nor European legislation provides definite rules to answer such questions. Precedent cases have provided guidelines and the Card Protection Plan case was referred to the ECJ. The ECJ decision lays down tests that have to be applied, in two stages, to decide whether there is a multiple supply, with each having their own VAT liability, or a single supply with one VAT liability.

Stage 1

Identify the essential features of the transaction. This involves identifying what the customer is actually receiving. To represent a supply, what is received must be distinct and independent; it must amount to more than merely a component of the overall supply. This process should not involve artificially splitting something that commercially is clearly a single supply.

This can be illustrated by a garage servicing a customer’s car. Although there are normally different elements that go to make up a typical service procedure, these cannot be said to be distinct or independent in the context of the overall service required by the customer, and any to attempt to describe them as separate supplies would clearly be artificial.

Stage 2

If stage one does identify separate supplies you should consider whether each supply can be properly regarded as a principal supply or whether some of them are merely ancillary to a principal supply. A supply is to be regarded as ancillary where, for a typical customer, it does not amount to an aim in itself but enhances the principal supply.

Mortgage packaging in general

The current position, as far as I am aware, is that all independent mortgage packaging businesses are treating all fees received from lenders, that relate directly to mortgage completions, as exempt from VAT. This is clearly on the understanding that they qualify for such exemption under VAT Act 1994, Schedule 9, Group 5, Item 5. This is notwithstanding the fact that payments made by lenders could be seen to be in return for a number of services, in addition to the introduction of the business itself, such as marketing and administrative services in relation to the application process.
The item 5 exemption is for intermediary services. These are defined as:

…….comprising the bringing together, with a view to the provision of financial services

• persons who are, or may be, seeking to receive financial services, and
• persons who provide financial services,

together with ……..the performance of work preparatory to the conclusion of contracts for the provision of those financial services. They 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 (unless these are ancillary to the overall exempt intermediary service).

Hopefully you begin to see the importance of the interaction of the exemption and the single supply rules outlined. Because the lender is making a payment to a packager in an intermediary capacity, with the intermediation service being the predominate one, the element relating to other services which may be outside the exemption is considered to be similarly exempt. It should also be noted that the “preparatory work” part of the exemption only applies to someone carrying out that work in an intermediary capacity as defined above. If that work was carried out by a party who did not play a part in the “bringing together” a charge for this service would be standard rated.

The FSA regulation of the industry in November 2004 (or more pertinently the non-regulation of mortgage packaging activities) shed some doubt on the ability of mortgage packagers to claim the financial intermediary exemption. To qualify the service must comprise “bringing together” which would suggest that this should be an FSA regulated activity. The scope of the FSA regulation of the industry is, however, outside the remit of this report, save for the fact that, for whatever reason, the FSA do not regulate mortgage packaging activities. This point has not been used by HMRC in order to challenge the exemption of mortgage packagers as far as I am aware.


Marketing allowance model – fees received subject to VAT at the standard rate, wherever processing is carried out

Top-slicing model

➢ Underwritten on site – should qualify for exemption – ruling recommended

➢ Member processed direct – review network terms in member agreements. Strongly recommend seeking a ruling before treating as exempt income

There are a large number of test cases in this complicated area, none of which are directly comparable to the proposed model. In addition, there is an ongoing EC review of the VAT treatment of financial services in general and, until that review is complete there is an increased level of uncertainty in this sector.

I believe that this advice allows you to best structure your activities to keep income VAT exempt where that is the desire, and to have the best chance of the recommended rulings being in your favour. It is also best practice to seek the ruling now, whilst there is no possibility of an adverse ruling resulting in a liability for undeclared VAT over the previous 3 years. It is often the case that businesses do not seek rulings because of this and also the uncompetitive position they would be put in until the ruling becomes industry-wide.


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