VAT, Crowdfunding & financial intermediaries

A recent case involving a payday lender provides a useful recap on the VAT financial services exemption. Crowdfunding platforms and other introducers/arrangers should take note.

I was recently asked if I had any discretion as to whether to charge VAT or not on legal advice. The answer was clearly 'no', but it reminded me of a previous project I had done reviewing the application of VAT to financial services intermediaries. Then up pops the judgement from a recently decided case giving a useful recap as to when the financial services exemption for VAT may, and may not, apply.

The summary of the law is of interest to:

  • P2P lending platforms;

  • loan originators for P2P platforms;

  • equity crowdfunding platforms;

  • aggregators and platforms operating an introduction model.

To recap, certain financial services activities such as providing credit (lending) or subscribing for shares are exempt from VAT. Firms that intermediate between lenders/subscribers and borrowers/companies (such as a crowdfunding platform) may also be providing exempt services.

In this case, a payday lending business made a claim to recover VAT it had paid to its suppliers for certain services, which HMRC refused. The services in question were those provided by lead generators (i.e. web firms that the payday lender would pay a commission to in order to acquire subprime borrowers) and a conversion agent (i.e. a firm that would ring up prospective borrowers that had not completed the loan paperwork).

The judge highlighted 12 key points about the exemption for intermediaries:

  1. Exemptions [to tax] should be interpreted strictly. No real surprises here, but it does create the need to look as your supplies at a granular level.

  2. What matters is the nature of the supply, not the identity of the supplier. You don't need to call yourself a credit broker to be a credit broker (which is a useful reminder about regulated activities in general).

  3. An intermediary can act entirely electronically. That doesn't just apply to being online but could include the application of AI and machine learning, or making API calls.

  4. The exemption is static, but the services covered can evolve. Fintech is creating new ways of business, but novelty does not prevent exemption.

  5. An intermediary will be remunerated for intermediation but will not be a party to the contract between borrower and institution. Article 36H agreements require a platform to undertake certain functions on behalf of the lender, but it should usually be clear that the platform is not a party to the central loan relationship.

  6. Negotiation [of the terms of the credit/investment] can be exempt even if no contract results. This means that failed fundraisings don't have to be treated differently from successful ones.

  7. An intermediary does not have to undertake the entire mediation. A supplier only needs to undertake one of the steps outlined in point 11, not all of them.

  8. An intermediary can be one in a chain of intermediaries. This may be relevant to deal origination firms bringing borrowers to platforms.

  9. Intermediation does not include carrying out back office functions. Delegating your own functions to a third party in relation to your existing clients (such as conducting AML checks) will not amount to intermediation.

  10. Intermediation does not include advertising or acting as a mere conduit. Hosting click through adverts does not amount to acting as an intermediary.

  11. An intermediary (a) introduces two parties, one looking for a financial product and a person providing it; or (b) negotiates the terms of such products as between the borrower/company and lender/investor; or (c) is someone who concludes a contract on behalf of one or other of the parties.

  12. An intermediary who acts as an introducer (point A above) must do something extra - such as assessing the suitability of the borrower or the suitability of the lender.

The takeaway points for firms are:

  • Be clear on what you are charging to who (or what you are being charged for). This is particularly true for P2P platforms that operate what is ostensibly an interest rate margin. Are you charging the lender or the borrower? Is it an arrangement or an administration fee?

  • Don't assume that the VAT exemption applies on a blanket basis. Look at each one of your revenue lines (including the various services and charges that may apply on enforcing a delinquent or defaulting debt) to determine whether or not it falls within the scope of the exemption.

  • Introducers need to do something more than introduce, but it doesn't have to be much more.

The case in question is Dollar Financial UK Limited v HMRC.

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