VAT exemption does not cover dental plan payment administration services, says EU court

VAT expert Maryse Heijnen of Pinsent Masons, the law firm behind Out-Law.com, said that the DPAS continues the CJEU's  narrow analysis of the VAT exemption for transactions concerning payments and transfers, in line with its recent judgement in a case involving Bookit.

"The judgement confirms that a service provider has to show how its services effects legal and financial change, in order for the services to come within the scope of the exemption. This may pose challenges for any business which cannot meet that test," she said.

Under the dental plan provided by DPAS to dentists, the dentist agreed to provide dental care to patients in return for a monthly payment by the patient. Patients made monthly payments to DPAS’s bank account by direct debit. Each month, DPAS paid the dentists the aggregate amount payable to them in respect of all of their patients, less an amount retained by DPAS as a charge for its services.

Until 1 January 2012, the contractual arrangements implementing the dental plans were concluded solely between DPAS and the dentists and DPAS's services were treated by the UK's HM Revenue & Customs (HMRC) as exempt from VAT. This was under an exemption in Article 135(1)(d) of the VAT Directive for "transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection". 

However in 2010 the CJEU decided that insurance company AXA, which operated a similar service called Denplan on behalf of dentists, was liable for VAT at the standard rate because Denplan's services were essentially those of 'debt collection' and therefore specifically excluded from the exemption.

Following the AXA decision, DPAS changed the structure of its contracts with dentists and patients so that although it continued to make supplies of dental payment plans to dentists, which were subject to VAT; it also made some supplies directly to patients. Each patient was requested to sign a form, agreeing that DPAS would ‘manage and administer’ payments due under the dental plan and that the patient authorised DPAS to deduct a monthly charge from the monthly payment agreed with the dentist. DPAS argued that the services to patients were exempt from VAT, but HMRC disagreed.

Although the Fist-tier Tribunal found in favour of DPAS, the Upper Tribunal referred the case to the CJEU because it was unsure about how the CJEU's decision in the AXA case and subsequent decisions involving Bookit and the National Exhibition Centre applied to the facts in the DPAS case.   

The CJEU said in its judgment that the supply of services by DPAS "does not, as such, effect the legal and financial changes which characterise the transfer of a sum of money within the meaning of the case-law …, but is administrative in nature".

"As the Advocate General also observed … a supply of services may be regarded as a ‘transaction concerning transfers’ or as a ‘transaction concerning payments’ within the meaning of Article 135(1)(d) of the VAT Directive only where it has the effect of making the legal and financial changes which are characteristic of the transfer of a sum of money. By contrast, the supply of a mere physical, technical or administrative service not effecting such changes will not come within that concept," the CJEU said.

"DPAS does not itself carry out the transfers or the materialisation in the relevant bank accounts of the sums of money agreed in the context of the dental plans at issue in the main proceedings, but asks the relevant financial institutions to carry out those transfers. By contrast, as the tax authority contends, a supply of services such as that at issue in the main proceedings is comparable to the card-handling fees which were at issue in the [Bookit] case …. That case concerned, in essence, a supply of services which consisted for the taxpayer in submitting to the financial institutions concerned requests for payment which the customers had previously accepted to carry out with a view to purchasing a product and which constituted a preparatory stage to carrying out transactions concerning payments and transfers effected by those establishments," the CJEU said.

It said that a supply of the services provided to patients by DPAS was "merely a step prior to the transactions concerning payments and transfers covered by Article 135(1)(d) of the VAT Directive". 

The judgement of the CJEU in DPAS initially seems to contradict its earlier decision in AXA Denplan, Maryse Heijnen said.

"However the Court said that in the AXA Denplan case it was not examined whether the supply of services met the criterion established by previous case law for the purpose of identifying a transaction concerning payments and transfers, but that the Court focused its analysis on the question of whether that supply of services was covered by the concept of ‘debt collection’," she said.

The ruling said: “It is also not apparent from that judgment whether the Court thereby wished to broaden the concept of ‘transactions…concerning…payments [and] transfers’, within the meaning of those provisions, which it had already defined by its previous case law, so as to include transactions which do not, in themselves, make the legal and financial changes which are characteristic of the transfer of a sum of money, or to redefine that concept by establishing new criteria." 

The Court accepted that the service was essential to making the payments owed by the patients to their dentists and insurers, but said that "since Article 135(1)(d) of the VAT Directive must be interpreted strictly, the mere fact that a service is essential for completing an exempt transaction does not warrant the conclusion that that service is to be exempted".

It said that even though the transactions exempted under Article 135(1)(d) to (f) of the VAT Directive "do not necessarily have to be carried out by a bank or a financial institution", they "are, by their nature, financial transactions", whereas the services provided by DPAS were "administrative in nature" and so were not exempt from VAT. 

By answering the first question in the negative, the CJEU did not have to answer the second question in relation to 'debt collection', which is explicitly excluded from the VAT exemption for payments and transfers. 

It is likely that the interaction between what is exempt from VAT and what is excluded as debt collection will require further clarification, said  Heijnen.