Whether redundancy payments were part of the VAT consideration for services to wind down a business

Thu 28 Dec 2017

The First tier Tribunal (FTT) has held that payments in respect of redundancy costs made by the Bank of Scotland (BOS – a subsidiary of Lloyds Banking Group) to an Irish company, Certus, on the winding down of its subsidiary’s Irish operations, were not consideration paid to Certus for the services of winding down those operations. The amount of VAT at stake was around £5.64m, and while the decision was decisively in favour of the taxpayer, it is not yet known if HMRC will appeal the decision.

The contractual arrangements and how they arose were key to the FTT’s decision. Any business seeking to outsource the winding down of part of its business operations should ensure the contractual arrangements properly reflect the  substance of the commitments it has to wind down the operations, and does not inadvertently create a VAT charge.

Background

Certus agreed to administer and collect on BOS’s subsidiary’s remaining loan book in Ireland. This involved call centre services for customers, checking information such as changes of address and requesting payment from customers in arrears. The agreement involved the transfer of around 722 staff to Certus. Unite negotiated on behalf of the employees that BOS make a deferred redundancy payment to Certus in respect of the staff, as by the nature of the engagement, the staff would eventually all be made redundant once the collection activity was complete.  This was established through a legal framework agreement for BOS to make the payments agreed with Unite.  These would be made whether or not Certus continued to be involved in the winding down work.

The FTT considered the CJEU case of Tolsma (C-16/93) as guidance that for there to be consideration for a supply of services, there had to be a legal relationship between the provider of the service and the recipient, with an obligation to provide the service to the recipient, for which the provider receives remuneration constituting the value actually given in return for those services. In other words there needed to be a direct link between the payment made and the provision of services.

The FTT found that Certus’s fee for their services was dealt with under contracts separate from that for the redundancy payments due to the employees and that the redundancy payments had nothing to do with the fees. These were to be paid by BOS to discharge Certus’s legal obligation to pay the employees,

They also held that the payment mechanism for Certus’s fee was significant (it was based on a cost plus or fixed fee basis for services provided by Certus). The FTT considered the redundancy payments were a separate stand-alone obligation arising as a result of negotiations with Unite, and that in substance, the sums were due to the employees with Certus being the conduit for payment.  Consequently the FTT held the redundancy payment was not subject to VAT.

Action

For further discussion on the VAT consequences of outsourcing, please get in touch with a member of the Mazars VAT team.