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VAT and debt collection following the AXA judgment

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All payment related services falling within the definition of ‘debt collection’ as outlined by the European Court of Justice in a recent judgment are now chargeable to VAT at the standard rate, HMRC has announced.

Revenue & Customs Brief 54/10 outlines HMRC’s position following the judgment in HMRC v AXA UK plc (C-175/09), concerning service charges paid by dentists.

As Tax Journal reported on 8 November, the company collected fees for dentists by monthly instalments and the dentists paid the company a monthly service charge. The company treated those service charges as exempt from VAT, but the ECJ upheld HMRC's view that the company was making a single supply that failed to qualify for exemption.

AXA is the representative member of a VAT group including Denplan, which claims to be the UK's leading dental payment plan specialist with over 6,500 member dentists. Denplan expressed disappointment with the ruling last October but said it had accounted for VAT for 25 years on the ‘administration charges’ paid by dentists.

HMRC said in Brief 54/10: ‘The [ECJ] found that the supply AXA made to the dentists (which it summarised as the collection, processing and onward payment of sums of money due from third parties to the dentists) was specifically excluded from [the VAT exemption in Article 135(1)(d) of the EU VAT Directive] as “debt collection”.’

Following the AXA judgment, ‘debt collection’ cannot be seen as applying solely to the service of chasing and recovering overdue payments on behalf of the creditor, HMRC said.

All services principally concerned with collecting payments from the person owing them for the benefit of the entity to which those payments are owed – regardless of whether those payments are received before, on, or after their due date – fall within the exclusion to the exemption and are liable to VAT at the standard rate, it added.

The ECJ judgment gave HMRC scope to revisit its policy on the liability of a broad range of payment services previously considered to be exempt, in a move ‘which could hit financial institutions in particular’, Valentina Sloane, a barrister at Monckton Chambers, wrote in Tax Journal (15 November 2010).