Month: March 2024

In this post, Adam Ferris (Senior Associate) in the Finance Disputes Team at CMS and Henry Powell (Associate) in the Real Estate Disputes Team at CMS comment on the judgment of the Supreme Court in Byers and Ors v Saudi National Bank [2023] UKSC 51, which was handed down on 20 December 2023.

Summary

The Supreme Court has clarified the principles applicable to a claim for knowing receipt.

Knowing receipt is an equitable personal claim which can be brought against a person who has received property transferred to them in breach of trust. The principal elements of such a claim are that:

A trustee transfers trust property beneficially owned by the claimant to the defendant in breach of trust; and

The defendant had knowledge of the breach of trust at the time of the transfer or obtained such knowledge prior to disposing of the property.

The successful claimant in knowing receipt has against its defendant remedies requiring the defendant to account as a trustee of the property. Accounting to the claimant is a powerful remedy; the defendant must restore the trust fund to the position it would have been had the breach not occurred.

It has long been established that knowing receipt liability will not arise where the claimant’s equitable proprietary interest in trust property is overridden by a transfer to “equity’s darling”, i.e. a bona fide purchaser for value without notice of the breach of trust. The primary issue before the Supreme Court – Lord Hodge, Lord Briggs, Lord Leggatt, Lord Burrows and Lord Stephens – was whether it is the case more generally that for a claim in knowing receipt to succeed the claimant must have a continuing equitable proprietary interest in the trust property, that has not been overreached or overridden, at the point it is received by the defendant. In particular, can knowing receipt liability arise when the defendant receives clean title to property transferred to it in breach of trust as a result of the claimant’s beneficial interest being extinguished by the foreign law governing the transfer of the property? 

The Supreme Court held, dismissing the appeal from the Court of Appeal, with whom it agreed, that a claimant in knowing receipt must be able to establish a continuing equitable interest, which has not been extinguished by overriding or overreaching, at the point the defendant receives the property. The opposite conclusion would have resulted in a “deep-rooted contradiction” between the recipient holding clean title to property yet being under an obligation to restore it to another. Accordingly, where the claimant’s beneficial interest is overridden upon the transfer to the defendant by the operation of foreign law – as it had been in this case – no liability in knowing receipt can arise.

Therefore, despite Saudi National Bank having knowingly received company shares in breach of trust, it could not be held liable for a claim in knowing receipt in the High Court, the Court of Appeal or, finally, the Supreme Court because the Appellant’s beneficial interest in the shares had been extinguished by the transfer, which was governed by Saudi Arabian law.

Policy arguments that the conclusion reached by the Supreme Court would amount to a “money launderers’ charter” were rejected on the basis that both criminal law and the availability of claims in dishonest assistance (not pleaded in this case) provide a sufficient deterrent to fraudsters who might seek to make use of foreign law transfers to avoid knowing receipt liability.

While this case provides helpful clarification on the law of knowing receipt, the Supreme Court acknowledged that a number of areas of uncertainty remain, including:

Whether the level of knowledge required is a fixed standard of knowledge or one based on unconscionability that may vary on a case by case basis;

Whether a category of knowledge known as “constructive knowledge” can satisfy such requirement;

What is the relevance of unjust enrichment to knowing receipt; and

Whether knowing receipt is properly categorised as ancillary to a proprietary claim (as Lord Briggs found) or an “equitable proprietary wrong” (as Lord Burrows found).

These issues will need to be determined on another occasion.  

Background

A Cayman Islands company, Saad Investments Company limited (“SICL”), was the beneficiary of Cayman Island trusts. The owner of SICL, Mr Maan Al-Sanea, declared himself a trustee of shares SICL held in five Saudi Arabian banks (the “Disputed Securities”) and, on 16 September 2009 (the “September Transfer”), transferred the shares to Samba Financial Group to discharge part of the personal debts he owed the bank. Latterly, in April 2021 the assets and liabilities of Samba Financial Group would be transferred to Saudi National Bank and so for the purposes of this article we refer to both as (the “Bank”). On the day of the September Transfer the Bank duly credited Mr Al-Sanea’s account with the market value of the Disputed Securities in the sum of around 801 million Saudi riyals and the shares were registered in the Bank’s name.

SICL collapsed into insolvency in 2009 and joint official liquidators were appointed (the “Claimants”).  In 2013 the Claimants sought a declaration from the High Court under section 127 of the Insolvency Act 1986 that the September Transfer was a void disposition of property belonging to SICL. The High Court imposed a stay on jurisdictional grounds. The Claimants were successful on appeal to the Court of Appeal and, thereafter, the Bank appealed to the Supreme Court in February 2017 (Akers and others  v Samba Financial Group [2017] UKSC 6).

Allowing the Bank’s appeal, the Supreme Court – comprising Lord Neuberger, Lord Mance, Lord Sumption, Lord Toulson and Lord Collins – held that, at common law, the nature of the interest intended to be created by a trust depends on the law governing the trust.

Saudi Arabian law does not recognise a distinction between legal and beneficial (i.e., equitable proprietary) ownership in the way the English common law does. Rather, in the Saudi jurisdiction, the disposition of shares to a third party ‘extinguishes’ any interest of a beneficiary in the shares. As a matter of Saudi Arabian law, the effect of the September Transfer and registering of the Disputed Securities in the Bank’s name meant that SICL had no continuing proprietary interest in the Disputed Securities following the transfer.

It followed that the transfer of the Disputed Securities to the Bank did not ‘dispose’ of any rights belonging to SICL within the meaning of section 127, which applied only to assets legally owned by the company that it sells itself, rather than the transfer of legal rights held by a third party as in the case of Mr Al-Sanea’s transfer of SICL’s shares to the Bank. The appeal was dismissed.

The Claimants applied to amend the particulars of claim to plead a claim in knowing receipt and, as an insurance policy if permission to amend were refused on limitation grounds, issued a new claim in knowing receipt.

Permission to amend was refused on appeal and so the new claim in knowing receipt reached trial in the High Court in October 2020.

Decisions of the lower courts

In the High Court, three substantive issues came before Fancourt J: as to liability, the “Saudi Arabian Law” issue and the “Law of Knowing Receipt” issue and, on quantum, the “Valuation” issue.

Fancourt J gave judgment on 15 January 2021 and held in relation to the first two issues that:

Saudi Arabian Law – the effect of the September Transfer under Saudi Arabian law was such that it extinguished SICL’s proprietary interest in the Disputed Securities. As a matter of evidence as to the law and practice in Saudi Arabian capital markets, registration is prima facie evidence and, until displaced, is conclusive as to ownership of shares.

Law of Knowing Receipt – the cause of action depends on a defendant’s knowledge that the property it received is trust property which ought to have been dealt with in accordance with the trust. Following the decision of the House of Lords, in Macmillan Inc v. Bishopsgate Investment Trust plc (No.3) [1995] 1 WLR 978, Fancourt J held that a claim in knowing receipt is a personal claim for equitable compensation based on a proprietary interest, but where the Bank acquired clean title – here, by virtue of the foreign law governing the transfer of property, but also in other scenarios such as where clean title is conferred by virtue of statute (e.g. the Law of Property Act 1925, s 2) or by a transfer to equity’s darling – then the claim must fail.

In view of the two hurdles to liability there was no need to decide the third issue on quantum but Fancourt J gave his view that when valuing trust property the proper valuation method for the court would ordinarily be on the basis of market valuation but, on the facts of this case, given the size of the shareholding relative to the average daily traded volumes, it was appropriate to apply a ‘block discount’ from the quoted price.

On all three fronts the Claimants appealed to the Court of Appeal, which handed down judgment on 27 January 2022. Newey LJ, Asplin LJ and Popplewell LJ, dismissed the appeal for these reasons:

Saudi Arabian Law is an Islamic system with concepts and principles far removed from those in English law and on the particular facts of the case the practice and culture of Saudi Arabian capital markets was relevant in determining the law. Fancourt J, as trial judge, had heard extensive expert evidence to determine these foreign law issues. The Claimants had failed to satisfy the criteria for the Court of Appeal to interfere with the trial judge’s findings, per Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] E.T.M.R. 26, [2014] 1 WLUK 663.

Law of Knowing Receipt – the Claimants could not establish a continuing proprietary interest capable of making the Bank a knowing recipient as this was entirely inconsistent the unencumbered title it received.

The Court indicated that were the findings on liability not fatal to the appeal it would have allowed the appeal on the Valuation issue. The preferred valuation method was by reference to the cost of the asset had it been purchased by the trustee rather than what it would have achieved on a sale, which would involve no block discount.

Jettisoning the Saudi Arabian Law issue, the Claimants appealed the Court’s decision on Knowing Receipt alone.

Knowing Receipt: the central issue on appeal to the Supreme Court

On the Bank’s case, an action in knowing receipt requires the claimant to have a continuing equitable proprietary interest in the relevant property at the point it is received by the defendant. The September Transfer of the Disputed Securities to the Bank caused the Bank to receive title freed forever from the Claimants’ equitable interest and as such the knowing receipt claim must fail.

On the Claimants’ case, a continuing equitable proprietary interest is not required. Rather, having acquired the Disputed Securities with clean title, the Bank’s knowledge that a breach of trust was involved made it unconscionable for the Bank to continue to treat that property as its own and so liability in knowing receipt arose.

Approving the decision of the Court of Appeal and dismissing the Claimants’ appeal, Lord Briggs and Lord Burrows gave judgment – with whom Lord Hodge, Lord Leggatt and Lord Stephens agreed – setting out the requirements for a claim in Knowing Receipt.

Both Lord Briggs and Lord Burrows agreed that the question with which they were asked to grapple had been addressed head on in the case law to date. As such, they were required to derive their answer from an analysis of principle.

Pertinent to the court’s analysis was its observation of the well-established rules pertaining to a transfer of trust property to equity’s darling, in particular that:

a transfer of trust property to equity’s darling overrides the proprietary interest of the beneficiary (even if the transfer is made in breach of trust); and

the effect of this overriding is permanent and is not resuscitated when the recipient later becomes aware of the breach of trust or where the recipient subsequently transfers the property to another party that is aware of the breach of trust.   

The Supreme Court found that knowing receipt is not an accessory liability: it requires interference with the claimant’s equitable rights rather than being merely responsible for another’s wrongdoing. Liability in knowing receipt depends on the claimant having a continuing equitable proprietary interest when the property is received. If the claimant’s interest is extinguished, as it is as a result of a transfer to a bona fide purchaser for value without notice, as a result of the operation of statute, or, as in this case, as a result of the operation of foreign law, there can be no proprietary or knowing receipt claims. The effect of Saudi law in this case was to confer clean title to the shares on the Bank, overriding the Claimants’ equitable interest.

If the opposite were true this would imply a suspensory effect on the claimant’s proprietary interest as a result of a transfer to equity’s darling which would offend the basic equitable principles referred to above. The purpose of the doctrine of equity’s darling is to confer full beneficial ownership of property. Equity stops short of ‘interposing equitable interests’ in derogation of that outcome because it regards equity’s darling as having the better right to ownership than the beneficiary. The earlier equitable interest is overridden, once and for all, and cannot be revived against a successor in title to equity’s darling even with knowledge, per Harrison v Forth (1695) Prec. Ch. 51; 24 ER 26.

To say otherwise would seriously detract from the full beneficial ownership equity treats the recipient as acquiring. A legal interest or estate is good against all the world, whereas an equitable interest is (save for statutory intervention or foreign law) good against all the world except equity’s darling.

Further, the Court held that there was no reason why a claim in knowing receipt should survive overriding or overreaching but powerful reasons which tended in the opposite direction. In resolving the “deep-rooted” contradiction between having clean title and being obliged to restore the same property to another, how could equity’s darling say “the property is mine” but also be required to ‘look after [the property] in the meantime’, and to account to the beneficiary for any use of the property falling short of those duties? It could not.

Policy arguments made by the Claimants that this principle would incentivise fraudsters to route assets to third parties via jurisdictions where the law extinguishes equitable proprietary interests could not assist the Claimants either. The criminal law acts as a better disincentive to that fraudulent conduct than the civil law (and in any event a civil law claim in dishonest assistance is likely to be available against a dishonest recipient), and a policy concern of that kind could not possibly undermine the force of the Court’s principled view on continuing equitable interest.

Lord Briggs’ diagnosis for the confusion regarding this issue in previous case law was a looseness in the language of previous authorities, in referring to equitable doctrines and constructive trusts, knowledge and notice, as in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 which had obscured the conditions for a claim in knowing receipt. Accordingly, the court emphasised the priority of the conflicting equitable principles.

Lord Briggs disapproved of the Claimants’ argument that knowing receipt was equity’s response to the apparent unconscionability of the defendant treating the property as his own after learning of the breach of trust rather than the best available vindication of the claimant’s continuing equitable proprietary interest in the property where it has been dissipated by the defendant. The test proposed by the Claimants wrongly elevated unconscionability from an equitable objective to an unruly and unpredictable test for liability which would have unacceptable adverse consequences for certainty in resolving issues as to priority of title to property.

The appeal was dismissed.

Comment

The Supreme Court was tasked with clearing a fog which had hung over this litigation and the doctrine of knowing receipt. It had been allowed to creep in through imprecisions of language and a tendency for other courts to offer views on matters which were not properly before them.

In the light of the Court’s judgment, which marks a return to basic principles of equity and an unwillingness to defer to an exercise in weighing ‘all the circumstances’ in the face of apparent competing equitable claims, a recipient of property who has received clean title can say “this is mine”. The force of the Supreme Court’s statement on the unimpeachability of such a title has already assisted lower courts, as in Asturion Foundation v Alibrahim [2023] EWHC 3305 (Ch), which had been experiencing difficulties in ‘classifying’ and ‘characterising’ claims in knowing receipt.

These filings were made without the knowledge of the companies concerned or the lenders who held the charges. As a result, Companies House incorrectly marked the charges as satisfied on the public register when in fact they remained outstanding – causing widespread concern amongst banks and other lenders. 

The filings all seem to have been made in February by an individual giving an address in Enniskillen in Northern Ireland. There does not appear to be any discernible pattern, with the issue affecting various companies and lenders. The filings have been made maliciously, although the motivation remains obscure.

This article explores the action taken by Companies House in response to the attack and steps which a lender may want to take in the light of it.

What action has Companies House taken to rectify this?

At the time of writing, Companies House has not made any formal announcement regarding the issue or the action that it has taken to rectify it, although it has communicated directly with affected parties. Companies House believes that it has identified all the affected companies and blocked the account from which the incorrect filings were made.

It is also understood that Companies House has rectified the register for the affected companies using new powers under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). In each case, the charge previously erroneously shown as satisfied is now stated to be outstanding. The filing history for the company has also been annotated with a note that it has been rectified and that material formerly considered to form part of the register is no longer considered by the Registrar to do so.

Enhanced role of Companies House under ECCTA

This incident and the action taken by Companies House highlights a recent fundamental change in the role of Companies House. Under ECCTA, which received royal assent in October 2023, this is changing from an essentially administrative function to that of a more proactive gatekeeper in relation to company formation, with new objectives, including that of ensuring the accuracy and integrity of information on the register of companies.

ECCTA enshrines these new objectives in statute and provides Companies House with additional powers to fulfil this role, including stronger powers to remove information from the register, require additional information to be provided and reject documents where there are inconsistencies. Many of these additional powers came into force on 4 March 2024 and Companies House appears to have moved quickly to utilise them to deal with the erroneous filings. Previously, it would have been necessary for an affected party to obtain a court order authorising the rectification of the register in each case – which would have been time consuming and involved a cost to the company.

New guidance on Companies House website states that its approach to the removal of information from the register is changing. It will remove information where it is satisfied that information is false, has been sent without the company’s knowledge or where a document records a transaction that never occurred.

ECCTA will also introduce identity verification requirements for directors, persons with significant control and persons filing information on behalf of companies. These measures are not yet in force but had they been, the person who made the fraudulent filings would have had to comply and provide evidence of their identity.  Their introduction is seen by Companies House as a longer-term project as they require a significant upgrade to Companies House’s existing systems. However, the fact that one individual could cause this amount of disruption demonstrates the need for these measures.

Acceptance of statements of satisfaction in the future

The incident also highlights a well-known flaw in the system for noting charges on the register as having been satisfied.  It has always been viewed as anomalous that Companies House must accept a completed statement purporting to be from or made on behalf of the company and mark a charge as satisfied on the register, without reference to the charge holder and without any evidence that the charge has actually been satisfied or released. Whilst there have been instances in the past of companies mistakenly filing statements of satisfaction, it may not previously have been anticipated that a third party might maliciously file a statement of satisfaction, falsely claiming that they were doing so on behalf of the company. 

As one of Companies House’s new objectives is to ensure the accuracy of information on the register, it may look to take a more rigorous approach to its acceptance of such statements in future. While we wait for the identity verification measures to be brought into force, it will be interesting to see if Companies House takes the view that it can use its new powers under ECCTA to take a more stringent approach, consistent with its new objectives.

What action should lenders take?

Affected lenders should check that the relevant company did not enter into any transactions which might prejudice any charges whilst they were incorrectly shown as satisfied on the register. 

Subject to this, the action taken by Companies House should resolve the current issue. However, it is possible that Companies House has not identified all affected companies and there could be further deliberate misfilings made from another account. 

We anticipate that lenders will therefore want to take a cautious approach on new and existing matters and require their advisers to check recent filings of statements that charges have been satisfied to see if they look suspicious. In relation to any transactions where reliance is continuing to be placed on existing security (for example, on an amendment to an existing loan facility), it will be prudent to check that it has not been incorrectly marked as satisfied on the register.

Conclusion

This incident has brought into focus some of the very concerns which prompted ECCTA in the first place and provided Companies House with an early opportunity to step into its new role. For further detail on Companies House and its new reforms, please see the following series of articles created by Shoosmiths. 

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The rules are designed to address concerns over “concentration risk” (in effect, too many FS firms  / institutions having their critical service and IT eggs in too few supplier baskets) and the impact an outage with a CTP could have on  operational resilience across the financial system. In an era where “cloud first” is the mantra of most FS IT departments, the threat of something going seriously wrong at one of the large vendors or hyperscalers is seen as potentially existential. 

The rules represent a bold stretching of the BoE / PRA’s regulatory perimeter. For the first time, non-FS businesses who supply important (enough) services to the industry will come under the direct supervision of the regulators. Obviously there are limits to what is being proposed, and the rules relate mainly to the provision of information by CTPs to the regulator to show that they are resilient and secure. It is a punchy move nonetheless. 

So far, regulated FS businesses have been tasked with making sure that their own operations (including when they are outsourced) are sufficiently resilient. But the buck stops with them – which means that, when dealing with relevant suppliers, they are possibly only as good as the due diligence information, audit rights, and contractual assurances etc which the supplier is willing to give. Cue years of debates in contract negotiations about what is “market” vs what is a “regulatory requirement”!

The new rules at least might provide an overlay to that where, before they can supply to the industry, CTPs at least have to show the regulator that they are stable enough. 

I’m sure that the consultation responses, when they are shared, will show an obvious spectrum of opinion ranging from resistance on the part of suppliers, to support from institutions. For example, exactly how CTPs are identified is a tricky subject  – the proposal being that HM Treasury decides after recommendations.  However, it may be that some vendors can see it as an opportunity to gain approval / endorsement and use the fact that they are compliant as a differentiator.

Based on feedback so far, I would expect to see some interesting questions and themes coming out of the consultation responses including:

Whether the industry / customers should have a say in which suppliers are designated as CTPs and how often the list should be reviewed – especially given how fast developments in AI and FinTech are moving
What enforcement action would be taken if a designated CTP did not comply with the requirements? Would the regulators be able to force a supplier out of the UK market, and what about the impact on their existing customers?
Should individual officers of CTPs have similar responsibilities as senior managers of FS regulated  businesses?
Whether CTPs should be required to share with their FS customers the supporting evidence of their operational resilience which they have provided to the regulators and to otherwise deal openly with them (subject possibly to redactions).
Should contract terms be mandated for use between CTPs and firms – possibly in a similar way to the “model clauses” used to aid protection of personal data when it is transferred overseas. 
How costs will be managed. Whilst compliance may be welcomed, firms may be wary of the potential impact on suppliers’ prices for their relevant services.

We will have to wait and see how those and any other relevant points are addressed by the regulators in response to the consultation.

 

CP26/23 – Operational resilience: Critical third parties to the UK financial sector

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Background

In this post, Mark Whiteside, Partner at CMS, and Johanna Dodgson, Associate at CMS, comment on the Supreme Court’s judgment in Target Group Ltd v Commissions for His Majesty’s Revenue and Customs [2023] UKSC 35.

Shawbrook Bank Limited (“Shawbrook”) is a provider of mortgages and loans. The appellant Target Group Ltd (“Target”) administers loans made by Shawbrook, including by operating individual loan accounts and instigating and processing payments due from borrowers.

The principal issue was whether the services provided by Target qualified for exemption under the Value Added Tax Act 1994, Group 5, items 1, 2, 2A and 8 of Schedule 9. It was not in dispute that the UK legislation reflects the exemption provided for in the Principle VAT Directive, Article 135(1)(d), for transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.

Target argued that its services were exempt from VAT under the Principal VAT Directive, article 135(1)(d) (the payments exemption). Target relied on the fact that it procured payments from borrowers’ bank accounts to Shawbrook’s bank accounts by giving instructions for payment which were then automatically and inevitably carried out through the BACS system. Target also relied on the fact that it inputted entries into the borrowers’ loan accounts with Shawbrook, which it claimed amounted to transactions concerning debts.

Through the courts

The First-tier Tax Tribunal (“FTT”) found that Target’s supply included transactions concerning payments or transfers within the financial services exemption but that the predominant nature of the supply was debt collection, therefore excluded from the exemption and taxable.

The FTT decision was handed down before the CJEU decision  in Commissioners for Her Majesty’s Revenue and Customs v DPAS Limited (Case C-5/17) [2018] STC 1615 (“DPAS”) and when the case was appealed to the Upper Tribunal (“UT”), the UT held that the subsequent CJEU decision made it clear that the supplies by Target did not fall within the scope of the exemption for payments and transfers. The UT also held that Target’s inputting of accounting entries in the loan account did not fall within the exemption as it did not change any party’s legal and financial position.

Target appealed to the Court of Appeal. The Court of Appeal, unanimously, dismissed the appeal. In particular, DPAS made it clear that:

“actual execution is necessary to qualify as a transaction concerning transfer or payment, and the mere giving of an instruction is not sufficient in itself, even if the instruction is or order is indispensable to the transaction taking effect, and even if the instruction triggers an entirely automatic process leading to payment.”

In agreement with the lower tribunals, the Court of Appeal also rejected the alternative argument that the supplies were exempt as transactions concerning current accounts. In agreement with the FTT and the UT, the Court of Appeal considered that a fundamental characteristic of a current account was that a customer is able to deposit and withdraw funds in varying amounts and, in the case of a current account, the account holder can pay amounts to third parties. The loan accounts operated by Target were not “current accounts“.

Target appealed to the Supreme Court.

The Supreme Court’s judgment

The Supreme Court considered whether the instructions Target provided to BACS, which automatically and inevitably resulted in the transfer of funds from the bank account of a borrower to the bank account of the lender, meant that the services supplied by Target were within the scope of the exemption.

The Supreme Court considered the Court of Justice decision in Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) [1997] (“SDC”). This was the first case to consider the exemption in the Principal VAT Directive, Article 135(1)(d). The Supreme Court derived the following principle from SDC: to be exempt the services provided by a data-handling centre, viewed broadly and ‘as a distinct whole’, must (i) have the effect of transferring funds; and (ii) change the legal and financial situation.

HMRC and Target disagreed about whether the reasoning in SDC required Target’s services to have this effect and make that change (‘the narrow interpretation’) or whether it was sufficient for them to have that causal effect (‘the wider interpretation’). HMRC argued for the narrow interpretation and Target for the wider.

Surveying the subsequent case law, the Supreme Court held that ‘later CJEU case law, and in particular Bookit Ltd v Revenue and Customs Comrs (Case C-607/14) [2016], National Exhibition Centre Ltd v Revenue and Customs Comrs (Case C-130/15) [2016] STC 2132  and especially DPAS, have made it absolutely clear that the narrow interpretation is the correct one.’

The narrow interpretation meant that in order to fall within the exemption:

the services must in themselves have the effect of transferring funds and changing the legal and financial situation;

it is not enough to give instructions to do so thereby triggering a transfer or payment;

it is not enough to perform a service which is essential to the carrying out of the transfer or payment, nor one which automatically and inevitably leads to transfer or payment; and

it is necessary to be involved in the carrying out or execution of the transfer or payment—its ‘materialisation’. This requires functional participation and performance. Causation is insufficient, however inevitable the consequences.

Based on the narrow interpretation, it was clear that Target’s services of providing instructions which automatically and inevitably resulted in payment from the borrowers’ bank accounts to the lender via BACS were insufficient to fall within the exemption.

Concluding thoughts

The Supreme Court’s judgment confirms that the VAT exemption for payments and transfers is to be interpreted strictly, and that it only applies to services that perform the specific and essential functions of a payment or transfer, not to services that are preparatory, ancillary or administrative in nature.