Royal Bank of Scotland Group Plc v. Decision of the Vat and Duties Tribunal [2002] ScotCS 54 (26th February, 2002)

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Decision of the Vat and Duties Tribunal [2002] ScotCS 54 (26th February, 2002) SECOND DIVISION, INNER HOUSE, COURT OF SESSION Lord Justice Clerk Lord Coulsfield Lord Sutherland XA98/01 OPINION OF THE COURT delivered by THE LORD JUSTICE CLERK in APPEAL by THE ROYAL BANK OF SCOTLAND GROUP plc against A decision of the VAT and Duties Tribunal dated 21 March 2001 and communicated to the appellants on the same date _______ Act: Tyre, QC, Ghosh : MacRoberts Alt: McNeill QC, S A L Woolfe : Shepherd & Wedderburn WS 26 February 2002 The decision appealed against This is an appeal from a decision from the Edinburgh VAT and Duties Tribunal dated 21 March 2001 to the effect that for VAT purposes the supplies made by the appellant to other banks consisting of the use of its automated telling machines (ATMs) by customers of those banks are exempt and not zero rated. The facts The facts of this case are agreed. They relate to the ATM system in general and the specialties affecting the ATMs of the appellant that are situated in Scotland. The ATM agreements The appellant has entered into two agreements with other banks regulating the use of the participants' ATMs, namely an agreement dated 17 September 1986 (as amended by a supplemental agreement dated 29 December 1995) between Barclays' Bank, Lloyd's Bank, Bank of Scotland and the appellant (the four-bank agreement) and heads of agreement dated September 1991 between the appellant and Midland Bank (the Royal/Midland agreement). Both agreements relate to the same basic system that the participating banks have set up. The preamble to the four-bank agreement narrates inter alia that "The parties (A) recognise that the sharing of ATM encashment facilities on a reciprocal basis is likely to enhance the usefulness of ATMs and to be of general benefit to the public ... and (C) have agreed to proceed on a committed but reviewable basis with reciprocal arrangements for the sharing of cash dispensing facilities through the parties' respective Approved ATMs." The "reciprocal arrangements" are defined as "the arrangements for reciprocal ATM encashment facilities between the parties contained in or provided for in this Agreement (cl. 1(A))." Clause 2 of the agreement ("Reciprocity") defines the parties' obligations to make available the encashment facilities to their customers and provides for the further refinement and development of the system. These obligations include an obligation on each party to make available to the system a specified minimum number of ATMs. Clause 4 (as substituted by the supplemental agreement) provides inter alia that "commission charges of the ATM banks in respect of the Reciprocal Arrangements will be agreed bilaterally between the parties" and that "a party may not charge another party's customers for transactions at its own ATMs." The commission charge is commonly referred to as the reciprocity fee. Clause 6 provides that each participant will reimburse promptly and in accordance with the agreed procedures each ATM bank through whose ATM cash is dispensed in accordance with the contract. The four-bank agreement is to be construed in accordance with the laws of England (cl. 25), but counsel agree that nothing turns on that point in this case. The Royal/Midland agreement is a shorter document drafted in a different style, but in our view it is similar in all essentials so far as the present question is concerned. Clause 1 is as follows: "This is an agreement as to reciprocity of ATMs but it is made within the framework of a competitive situation. The Banks see advantages in the agreement for their customers and for themselves but freedom of action remains on the part of each Bank, subject to the specific terms of this Agreement." Clause 8 provides for the payment of a reciprocity fee on a fixed charge basis. It provides that the charge "only relates to transactions between the banks." Banknotes This case has arisen because the appellant is one of three Scottish banks that are entitled to issue their own banknotes (cf. Bank Notes (Scotland) Act 1845 (the 1845 Act)). The appellant's banknotes, like those of the Bank of England, are notes payable to bearer on demand. All banks other than the Scottish note-issuing banks dispense Bank of England notes from their ATMs wherever they are situated. The appellant has ATMs throughout Scotland, England and Wales. In England and Wales the appellant dispenses Bank of England notes from its ATMs; but in Scotland, in almost every case, it dispenses its own banknotes. On rare occasions it dispenses Bank of England notes through its Scottish ATMs but, under an agreement between the Scottish note-issuing banks, it never dispenses notes of other Scottish banks. It is agreed that the appellant does not "issue" Bank of England notes. It merely circulates Bank of England notes that are already in issue. But when it dispenses its own banknotes through an ATM, it "issues" them and is required to cover the promise on the face of the notes to pay the bearer on demand. The appellant has no obligation under either of the ATM agreements to dispense its own banknotes from any ATM. The reciprocity fee The reciprocity fee is a uniform flat-rate fee for each ATM transaction, whatever the value, number or denominations of the notes dispensed. The fee is payable whether the notes dispensed are the appellant's own notes or Bank of England notes. The customer of a counterparty bank who uses an ATM of the appellant does not reimburse, at any rate directly, the counterparty bank for payment of the reciprocity fee. The reciprocity fee is directly payable by the counterparty bank to the appellant. The statutory background Sections 30 and 31 of the Value Added Tax Act 1994 distinguish between a zero-rated supply of goods or services and an exempt supply. Section 30 provides inter alia as follows: "30(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section - no VAT shall be chargeable on the supply apart from this section; but it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil. (2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified. Group 11, item 1, of Schedule 8 is as follows: "1. The issue by a bank of a note payable to bearer on demand." Section 31 of the 1994 Act provides inter alia as follows: "31. A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 ... " Group 5, item 1, of Schedule 9 is as follows: "1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money." If a supply of goods or services is zero-rated, no VAT is charged upon it; but the supply is in all other respects treated as a taxable supply. The supplier is therefore entitled to credit for the input tax attributable to the supply. The input tax in this case would include the tax incurred in the production of the notes. If a supply of goods or services is exempt, it is not a taxable supply at all. The supplier is therefore not entitled to credit for the input tax attributable to the supply. It is agreed that where a reciprocity fee is payable for the dispensing of cash at an ATM of the appellant in England or Wales, the supply for which the fee is paid is an exempt supply under Group 5, item 1 of Schedule 9 ( supra ). It is also agreed that the supply is an exempt supply on those rare occasions when the appellant dispenses Bank of England notes from an ATM situated in Scotland. The reasoning of the Tribunal The Tribunal held that for the purposes of VAT no material distinction could be made between the dispensing of cash from a Scottish ATM and the dispensing of cash from an English ATM. Since the reciprocity fee was a flat rate fee and since it was a matter of indifference to the customer which notes were dispensed, the Tribunal considered it difficult to argue that the reciprocity fee could be seen as a consideration payable for the issue of banknotes by the appellant. The Tribunal found that "what was specifically and essentially supplied in consideration of the reciprocity fee was the service of providing the customers of counterparty banks with the facility to obtain money" (Decision, p. 11). That was the case whatever type of banknotes the appellant's ATMs dispensed. The case for the appellant Counsel for the appellant submitted that the Tribunal erred in its conclusion as to the nature of the service supplied by the appellant in consideration of the reciprocity fee. The fee is not paid for the provision of a facility to obtain money. It is paid for the service of dispensing cash through the ATM. This is demonstrated by the fact that the fee is payable only if and when cash has been dispensed. There can be a supply by the appellant to the counterparty bank even though the service of dispensing the cash is provided to a third party, namely the customer of the counterparty bank ( Lord Adv . v. Largs Golf Club , 1985 SLT 282, at pp. 285-6; CCE v. Redrow Group plc , [1999] 1 WLR 408 , at pp. 412D - 413A). Moreover, it is irrelevant that the customer may be indifferent as to the type of notes dispensed. As long as the appellant's own notes are dispensed, there is an issue of notes arising from the fact that the appellant puts its promise into circulation and must cover it. The supply in respect of which the reciprocity fee is payable is therefore a zero-rated supply within the meaning of the 1994 Act (Sched. 8, Group 11, item 1). On the other hand, when the appellant's ATMs dispense Bank of England notes there is a simple transfer of money falling within Group 5 of Schedule 9 and therefore there is an exempt supply. If the ATM dispenses a mixture of the appellant's notes and Bank of England notes, the supply is partly zero-rated and partly exempt. If that result seems anomalous, the anomaly is not a consequence of VAT legislation. It is a consequence of the Scottish banknote legislation. The case for the respondents Counsel for the respondents submitted that the Tribunal correctly identified the nature of the supply. It consists in the appellant's participating in the reciprocal system by providing to the counterparty bank a facility for its customer to obtain cash. That remains the nature of the service even if the performance of the appellant's contractual obligations involves the issue of its own notes. The agreements provide for the sharing of facilities by the making available of ATMs to customers of all of the participating banks. Each bank is obliged to make available a specified minimum number of ATMs for this purpose. For each sum that one of its ATMs dispenses the appellant is reimbursed and is paid a fee. The fee is not related to the value of the transaction. A flat-rate fee arrangement is appropriate because the banks each provide different numbers of ATMs and because the essence of the supply is that of a service to the counterparty bank by the provision of cash to its customer. The supply is therefore an exempt supply falling within Group 5 of Schedule 9. Decision The essential question in this case is to identify the nature of the supply for which the reciprocity fee is paid (cf. Ivory and Sime Trustlink Limited v. CCE , 1998 SC 774, at p. 777F). In our opinion, the Tribunal correctly identified the nature of the supply. The question raised in this case affects only those transactions that take place at ATMs of the appellant in Scotland and involve the dispensing of the appellant's own banknotes. It is agreed that where an ATM transaction involves the dispensing of Bank of England notes the reciprocity fee is payable for an exempt supply. The short question therefore is whether the dispensing of the appellant's banknotes in such a case transforms the supply into a zero-rated supply because it then consists of the issuing by the appellant of notes payable to bearer on demand. In our opinion, the case for the appellant is unsound. It fails sufficiently to take account of the fact that there is a supply of a service to the counterparty bank, even if that involves the provision of a service to the third party customer and even if the service to that customer is an "issue" of banknotess. In this respect, the appellant is in a similar position to that of the estate agents in CCE v Redrow Group plc ( supra ). In that case the appellant company was in the business of building new houses. It offered to prospective buyers of its houses the services of estate agents who would act in the sale of their existing houses and it undertook to pay the estate agents' fees, provided that the purchase of the new house from the appellant went through. It was held that, although the estate agents were supplying a service to the prospective buyers, the fact that the appellant instructed them and paid their fees had the consequence that the transaction between them and the appellant constituted a supply of services by them to the appellant. Under the contractual arrangements between the appellant and the counterparty bank the obligation to provide the supply is owed directly to the counterparty bank. In our opinion, the reciprocity fee is payable to the appellant in consideration of its providing to the counterparty bank a supply consisting of a service to a customer of that bank in the form of a facility to withdraw cash, in whatever form it is dispensed. The agreements in this case emphasise the reciprocal nature of the system that they establish. They show that, whatever benefits it may have for individual customers, the system is established for the mutual benefit of the participating banks. In our view, the flat-rate basis of the reciprocity fee is a logical reflection of the fact that the appellant provides a service to the counterparty bank which is in essence the same whatever the value of the transaction, or the type, number or denominations of the notes dispensed. We are confirmed in this view by the fact that the agreements do not oblige the appellant to dispense any of its own notes through any of its Scottish ATMs. In our view, the nature of the supply for VAT purposes cannot depend on the voluntary decision of the appellant to implement its obligations under the agreements by dispensing one type of banknote rather than another. We shall refuse the appeal. BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII URL: https://www.bailii.org/scot/cases/ScotCS/2002/54.html