Article: Perspective on the Payment VAT Exemption Following the Decision of the UK Supreme Court in Target

Abstract

It is well established that the Court of Justice of the European Union (CJEU) has taken a strict approach in construing the payment VAT exemption laid down in Article 135(1)(d) of the VAT Directive 2006/112/EC (VAT directive). After more than twenty years of jurisprudence in this space, the CJEU held in DPAS Limited (Case C-5/17) (DPAS) that an instruction to make a payment, albeit essential, was not enough to satisfy the legal requirements for VAT exemption. The impact of this judgment cannot be overlooked. In the UK, the Supreme Court handed down its judgment in Target Group Limited on 11 October 2023 (Target SC) (Target Group Ltd v. HMRC [2023] UKSC 35) in which it fully endorsed the DPAS doctrine, resulting in a disappointing but widely expected outcome. At its core, it was held that, even if a supplier causes a transfer by sending a binding instruction, such activity does not meet the bar for exemption regardless of whether such causal effect inevitably results, without alteration, in a transfer of funds between the parties. This interpretation represents a landmark shift in interpretation under UK VAT law towards a more restrictive approach. In the author’s view, although the conclusion seems sensible as applied to the facts in Target SC, the Supreme Court did not take the opportunity to distinguish mere administrative tasks taking place outside a typical payment supply chain from a payment instruction made by a financial intermediary, thereby putting any type of instruction on equal footing. This contribution considers the judgment in Target SC in detail and examines whether the legal interpretation of the UK Supreme Court aligns with previous judgments of the CJEU. VAT, Payment Exemption, Outsourcing, Functionality Test, Causal Effect, Restrictive Interpretation, SDC