Blog Up Date: November 14th 2012
As an update to my recent post on how HMRC need to give a clear guidance on how to treat VAT for finance and insurance leads, I have just heard from HMRC on their conditional stance they think they will be taking for the UK.
At present, there is a team of people at HMRC who are currently investigating the entire finance and insurance lead generation marketplace and over the course of the next few months, they plan a deep dive into all suppliers of finance and insurance leads.
Its worth reviewing the Gregory Pennington Case below:
Below is an except from the Gregory Pennington (Friendly Loans) case
[43] The term negotiation in art 13B(d)(3) has its own independent meaning in Community law, and is not to be equated merely with an English dictionary definition.3 The Court of Justice has established the following principles in relation to the construction of negotiation:
(1) In order to be characterised as exempt transactions for the purposes of art 13B(d)(3) the services provided must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in the provisions (Sparekassernes Datacenter (SDC) v Skatterministeriet (Case C-2/95) [1997] STC 932, [1997] ECR I-3017, para 66).
2 Customs and Excise Comrs v BAA plc [2002] EWCA Civ 1814, [2003] STC 35, [2003] 1 CMLR 703, para 14.
3 Customs and Excise Comrs v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, [2002] QB 546, para 21 of the opinion.
[2010] SFTD 96 at 108
(2) The words ‘including negotiation’ are not intended to define the principal object of the exemption laid down in the provision, but to extend the scope of the exemption to negotiation (CSC Financial Services Ltd v Customs and Excise Comrs (Case C-235/00) [2002] STC 57, [2001] ECR I-10237, para 38).
(3) Article 13B(d)(3) defined exempted transactions according to the nature of the services provided and not the person supplying or receiving those services; the identity and legal type of the person effecting the transactions were therefore irrelevant in determining whether an transaction was exempt. Further, the provisions at issue made no distinction with regard to the specific manner in which the service was performed; accordingly, the fact that a service was performed entirely by electronic means did not exclude it from exemption (Sparekassernes Datacenter [1997] STC 932, headnote holding (1)).
(4) The concept of ‘negotiation’ applies to the activity of an intermediary who does not occupy the position of a party to a contract relating to a financial product and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation is, in effect, a service rendered to and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side. In that regard, the purpose of such an activity is to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the content of the contract (CSC Financial Services Ltd [2002] STC 57, [2001] ECR I-10237, para 39).
(5) On the other hand, it is not negotiation where one of the parties entrusts to a sub-contractor some of the clerical formalities related to the contract, such as providing information to the other party and receiving and processing applications for subscription to the securities which form the subject matter of the contract. In such a case, the sub-contractor occupies the same position as the party selling the financial product and is not therefore an intermediary who does not occupy the position of one of the parties to the contract, within the meaning of the provision in question (CSC Financial Services Ltd [2002] STC 57, [2001] ECR I-10237, para 40).
(6) The wording of the Sixth Directive did not, in principle, preclude the activity of negotiation from being broken down into separate services which might then fall under the concept of ‘negotiation of credit’ for the purposes of that provision and benefit from the exemption which it provided. It followed from the principle of fiscal neutrality that operators had to be able to choose the form of organisation which, from the strictly commercial point of view, best suited them, without running the risk of having their operations excluded from the exemption provided for in art 13B(d)(1). It was not, therefore, inconsistent with art 13B(d)(1) for the service of negotiation of credit to be divided, as in the instant case, into two services (Ludwig v Finanzamt Luckenwalde [2008] STC 1640, [2007] ECR I-5083, paras 34, 35, 37).
It looks likely that the rules will state that in order for leads to be exempt, you need to have a one-2-one contractual relationship with a buyer of leads and not selling to a “bidding tree” or “ping tree”. I am seeking clarification of this for Finance and Insurance leads as there is likely to be a different view and will update a post when I know more. Additional, this ruling is likely to affect the way my company operates so may be seeking a challenge to HMRC if the outcome is negative.
I am still unclear on what we should do as a company regards our reverse billing of VAT for offshore purchased and am still awaiting written confirmation on how we should treat Finance leads. Until we get clarification it is impossible for us to establish how any tax input or partial exemption rules to apply.
I cannot wait any longer for the verdict and to ensure I am doing the right thing by HMRC law (as it stands today) I have no choice but to apply the full reverse billing process from December onwards (which is when our Q4/Q1 VAT return period starts) and then seek a refund for any overpayment of the rule is confirmed that we have to charge VAT on Finance leads as this will mean we can claim a large part of our VAT reverse billing payment back. It will have an adverse affect on our margins but better that than continue to build a potential liability.
Related Posts:
Blog Up Date: September 5th 2012
For a while now I have been meaning to blog about a VAT confusion that is currently present in the UK market which could have far reaching implications for many lead gen businesses who operate in the financial sector.
For the sake of clarity, where I refer to an “Lead Generator or Seller” I mean any business who sits between the consumer and the lead transactor (eg: a transactor is a broker or IFA etc). So essentially I refer to any internet marketing firm that simply sells leads to an aggregator, a broker, an IFA or the company that deals with the conclusion of the lead process.
So therefore lead “sellers” might include companies like Media Ingenuity (who own TotallyMoney), MoneySupermarket, IPT, SimplyMediaNetwork, LeadPoint etc, and a “Buyer” is the company the does the contractual process such as brokerages (eg:LifeSearch), debt management firms (eg: MoneyAdviceGroup) or any IFA’s.
Having been immersed in the world of finance lead gen and equally immersed in the complex world of VAT regulation, it has become clear that there are a lot of companies in the UK who may be unknowingly building up a big VAT liability.
There is real confusion over how lead generators (and lead aggregators) should treat VAT on financial leads. I have spoken with many companies in this space and none of them are sure of the facts or how to interpret the current law. (Which may be about to change or be clarified)
The confusion centres around specifically what activity qualifies for VAT exemption and what does not. ie: What do you need to do with a lead for it to become an exempt supply as on its own, it is not exempt supply and many companies are under the false impression that any finance lead is exempt.
Below are some basic rules broken into selling and buying leads and/or media for intermediaries:
Selling Leads
Insurance Leads
Insurance leads have a slightly different treatment to Finance leads. A Finance lead is any lead that has to do with money lending such as Loans, Mortgages etc. However, it is not clear when a Finance lead becomes exempt, we are awaiting a clarification from HMRC.
VAT legislation defines a VAT exempt insurance intermediary as someone who brings together persons seeking/providing insurance or someone who carries out work preparatory to the conclusion of contracts of insurance or reinsurance.
Guidance (from HMRC) gives more specific detail of relevant activities:
Activities that qualify for VAT exemption:
Acting in an intermediary capacity in the chain between the insured and the insurer:
- Introductory services, including work preparatory to a contract (regardless of whether a policy is ultimately purchased). This includes preparation of application forms and forwarding these to the insurer.
- Administrative assistance relating to the performance of contracts
- Claims handling
- The collection of premiums
Activities that do not qualify for VAT exemption:
- Market research and product design
- Advertising
- Promotional or similar services (including ‘click throughs’ on websites where no policy negotiation etc is carried out)
- Collection and provision of information,
- Valuation and inspection services, services of loss adjustors, motor assessors, surveyors and similar experts.
HMRC Guidance for Insurance Intermediaries (HMRC Brief 31/10)
Of practical relevance in relation to web-based insurance intermediary activities, following the Insurance Wide case summarised in Appendix 3, HMRC issued guidance confirming that VAT exemption will apply in situations where the business is acting as more than a ‘mere conduit’. They list 4 tests to be met:
- The services are provided by someone engaged in the business of putting insurance companies in touch with potential clients or more generally acting as intermediaries between the two parties (although this may not necessarily be their principal business activity).
- The business provides the means (that is, by way of an internet ‘click through’ or some other form of introduction) by which a person seeking insurance is introduced to a provider of insurance or to another intermediary in a chain leading to an insurance provider.
- That introduction takes place at the time a customer is seeking to enter into an insurance contract (although in some instances an insurance contract may not actually go on to be finally concluded).
- The introducer also plays a proactive part in putting in place the arrangements under which that introduction is effected.
For the purposes of condition 4 above, evidence that the introducer has been proactive in putting in place the arrangements under which the introduction is effected could, for example, take the form of some or all of the following:
- active endorsement of the insurer or the insurance product
- involvement in the selection of the insurance products and/or providers
- involvement in the process under which the insurance contract is entered into, even though the intermediation of the contact itself is undertaken by a 3rd party (for example, by having input into what questions should be asked of the prospective insured or the design of the 3rd party’s website)
- negotiating a special rate for the insurance product/s on behalf of its customers or membership base
- some form of assessment of the customer’s requirements so that they are directed to the most appropriate insurer for them
So what this could mean in practical terms is that, unless you are involved in the negotiation process; you may be deemed an “agent” and therefore required to charge VAT on lead you sell. As stated above, this is not 100% clear and we are awaiting clarification on this rule, until we get clarification it is impossible for us to establish how any tax input or partial exemption rules to apply.
Selling Leads
Finance Leads (Mortgages, loans etc)
The rules around selling Finance leads is even tighter than Insurance leads and a good friend of mine who is an IFA has informed me that the plans next year or in 2014 will make the rules tighter still. Something to the effect that you need to actually be part of the final contractual signature chain to claim exemption but we await the new rules to be announced.
The rules as they stand today are below (from HMRC):
To be regarded as a Finance intermediary, the business needs to be:
(i) bringing together persons who are or may be seeking to receive financial services and persons providing such services; and
(ii) performing work ‘preparatory to’ the conclusion of the contracts.
Activities that qualify for VAT exemption:
In terms of activities that are deemed to be ‘preparatory work’, the following activities need to be carried out in order for VAT exemption to apply and they are regarded as being specialised in nature:
- The completion and checking of forms and sending them to the financial institution. This element can be carried out by specialised software, AND
- Mediating between the customer and financial service provider. This means the activity must involve a process of negotiating contract terms and/or price, regardless of whether the customer ultimately decides to take up the offer.
Activities that do not qualify for VAT exemption:
- Market research and product design
- Advertising
- Promotional or similar services (including ‘click throughs’ on websites where no contract negotiation etc is carried out)
- Collection and provision of information
So in summary, if you are a UK based VAT registered company that just sells leads to an aggregator or a brokerage; you may need to apply VAT.
You may also need to apply VAT (under the Reverse charge rule) to your offshore media buying, (eg: google) which you cannot claim back if you do not charge VAT on the lead.
Additionally, just to add to the joy…HMRC can go back up to four years to reclaim they money – and they actively do.
There is some good news though and a way out if you have a liability… If your business does have a liability and your contracts with your buyers allow, you could raise a “VAT only” invoice to all your buyers who should have been charged VAT.
Obviously this could destroy your relationships with buyers but what a lot of people are unaware of is a thing called “VAT Bad Debt exemption”. Essentially, if you raise a VAT invoice and the company will either a) not pay or b) the company is no longer in business then after a period of six months, HMRC will write off your liability (under certain circumstances).
With so many Life Insurance brokers, loans and mortgages firms going bust in the last few years, many companies will find there is a way out of a portion (if not all) of their liability as the chances are they will have dealt with firms who no longer exist.
Buying Leads
So this is where the fun really starts! (assuming you are a UK, VAT registered company), there are two simple things that you need to know and apply to your buying activity:
1) If you buy offshore media (eg: Google, Yahoo, facebook etc) from ANY company who is outside the EU and does not charge VAT on their invoice, it is YOUR responsibility to apply the reverse charge rule and pay HMRC 20% VAT on top of the cost of the media. Al lot of people do not know this and it is something that I have only recently learned. What adds complexity to our company is that we cannot apply the reverse charge VAT at this stage until we know what we should forward charge as it will have a material impact on the amount of VAT we pay.
Now with most businesses, this does not really matter as you can claim the VAT back, but if you are selling a VAT exempt product then you cannot claim it back and therefore you are the liable party.
As an example, if you buy clicks from Google, you will note they do not have VAT on their billing invoice. It is therefore down to you to apply VAT when you record it on your books.
As said above, this applies to all companies that do not charge you VAT. This may not be news to you but I spoke to no less than five accountancy firms and additionally nine industry professionals and only two people from Industry knew this and only three of the accountancy firms were aware of it. (The latter point is quite extraordinary!).
Part of this lack of knowledge may be due to the fact the reverse billing law changed in Jan 2010 to enforce the above rule, here is except from HMRC:
Imports and purchases from abroad: paying and reclaiming VAT
Generally speaking, VAT is payable on all purchases of goods and services that you buy from abroad at the same rate that would apply to the goods or services if supplied in the UK. You must tell HM Revenue & Customs (HMRC) about goods that you import, and pay any VAT and duty that is due. Read more
2) If you are buying actual “leads” and not clicks from companies based overseas (eg: USA) and think you are gaining a VAT advantage then think again. It all depends if the USA company (the lead generator) is doing sufficient to make the lead exempt, chances are they will not be.
The obligation sits firmly with the buyer (eg: the company buying leads from the non UK generator in this instance, not the final destination buyer such as a Broker) to make a judgement on whether the supply constitutes an exempt service and if it does not (based on the rules stated above) then you should be applying VAT. Interestingly, this also applies to brokerages/Intermediaries.
This is where the majority of the problems in the UK reside. HMRC has been slow to realise the impact of the internet on international lead generation and technology developments and they urgently need to confirm exactly what type of lead supply may or may not be exempt.
Most industry professionals I have spoken to (and VAT consultants) think the rules are very grey on what truly constitutes an act of exemption.
If HMRC declare my business to be VAT liable then it will have far reaching consequences for the industry as it is the same ruling that will apply to nearly all finance lead generators who are trading leads as VAT exempt products.
It is true that there are currently legal ways to have “work arounds” such as sending leads offshore and converting them into a different VAT product but that to me is a dangerous loophole HMRC will close pretty soon. I could be wrong.
So in conclusion, you may be as confused as everyone else. The answer will soon be on the table as HMRC are currently looking at this issue with a number of companies in the space (including mine) to establish exactly what is correct.
If it proves negative for our industry then the next course may be group legal action to prove our industry case however the past experience of legal action with HMRC is that if you lose, they simply change the rules to make their point apply (see the InsuranceWide case) – it pretty much made them bankrupt in the process.
In Conclusion
So not a pretty picture and as said above, there are a LOT of companies that currently benefit from a VAT exemption which, if ruled against, will mean buyers/IFA etc will have to accept a hike in lead prices as nearly all lead generation companies I know work on the slimmest of margins when generating Life & Mortgage leads, they simply cannot absorb a 20% cost without a material change in their business operations.
Right now we have a two tier system, those companies who are paying VAT and trying very hard to make it work and those companies taking the advantage (and probably building up a potential VAT liability) it is pretty anti-competitive and not a long term scenario.
What is more concerning is that, as we speak there are more and more USA based companies taking advantage of this confusion and able to buy media cheaper than a UK VAT registered company. It will not be the USA companies they will be not left holding the can, it will be the UK companies who buy their leads.
Next steps will be to get the verdict from my HMRC officer regards what is exempt and what the reverse billing rules should be with us, meet with the other companies in the space who are also going through the same excersize with their HMRC officers and compare notes.
Some Case Law Worth Reading:
MoneySuperMarket VAT Case Win
The Group has reported £3.4m in refunds from HMRC after successfully challenging the VAT
treatment of the supply of certain of its lead services. Following a ruling received in March 2008
from HMRC the Group had treated the supply of its lead services as a standard rated supply for
VAT purposes rather than as an exempt supply that the Group believed to be correct.
Consequently the Group has recorded additional revenues of £3.2m in the statutory results for the
year together with a credit of £0.2m in administrative expenses.
Paymex Case
The effect of the Tribunal ruling is that IPs may have overpaid VAT, and therefore HMRC will pay claims for such overpaid VAT, subject to the normal partial exemption recovery position, where the IP’s services in an IVA are covered by the terms of the ruling. The VAT repaid will go into the IVA.
In the case of InsuranceWide, the VAT tribunal agreed with HMRC that it was merely an introducer and not an insurance agent, so the VAT exemption did not apply. However, in the Trader Media case, the VAT tribunal found that the services provided were exempt. HMRC appealed, as did InsuranceWide.
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