Of more universal importance is the impact of another decision, this time one by the European Court of Justice (ECJ), relating to the definition of “debt” for VAT purposes.

 

“Debt” is a common or garden word, which almost everyone will say they understand. It is also a word which is important in legal contexts, so one would expect it to have a well established legal definition to go alongside its more informal meaning. It is the kind of word that also is context specific, so we tend to be able to infer a more precise shade of meaning from the context in which we find it.

 

But in general, a debt is probably regarded as a sum (usually expressed in money, though sometimes in gratitude) which one party owes to another. In this there is often an assumption that the sum is payable (that is, it really ought to have been paid) as at the time that the reference to “debt” is made. Where that is not the case, such as where a debt is subject to being repaid at a future date, nonetheless, the debtor (he who owes it) holds the value of either the leant money or the provided goods and services in his possession at that time, and the debtee (he who is owed it) is therefore holding a negative value.

 

But are these assumptions correct? Actually, when you look into the matter, the definition can go rather wider than these assumptions. It is simply a sum that one party owes another, but devoid of any reference to any timing of repayment. In other words, a person can be said to owe money which is not yet due, and this is nonetheless a debt. And, furthermore, there is no prescription that the debtor ought to have received value in consideration of that obligation. Thus, a debtor might simply agree to pay a debtee a sum, but for nothing in return, and agree to pay it in the future, and that theoretically sets up a “debt”.

 

Many people will say that this is not the correct legal analysis. Of course, that is probably valid, though I have no doubt that that in turn could also be challenged as part of a doctoral thesis on the topic. But if you consult a dictionary, it seems to suggest that the everyday meaning of the word is really that a debt is any such obligation however derived.

 

Now for the element of context. What if we refer to “debt collection”? Do we then narrow off the meaning of “debt”? I imagine you would agree with what I always thought I knew, namely that debts can only be collected after they have fallen due. And, that a “debt collector” is only ever engaged as such when a person who ought to have paid by a given date has failed to do so. But, thinking about it in an historical perspective, this might not always have been so. Debt collectors of yore probably visited a tenant to collect the rent, or to collect burial insurance payments. They were not “overdue” because the only means of paying them was in cash to the collector. Nonetheless, he was collecting “debts”. So perhaps it is possible to act as a debt collector and collect sums that are not overdue in any sense, but are simply “due”.

 

But in the modern situation, where there are various automatic ways of making a payment, the concept of this involving collection of debts (except where payments are indeed overdue) seems far-fetched. There is no difference then between any arrangements made to execute a money transfer and “debt collection”. And this is an important distinction for VAT, since “debt collection” services are specifically excluded from being exempt as a financial service. Effecting movements of money is an exempt finance service. “Debt collection” is taxable. So it surely must be distinct.   

 

Which is why it is extremely surprising that the ECJ has decided in the case of AXA/Denplan that debt collection has its more medieval kind of meaning. It says of “debt collection” that “it is irrelevant that such service is supplied at the time when the debts concerned become due …”. It then says that the words ‘debt collection’ in Article 135(1)(d) “ … cover the collection of debts of any nature, without limiting their application to debts which were not paid on their due date.” and that the term includes “debts which have not yet become due and which will be paid on the due date.”

 

This was relevant to AXA, because their service involved setting up a payment scheme for dentists whereby periodic payments would be made to access a package of services. An aspect of this payment scheme is that each participant did not necessarily consume the corresponding value of services prior to their payment falling due, so that they did not necessarily receive consideration in dental services by the time the installment was payable. AXA made the arrangements for executing these payments, as at their due date. HMRC argued that this service went too wide to be a pure exempt finance service. HMRC did not argue that the service was one of debt collection. It was the ECJ that solved the case (at least as it saw the position) by re-characterising the activity as debt collection, and saying that collecting sums as they fell due, in a mechanistic fashion, was included in “debt collection”.

 

HMRC Brief 54/10 (though issued in January 2011), gratefully accepts this analysis. There is of course a fear that this means that all bank transfer charges must be taxable rather than exempt. Clearly, there is an issue over where the borderline between exemption and taxability now stands. However, since the VAT Directive clearly provides for services relating to “payments, transfers, debts, cheques and other negotiable instruments” to be exempt, vanilla flavoured bank transactions must surely remain inviolate. But what more need be added to transform a package of services into debt collection is a moot point. As so often with the ECJ, it sets out its position in such general terms that it becomes almost impossible to discern a set of principles which can be used to determine the outcome in a real world situation.