Providers of credit with a place of business in the UK are normally not subject to UK VAT on the basis that the supply of credit itself is exempt from VAT. However, one consequence of this is that where any supplies are made to a Credit Provider in the UK any VAT which is charged to the Credit Provider is part of its cost base. Common examples would include any rent paid for premises and any IT bought in the UK.
The current rate of VAT in the UK is 20%.
The Reverse Charge
There is a trap within UK VAT for the unwary purchaser of certain supplies from outside the UK. Where supplies of certain services are made by a non-UK supplier to a UK business, then the non-UK supplier does not charge VAT as it is not within the UK tax net. However, to avoid an advantage being gained by non-UK suppliers over UK suppliers, there is a mechanism under which the UK business receiving the supply is then treated as supplying it to itself and has to charge itself VAT. This is known as the Reverse Charge.
It is not uncommon for Lead Generators to be based outside the UK and for these Lead Generators to sell the leads to Credit Providers with a UK presence. If these supplies were subject to the Reverse Charge, then the Credit Provider would incur a cost in acquiring the lead which was not transparent in the price of the lead. For example, a UK-based Credit Provider acquires a lead from a US-based Lead Generator for £10. If the Reverse Charge applies then in addition to the £10 payable to the US Lead Generator, the Credit Provider will also be required to pay £2 of VAT which it cannot then recover. Consequently, the true cost for the acquisition of the lead is £12 rather than the £10 price charged by the Lead Generator.
There has been some controversy as to whether leads sold in this manner are subject to the Reverse Charge or not. Broadly if a lead simply constitutes the sale of information on a potential borrower to a Credit Provider then this would be subject to VAT. However, if the Lead Generator’s service amounted to the negotiation of credit then the sale would be exempt from VAT so the additional cost would not be incurred by the Credit Provider.
It is common for Lead Generators to sell their leads through a “Ping Tree” model. This means that the potential borrowers have answered a certain number of questions to determine that they are potentially suitable borrowers. A Credit Provider is chosen from a number of potentially suitable Credit Providers based on lending criteria set out in the Ping Tree Model, and of course the willingness of the Credit Provider to pay the Lead Generation fee.
HMRC’s position in relation to this Ping Tree Model was at first helpful but quickly changed so that in their view all the Ping Tree Model actually did was determine which of the potential Credit Providers would be prepared to pay the highest price for the particular lead. HMRC consider that this was therefore purely a sale of the lead such that VAT would be attached to the price paid.
This issue has recently come before the Tax Tribunal in the case of Dollar Financial UK v HMRC. In this case the Tribunal has decided that the Ping Tree Model amounts to more than the sale of the lead to the highest bidder. The Tribunal has determined that the Ping Tree Model does electronically sift through the answers to the questions by the potential borrower to determine for which of the panel of Credit Providers the lead would be suitable. By asking a number of questions and filtering the potential Credit Providers by reference to prepared criteria, the Tribunal in effect accepted that the Lead Generator was involved in the negotiation of credit and that, as such, the service provided by the Lead Generator was exempt from VAT.
This is a significant win in the context of the provision of credit as VAT represents a large potential cost to the business.
As always the facts in any particular case need to be considered before applying the principles to a different case. In particular, the Tribunal was influenced by the number of questions being asked by the Lead Generator to be inputted into the Ping Tree If the number of questions in the filter process were too few and the information too basic, then offering the lead to a Credit Provider would be treated as no more than acting as a mere sales conduit rather than negotiating credit. The message for Lead Generators is to review their model to ensure it amounts to a negotiation of credit and the message for Credit Providers is to consider whether the Lead Generators they deal with are sufficiently robust in this process.
Any Credit Provider who has already suffered a VAT cost in relation to the acquisition of leads should consider whether they can now reclaim such cost from HMRC.