Neutral Citation Number [2003] EWCA Civ. 492                              Case No: C3 2002 1090
 
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LONDON VALUE
ADDED TAX AND DUTIES TRIBUNAL 
(Dr Nuala Brice,Mr K.S. Goddard MBE
 and Mrs S. Sadeque MRCS)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 11April 2003

Before :

LORD JUSTICE PETER GIBSON
LORD JUSTICE POTTER
and 
LORD JUSTICE JONATHAN PARKER
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Between :

	Commissioners of Customs and Excise	Appellants	
	- and -		
	Electronic Data Systems Ltd	Respondent	

Mrs Melanie Hall QC and Mr Andrew O’Connor (instructed by The Solicitor for Customs and Excise) for the Appellants
Mr Roderick Cordara QC and Mr David Scorey (instructed by The Legal Department of EDS Ltd) for the Respondent

Hearing dates : 17, 18 and 19 March 2003
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JUDGMENT : APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

Lord Justice Jonathan Parker :

 INTRODUCTION
1.	This is an appeal by the Commissioners of Customs and Excise (“the Commissioners”) against a decision of the London Value Added Tax and Duties Tribunal (Dr Nuala Brice, Chairman, Mr K. S. Goddard MBE and Mrs S. Sadeque MBCS) (“the Tribunal”) which was released on 19 March 2002.   By its decision (“the Decision”), the Tribunal allowed an appeal by Electronic Data Systems Ltd (“EDS”) against two decisions of the Commissioners rejecting EDS’ claim that a supply of services by EDS to Lloyds TSB Bank plc (“the Bank”) is exempt from value added tax (“VAT”) by virtue of Article 13B of the Sixth European Council Directive on the Harmonisation of the Laws of the Member States relating to Turnover Taxes – Common System of Value Added Tax: Uniform Basis of Assessment (“the Sixth Directive”).    
2.	The services in question were supplied by EDS to the Bank pursuant to a Master Services Agreement dated 30 September 1999 (“the 1999 agreement”).    The 1999 agreement superseded an earlier agreement between the parties made in 1998 (referred to in the Decision as “the 1998 agreement”).  By the 1999 agreement, the Bank ‘outsourced’ to EDS certain of its customer services relating to lending and insurance.    It is common ground that, had such services been supplied direct by the Bank to its customers, the supply would have been exempt from VAT; however, it is also common ground that that is not material to the question whether the supply of services by EDS to the Bank under the 1999 agreement is similarly exempt.   
3.	Article 2 of the Value Added Tax Tribunal Appeals Order SI 1986 No. 2288 (made pursuant to section 86 of the Value Added Tax Act 1994 (“the 1994 Act”)) provides for an appeal from a VAT tribunal direct to the Court of Appeal if (a) the parties consent, (b) the tribunal certifies that the decision involves a point of law relating wholly or mainly to the construction of (among other things) a Community instrument, being a point of law which has been fully argued before it; and (c) the leave of a single judge of the Court of Appeal has been obtained.   In the instant case those three conditions have been fulfilled: the parties consent; the Tribunal has given the requisite certificate; and Carnwath LJ has given leave.
ARTICLE 13 OF THE SIXTH DIRECTIVE
4.	 Article 13 is in Part X of the Sixth Directive.   Part X is entitled “Exemptions”.   Article 13 itself, which is headed “Exemptions within the territory of the country”, is divided into three parts: 13A, 13B and 13C.   Article 13A, which is headed “Exemptions for certain activities in the public interest”, is not material for present purposes; nor is Article 13C, which is headed “Options”.   Article 13B, which is headed “Other exemptions”, provides as follows (so far as material):
“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:
 (a) insurance and reinsurance transactions, including related services performed by insurance brokers and agents;
 (b) .......
 (c) .......
 (d)  the following transactions:
 (1) the granting and the negotiation of credit and the management of credit by the person granting it;
 (2)  .....
 (3) transaction[s], including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;
 (4)  .....
 (5)  transactions, including negotiation, excluding management and safe-keeping, in shares, interests in companies or associations, debentures or other securities, excluding ....”
5.	The provisions of Article 13B were implemented by Schedule 9 to the 1994 Act, as amended by the Finance Order 1999 SI 1999 No. 594.   No issue arises in this case as to the interrelation of domestic legislation with the Sixth Directive; the arguments on both sides are accordingly confined to the direct effect of the Sixth Directive, and in particular of Article 13B.
THE RELEVANT FACTS
6.	The Tribunal set out the relevant facts in considerable detail in paragraphs 10 to 62 of the Decision.    For convenience, the entire passage is reproduced in an Appendix to this judgment.
7.	As an overview of the services supplied by EDS pursuant to the 1999 agreement, and of the mechanics of the supply, the following will, I hope, suffice.
8.	Pursuant to the 1999 agreement, EDS supplies to the Bank administrative services in the nature of loan arrangement and execution services.   In practical terms EDS represents the contact point between the Bank and actual or potential customers.   As such, its principal functions under the 1999 agreement are to receive initial applications for loans and to record details of the applicants (‘the capture of applications’); to ‘validate’ the applications, using the Bank’s credit-rating system (‘the validation of applications’); where a loan has been validated, to produce and forward to the borrower a loan agreement signed on behalf of the Bank together with a direct debit mandate and other documents; to verify the documentation received from the borrower; to release funds to the borrower; and to collect payments using the direct debit system.   
9.	As consideration for the supply, the Bank pays variable charges related to specific functions.    The charges are related to the volume of commercial activity, rather than to the amounts of the loans.   
10.	Under the 1999 agreement the Bank retains the functions of advertising the loans and of dealing with borrowers who are in arrears, but effectively EDS performs all other administrative functions in relation to the loans.
11.	By a separate agreement (“the insurance agreement”) dated 31 August 2000 and made between EDS and Lloyds TSB Insurance Services Ltd (“Lloyds Insurance”), an associate company of the Bank, EDS was appointed agent of the Bank in respect of the effecting of loan protection insurance.   Pursuant to this agreement, EDS undertakes the marketing and sales of loan protection policies.   Such policies provide cover in the event of the policy-holder losing his or her job (in which event the insurer credits the policy-holder’s bank account with the loan repayments as they fall due) and in the event of the death of the policy-holder (in which event the insurer pays off the loan in full).
12.	To perform its functions under the 1999 agreement and the insurance agreement, EDS operates a loan centre at Peterlee in County Durham, which is dedicated primarily to the supply of services under those agreements; the primary commercial aims being to generate as many loans, and sell as many policies, as possible.   Employees of EDS working at the loan centre wear badges bearing the name of the Bank.   EDS is authorised by the Bank to offer four types of loan, with or without loan protection insurance.   However, the Bank fixes the interest rates and the maximum and minimum sum which may be lent to any one borrower (although it does not set any limit on the total amount outstanding on loan at any one time).
13.	The mechanics of a loan transaction are in summary as follows.   Once the relevant initial information has been ‘captured’, and the borrower has selected the type of loan which he wishes to take, the loan application is ‘validated’ by the operator pressing a key on his computer.   This links him to the Bank’s software ‘credit-scoring’ system known as ASM (application scoring manager).   The ASM assesses the credit risk of the borrower and ‘decides’ how much he can afford by way of monthly repayments.   If the ASM ‘accepts’ the application, the operator quotes to the borrower the figures which the ASM has produced.   If the borrower accepts the quotation, the operator presses another key on his computer to generate the loan documentation, which is in standard form.  The documentation includes two copies of the loan agreement, one of which is ‘signed’ electronically on behalf of the Bank.    The documentation is sent to the borrower under cover of a standard letter, written on the Bank’s headed notepaper but giving the address of the loan centre.   Once the relevant documents have been returned by the borrower, and the operator has satisfied himself that they have been completed correctly, the operator submits the transaction to an automated sanction process.   If it survives that process, the next stage is authorisation.   Authorisation is an automatic procedure involving the checking of the clerical details of the transaction.   Once this has been completed, the operator presses another key on his computer to effect the release of the funds direct to the borrower’s bank account.   At that point, the loan is made.
14.	While a loan remains outstanding, EDS calculates and applies interest on a basis determined by the Bank, and debits interest charges to the borrower’s loan account.   Statements are provided periodically, or on request.   EDS also deals with clerical matters such as changes of address.   
15.	EDS also has authority to ‘close down’ a loan when requested to do so by the borrower.   On receipt of such a request, the operator will inform the borrower of the settlement figure (whilst at the same time trying to persuade the borrower to take out a new loan). 
16.	Accounts which are in arrears (‘delinquent accounts’) and insurance claims remain the responsibility of the Bank and of Lloyds Insurance respectively.
17.	EDS operates two accounts with the Bank, as trustee for the Bank.   Funds in these accounts are the Bank’s funds.   One of these accounts (‘account 1’) is used for transferring funds to borrowers who are not customers of the Bank and for receiving repayments both by direct debit and by cheque; the other is a suspense account for unallocated payments.   A third account was opened for the purpose of making payments of loans by cheque, but in the event no such payments have been made.   Account 1 is cast daily by EDS and the Bank advised of the net balance (whether debit or credit).   If there is a shortfall, the Bank makes it good; any credit balance is transferred to the Bank.   The suspense account is cleared daily, and the payments allocated to individual agreements where possible.
EDS’ CONTENTIONS BEFORE THE TRIBUNAL
18.	Before the Tribunal, EDS contended that the supply of services pursuant to the 1999 agreement is exempt under Article 13B(d)(1) as constituting ‘the negotiation of credit’; alternatively that it is exempt under Article 13B(d)(3) as constituting ‘transaction[s], including negotiation, concerning .... payments [and/or] transfers ....’.   EDS further contended that in the event that the supply was not exempt under either of those provisions, the supply of services under the insurance agreement constituted a separate supply which was exempt under Article 13B(a).
THE PRINCIPAL AUTHORITIES
19.	Many authorities were cited before the Tribunal, and many have been cited in this court.    A number of them are referred to in the Decision.    In the interests of clarity, and in an attempt to avoid burdening this judgment with repetitious citations from authority, I think it appropriate at this stage in the judgment to turn to some of the principal authorities relevant to the issues in the case.
20.	I begin with Stichting Uitvoering Financiele Acties v. Staatssecretaris van Financien (Case 348/87) [1989] ECR 1737 ECJ (“SUFA”), which was relied on by Mrs Melanie Hall QC (for the Commissioners) as determining the general approach which this court should take to the interpretation of the exemptions contained in Article 13B.   
21.	In paragraph 11 of his Opinion in SUFA, Advocate General Mischo said this:
“It follows that any exemptions, as exceptions to the general rule that VAT is levied on all economic activity, are to be interpreted strictly and must not exceed what is expressly and clearly provided for.”
22.	In paragraphs 11, 13 and 14 of its judgment, the European Court of Justice (“the Court of Justice”) said:
“11.   With regard to the exemptions provided for by the Sixth Directive, it is evident from the eleventh recital in its preamble that the exemptions constitute independent concepts of Community law which .... should be placed in the general context of the common system of VAT introduced by the Sixth Directive.
.........
13.   It is clear from the foregoing that the terms used to specify the exemptions envisaged by Article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that turnover tax is levied on all services supplied for consideration by a taxable person.
14.   Article 13(A)(1)(f) of the Sixth Directive makes express reference only to independent groups of persons supplying services to their members.  ....  Since the conditions for exemption are precisely formulated, any interpretation which broadens the scope of Article 13(A)(1)(f) of the Sixth Directive would be incompatible with the objective of that provision.”
23.	Despite the emphasis placed upon strict interpretation in those passages, which are repeated in subsequent decisions, it is apparent that within the framework of the VAT regime a purposive approach to interpretation is nonetheless followed on occasions in relation to the concepts embodied in the individual exemptions.
24.	A striking example of the application of a purposive approach to the interpretation of the exemptions in Article 13B is the decision of the ECJ in Lubbock Fine & Co v. Customs and Excise Commissioners (Case C-63/92) [1994] STC (ECJ) 101 (“Lubbock Fine”), where the court held that the exemption in Article 13B(b) in respect of ‘the leasing or letting of immovable property’ included the surrender of a lease.    The reason for the decision is expressed succinctly in paragraph 9 of the court’s judgment, which reads as follows:
“Where a given transaction, such as the letting of immovable property, which would be taxed on the basis of the rents paid, falls within the scope of an exemption provided for by the Sixth Directive, a change in the contractual relationship, such as termination of a lease for consideration, must also be regarded as falling within the scope of that exemption.”
25.	Another, perhaps less striking, example of a purposive approach is Muys’ en De Winter’s Bouw-en Aannemingsbedrijf BV v. Staatssecretaris van Financien (Case C-281/91) [1997] STC (ECJ) 665 (“Muys”), where the Court of Justice said (in paragraphs 13 and 14 of its judgment):
“13.   Although the exemptions provided for in Art. 13 are to be interpreted strictly (see [SUFA]), nevertheless, in the absence of any specification of the identity of the lender or the borrower, the expression ‘the granting and the negotiation of credit’ is in principle sufficiently broad to include credit granted by a supplier of goods in the form of deferral of payment.   Contrary to the Commission’s view, the wording of that provision in no way suggests that there is any limitation on the scope of art.13B(d)(1) only to loans and credits granted by banking and financial institutions.
14.   That interpretation is borne out by the objective of the common system introduced by the Sixth Directive, which aims in particular to secure equal treatment for taxable persons.   That principle would be disregarded if a purchaser were to be taxed on credit granted by his supplier, whereas a purchaser seeking credit from a bank or another lender received an exempted credit.”
26.	In Expert Witness Institute v. Customs and Excise Commissioners [2002] STC (CA) 42 (“Expert Witness”), the Court of Appeal had to construe the expression ‘aims of a civic nature’ in Article 13(A)(1)(l).   Referring to paragraph 13 of the judgment of the Court of Justice in SUFA, Chadwick LJ said this (in paragraphs 16 and 17 of his judgment):
“16.    ....   That that is the approach to the construction of the phrase which we should adopt on this appeal is not, I think, in doubt.   Unless the aims of the institute fall fairly within the phrase ‘aims of a civic nature’, supplies of services by the institute are not to be treated as exempt supplies for the purposes of VAT.   It is not for this court to adopt a strained construction in order to fill what it may perceive to be a lacuna in exempting provisions in fiscal measures.   It is for the legislature to decide whether there is an unintended lacuna, and (if so) whether, and how, that lacuna should be filled ....
17.   It does not follow, however, that the court is required to give to the phrase ‘aims of a civic nature’ the most restricted, or most narrow, meaning that can be given to those words.   A ‘strict’ construction is not to be equated, in this context, with a restricted construction.   The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption, so that if the court is left in doubt whether a fair interpretation of the words of the exemption covers the supplies in question, the claim to the exemption must be rejected.   But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question.”
27.	Next, I turn to Sparekassernes Datacenter (SDC) v. Skatteministeriet (Case C-2/95) [1997] STC (ECJ) 932 (“SDC”), from which both sides on this appeal have made extensive citations.    
28.	In SDC the Danish court referred to the Court of Justice a number of questions arising out of the claim of an association (SDC) to exemption under Article 13B(d)(3) and (5).   SDC was an association which supplied services to its members (who were banks) comprising the execution of transfers, the provision of advice on and trade in securities, and the management of deposits, purchase contracts and loans.   A typical service consisted of a number of components which, taken together, constituted a service which a bank or its customers wished to have performed.   In supplying its services, SDC did not enter into any legal relationship with end customers.   It was remunerated for its services by the banks, and not by the end customers.    
29.	The questions which were referred to the Court of Justice included the following:
‘(3)(a):  Is it significant as far as the application of art. 13B(d) (3), (4) and (5) is concerned whether transactions are performed by financial institutions or by others?
(b):  Is it significant as far as the application of art. 13B(d) (3), (4) and (5) is concerned whether the entire financial service is performed by a financial institution which has links with a customer?
(c): If it is unnecessary for the application of art.13B(d) (3), (4) and (5) that the financial institution itself should perform the entire service [as the ECJ in due course held that it was], can the financial institution buy in transactions wholly or in part from another person, with the effect that the services performed by that other person are covered by art. 13B(d) (3), (4) and (5), or may particular requirements be made of that person?
(4):  How is the wording used in art. 13B(d) (3), (4) and (5) ‘transactions .... concerning’ to be interpreted?   This question seeks to ascertain whether the words ‘transactions .... concerning’ are to be understood as meaning that VAT exemption should also be granted in cases where a person either performs only a part of the service or performs only some of the transactions within the meaning of the directive which are necessary for supplying the complete financial service.’
30.	In paragraphs 20 to 29 of its judgment, the Court of Justice made a number of preliminary remarks on the interpretation of the exemptions contained in Article 13.   In paragraph 20 it observed (citing paragraph 13 of its judgment in SUFA) that the exemptions were to be interpreted strictly.   In paragraph 21 it pointed out that, as was evident from the eleventh recital of the preamble to the Sixth Directive, the exemptions constitute independent concepts of Community law which must be placed in the general context of the common system of VAT introduced by the Sixth Directive.   In paragraph 22 it said this:
“.... a comparison of the various language versions of point (3) of art. 13B(d) reveals that there are differences in terminology with regard to the phrase ‘transactions .... concerning’.   In view of those linguistic differences, the scope of the phrase cannot be determined on the basis of an interpretation which is exclusively textual.   In order to clarify its meaning, reference must therefore be made to the context in which the phrase occurs and consideration given to the structure of the Sixth Directive.....”
31.	The Court of Justice then referred (in paragraphs 23 and 24) to an argument put forward by the Danish government to the effect that if SDC’s supplies were exempt it would render it impossible for member states to take necessary steps to prevent tax evasion since it would be impossible to verify on any objective basis the nature of each of the supplies made by SDC.   As to that argument, the court said (in paragraph 25):
“It is sufficient to state in this regard that the argument put forward by the Danish [government] would be relevant only if a very broad interpretation of the concepts in question were adopted, without identifying the various components of the transactions involved.   However, as pointed out in paragraph 20 above, such an interpretation is excluded....”
32.	In the next section of its judgment, headed “The persons effecting the transactions concerned and the way in which those transactions are effected” and comprising paragraphs 30 to 38, the Court of Justice addressed question (3)(a) (among others).    In paragraph 30 of its judgment it reformulated such questions in the following way:
“.... whether points (3) and (5) of art. 13B(d) are to be interpreted as meaning that the exemption is subject to the condition that the transactions be effected by a certain type of institution, by a certain type of legal person or, in whole or in part, in a particular way.”
33.	The Court of Justice continued (in paragraphs 31 and 32):
“31.   As regards the first aspect, all the parties participating in the proceedings consider that it is not excluded a priori that persons other than certain financial institutions could effect the transactions exempted under art. 13B(d).   These parties therefore agree that the decisive criterion for the exemption is the type of transaction effected.   
32.   The transactions exempted under points (3) and (5) of art. 13B(d) are defined according to the nature of the services provided and not according to the person supplying or receiving the services.   Those provisions make no reference to that person.”
34.	In the next section of its judgment, headed “The contractual links between the person performing the service and the person receiving it” and comprising paragraphs 39 to 59, the Court of Justice addressed question (3)(b) above.   After summarising the parties’ arguments, the court said this (in paragraphs 45 to 48):
“45.   It must first be pointed out in this regard that, according to settled case law on the concept of supply of services for consideration contained in point (1) of art 2 of the Sixth Directive, taxable transactions, within the framework of the VAT system, presuppose the existence of a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient ....
46.   In the present case, most of the services provided by SDC involve no legal relationship between it and the end recipient, namely the customer of a member bank of SDC.   In such a situation the legal relations which are formed are between the bank and SDC.
47.   The services in point in the main proceedings are the services which SDC has performed for its own customers, namely the banks, and in return for which the banks have paid remuneration.   Having regard to that relationship, the services which SDC provides to the customers of the banks are therefore significant only as descriptors and as parts of the services provided by that body to the banks.
48.   As is clear from para 32 of this judgment, the identity of the provider of the service and the recipient does not affect the application of the provisions in question, except where they cover services which, by their nature, are provided to the customers of financial institutions.   ....”
35.	The Court of Justice then turned to the question whether it was necessary for the exempt service to be provided directly to the end customer of the bank.   In paragraphs 53 to 59 it said this:
“53.   On this point, it must be noted first of all that a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another.  It is characterised in particular by the fact that it involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks and, in some cases, between the banks.   Moreover, the transaction which produces this change is solely the transfer of funds between accounts, irrespective of its cause.   Thus, a transfer being only a means of transmitting funds, the functional aspects are decisive for the purpose of determining whether a transaction constitutes a transfer for the purposes of the Sixth Directive.
54.   In cases where the customer effects a transfer or causes a transfer to be effected without any action by the bank, the specific acts which constitute the transfer are carried out either by the data-handling centre and the customer or by the data-handling centre and a third party, the latter acting at the customer’s request, or by the data-handling centre acting alone pursuant to a standing order from the customer.
55.   The contractual links between the bank and its customer do not diminish the role of the data-handling centre.  It is from those links that the customer derives the right to have transactions effected, even if they are invoiced as services provided to the bank and also alter the bank’s financial situation.
56.   Moreover, if point (3) of art. 13B(d) of the Sixth Directive covered only the service which a financial institution provides to the end customer, only certain acts concerning transfer transactions could be exempt.   Such an interpretation would restrict the exemption in a way which is not supported by the wording of the provision in question.   That wording does not restrict the exemption to that relation and it is sufficiently broad to include services provided by operators other than banks to persons other than their end customers.
57.   It follows from the foregoing that an interpretation restricting the application of the exemption provided for by point (3) of art. 13B(d) to services provided directly to an end customer is unfounded.
58.   As far as SDC’s other functions are concerned, its role in relations with the banks and end customers is comparable to its role in a transfer.   Furthermore, the other exemptions provided for by points (3) and (5) of art. 13B(d) are, like the exemption for transfers, also defined according to the nature of the services provided and not according to the identity of the persons to whom they are provided.
59….. the exemption provided for by points (3) and (5) of article 13B(d) is not subject to the condition that the service be provided by an institution which has a legal relationship with the end customer.   The fact that a transaction covered by those provisions is effected by a third party but appears to the end customer to be a service provided by the bank does not preclude exemption for the transaction.”
36.	In the next section of its judgment, headed “Transfers and payments” and comprising paragraphs 61 to 68, the Court of Justice addressed question (4) above.   It began by noting the Danish government’s argument that the services supplied by SDC consisted of a number of separate elements and SDC’s contrary argument that in order for the exemption to apply it was not necessary for the services supplied to be complete services but that it was sufficient that the supply in question should be an element of a financial service in which various operators participated and which, taken as a whole, constituted a complete financial service.  The court continued (in paragraphs 64 to 66):
“64.   Given this difference of view, it must be noted first of all that the working of point (3) of art. 13B(d) of the Sixth Directive does not in principle preclude a transfer from being broken down into separate services which then constitute ‘transactions concerning transfers’ within the meaning of that provision and which are invoiced by specifying the elements of those services.   The invoicing is irrelevant for the application of the exemption in question, provided that the actions necessary for effecting the exempt transaction can be identified in relation to the other services.
65.   However, since point (3) of art. 13B(d) of the Sixth Directive must be interpreted strictly, the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt.   The interpretation put forward by SDC cannot therefore be accepted.
66.   In order to be characterised as exempt transactions for the purposes of points (3) and (5) of art. 13B[(d)], the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points.   For ‘a transaction concerning transfers’, the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation.   A service which is exempt under the directive must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank.   In this regard, the national court must examine in particular the extent of the data-handling centre’s responsibility vis-a-vis the banks, in particular the question whether its responsibility is restricted to technical aspects or whether it extends to the specific, essential aspects of the transactions.”
37.	The Court of Justice answered question (4) in paragraph 68 of its judgment, saying this:
“In view of all the foregoing considerations the reply to be given to the .... fourth question .... must be that this provision is to be interpreted as meaning that transactions concerning transfers and payments include operations carried out by a data-handling centre if those operations are distinct in character and are specific to, and essential for, the exempt transactions.”
38.	I turn next to five further authorities which featured in the arguments before the Tribunal and in this court, and in the Decision, in which the facts are to some degree comparable with the facts of this case.   I take them in chronological order.
39.	The first such authority is the decision of this court in Customs and Excise Commissioners v. Civil Service Motoring Association Ltd [1998] STC (CA) 111 (“CSMA”).
40.	The facts in CSMA were briefly as follows.   CSMA was a non-profit-making association providing motoring, leisure, financial and related services to its members, including a credit card scheme on terms agreed between CSMA and a bank (FBS).   The bank paid commissions to CSMA in connection with the scheme.   The Commissioners contended that the supply by CSMA was taxable; CSMA appealed, contending that the services consisted of making arrangements for the granting of credit, within the meaning of item 5 of Group 5 of Schedule 6 to the Value Added Tax Act 1983, and that the supply was accordingly exempt.   The Tribunal allowed CSMA’s appeal, concluding that by entering into the scheme it created conditions for the grant of credit to its members on favourable terms negotiated within the terms of the scheme.   The Commissioners’ appeal to the High Court was dismissed by Sedley J (as he then was).   Sedley J’s decision was upheld in the Court of Appeal.
41.	In the Court of Appeal Mummery LJ (with whom Pill and Hobhouse LJJ agreed), citing Muys and SDC, noted (at pp.115j-116a) that it was common ground that the exemptions in Article 13B were to be construed strictly.  Mummery LJ went on to express his conclusions thus (at pp.118d-119b):
 “Conclusion
In my judgment, the tribunal made no error of law in its construction of the exemption provisions in the Sixth Directive and in Sch 6 to the 1983 Act.  It was entitled to conclude, on the facts found by it, that the services supplied by CSMA to FBS were exempt, because they could be properly regarded as ‘the negotiation of credit’ and as ‘the making of arrangements for any transaction for the granting of any credit’.   Sedley J was right to reject the appeal of the commissioners.
My reasons for following the same course as Sedley J are as follows:
 (1)	It is common ground: (a) that FBS entered into exempt transactions granting credit in the form of credit cards to members of CSMA; but the exemption is not limited to a supply by the person granting credit; (b) that CSMA supplied services to FBS in connection with the granting of that credit to its members and, in consideration of those services, received a commission calculated by reference to the total amount of credit granted; and (c) that there is no express reference  in either the Sixth Directive or in Sch 6 of the 1983 Act to ‘particular transactions or to the ‘specific’ grant of credit.
 (2)	The critical question is whether the expressions ‘negotiation of credit’ and ‘making of arrangements for any transaction for granting of any credit’ are to be construed as implicitly restricted  to activities in relation to particular transactions for the specific grant of credit.  Neither the purpose nor the context of the exemption justify placing this restricted meaning on the wide general language of the directive and of the 1983 Act. Both the ‘negotiation of credit’ and ‘the making of arrangements’ for the granting of credit refer to the doing of things antecedent to, and directly leading to, the results sought to be achieved by the doing of those things.  The result to be attained is of a general rather than a specific nature, namely the ‘granting of any credit’.  In some cases intermediaries between principals will be involved in achieving that result.  In other cases they will not.  It is neither expressly nor impliedly necessary that they should be involved as a condition of the application of the exemption to those who do not actually grant credit.
 (3)	The activities of CSMA, in respect of which FBS paid commission, can reasonably and sensibly be described as negotiation of, or making arrangements for any transaction for, the grant of credit.  I am unable to detect either in the purpose of the exemptions or in the language and context in which they are expressed any distinction between (a) the negotiation, or making arrangements for particular transactions for the specific grant of any credit, and (b) these negotiations or arrangements planned and designed by joint efforts for the specific purpose of leading directly to the grant of credit by FBS to members of CSMA.
(4)	It is unnecessary to refer a question to the Court of Justice on the interpretation of the directive.  Although the Court of Justice has not given a ruling on this particular point, the above interpretation of the Sixth Directive is accurately reflected in the provisions of the 1983 Act and is sufficiently clear to enable this appeal to be determined without the necessity of a reference under art 177.
For all those reasons I would dismiss this appeal.”
42.	The second authority in the group of five is Card Protection Plan Ltd v. Customs and Excise Commissioners (reported in the Court of Justice at [1999] STC 270 and in the House of Lords at [2001] STC 174 (“CPP”).
43.	In CPP the facts were briefly as follows.   CPP offered credit card holders, for a price, a protection plan which was intended to protect them against financial loss and inconvenience resulting from the loss or theft of their cards or of certain other items such as keys, passports and insurance documents, together with other services.   CPP obtained insurance cover in respect of cardholders who purchased the plan by instructing an insurance broker to arrange the issue of a block policy by an insurance company, in which the cardholders were the assured.    The services offered by CPP to cardholders matched those comprised in the insurance cover under the block policy.    
44.	The Commissioners contended that the supply of those services by CPP to its customers, the cardholders, were chargeable to VAT on the basis that they comprised a ‘package of services’ which (since there was no direct contractual relationship between the insurance company and the cardholders) did not include ‘insurance transactions’ within the meaning of Article 13B(d)(1); and that the supply was accordingly taxable.   CPP contended that there was a direct contractual relationship between the insurance company and the cardholders, and that the supply was accordingly exempt.  The Tribunal found in favour of the Commissioners, but the High Court (Popplewell J) allowed CPP’s appeal in part, holding that there were two separate supplies: one of insurance and the other of services of convenience.   The Court of Appeal dismissed CPP’s appeal and allowed the Commissioners’ cross appeal.   CPP appealed to the House of Lords, which stayed the proceedings and referred a number of questions to the ECJ, including: (1) whether Article 13B(a) was to be interpreted as meaning that supplies of services such as those described in the plan which CPP provided to its customers constituted insurance transactions or related services of insurance agents and, for the purpose of answering that question, whether the term ‘insurance’ included the classes of activity, especially ‘assistance’ activity, listed in point A(18) of the annex to EC Council Directive 73/239 on insurance, as amended; and (2) what the appropriate criteria were for deciding, for VAT purposes, whether a transaction which comprised several elements was to be regarded as a single supply or as two or more distinct supplies to be assessed separately.
45.	Addressing these questions, the Court of Justice said this (in paragraphs 26 to 30 of its judgment):
“26.   By its first two questions which should be taken together, the national court essentially asks, with reference to a plan such as that offered by CPP  to its customers, what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately.
27.   It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provision in the Sixth Directive.  In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.
28.   However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR l-2395 at 2411-2412, paras 12 to 14, concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place.
29.   In this respect, taking into account, first, that it follows from art 2 (1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being  a typical customer, with several distinct principal services or with a single service.
30.   There is a single supply in particular cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service.  A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see Customs and Excise Comrs v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24).”
46.	In paragraph 32 of its judgment the Court of Justice referred back to the House of Lords the factual question whether CPP’s transactions were to be regarded as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those supplies was the principal supply to which the other was ancillary, so that it received the same tax treatment as the principal supply.
47.	On the referral, Lord Slynn (with whose speech the remainder of their Lordships agreed), having observed that it was plain from the ECJ’s judgment that some of the services offered by CPP constituted the provision of an insurance transaction within Article 13B(a), continued (in paragraphs 20 to 29 of his speech):
“20.   In the circumstances on the appeal there is only [one] question for your Lordships to decide.  Do the arrangements made constitute a single supply with some ancillary services or are there two independent supplies, an exempt insurance supply and a non-exempt card registration service?
21.   Although the tribunal heard oral evidence of the way the plan works it is plain that everything turns on the interpretation of the written arrangements in particular as set out in the 15 reasons.  Thus although the tribunal came to one conclusion on this question, and was supported by the Court of Appeal, it seems to me that it is open as a matter of law for your Lordships to review afresh the scheme although in doing so I pay full regard to the views of the courts below.
22.   It is clear from the Court of Justice’s judgment that the national court’s task is to have regard to the ‘essential features of the transaction’ to see whether it is ‘several distinct principal services’ or a single service and that what from an economic point of view is in reality a single service should not be ‘artificially split’. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.
23.   I accept that it is possible, as Mr Paines QC, for the commissioners, has contended, to find that some of the 15 points if separated out and seen in isolation do not on the face of it provide for insurance as commonly understood.  For example, point 1 provides only for an accurate computer record; point 6 provides for a change of address service; point 13 provides for a computer update service.
24.   But there are some points which indisputably provide for insurance of the most obvious kind.  Thus point 2 provides for £750 cover for fraudulent use on any one claim; point 3 provides for £750 cover up to the moment of the call to notify CPP: ‘(a)fter that your protection against fraudulent use is unlimited’.  These points reflects [sic] the insurance provided in section A of the policy issued by Continental to CPP for which clients are assured.  Others it seems to me fall within class 18, ‘Assistance’, in point A of the annex to EC Council Directive 73/239 as amended by EC Council Directive 86/641, eg points 4, 9, 10, 11 and 12, since it is clear that the service may consist of cash or acts in kind for the purposes of the Sixth Directive.
25.   If one asks what is the essential feature of the scheme or its dominant purpose, perhaps why objectively people are likely to want to join it, I have no doubt it is to obtain a provision of insurance cover against loss arising from the misuse of credit cards or other documents.  That is why CPP is obliged to, and does, arrange, through brokers, with an insurance company like Continental for that cover to be available.
26.   For the loss to be kept to the minimum it is valuable that the client should be able to notify CPP of the loss of a card and that CPP should be able to notify the company issuing the credit card.  It is particularly useful if the client is abroad.  For this purpose CPP needs an up-to-date record of cards with the necessary details and the client needs a replacement card if cards are stolen or lost.  To assist in the administration of the scheme, luggage tags and a medical warning card are useful.  Yet all of these are ancillary or incidental to the main objective of the scheme ie financial protection against loss.  The fact that the emergency cash advance and the cost of an emergency air ticket have to be reimbursed does not prevent those services from falling within ‘Assistance’ in class 18 in point A of the annex to EC Council Directive 73/239.  They clearly fall within the Court of Justice’s definition of insurance.
27.   The dominant purpose in my view is thus plainly one of insurance principally as to the provision of £750 and then of unlimited protection under points 2 and 3 but also in the other financial provisions such as those for dealing with seeking police help and pursuing claims in point 8.
28.   In so far as there are services which are not independently to be categorised as insurance they are in my view ancillary and in some cases minor features of the plan.  They were, as CPP contends, preconditions to the client making a claim for cash indemnity or assistance or a precondition of the furnishing of insurance cover.  I doubt whether they can in any event be regarded as sufficiently coherent as to be treated as one separate supply but even if they can it is ancillary to the provision of insurance.  To regard the provision of insurance as ancillary or subsidiary to the registration of credit card numbers is unreal and the consequences for the client of being able to take protective action with CPP with whom the cards are registered is closely linked to the insurance service.  It is not possible to say that some elements of the transaction are ‘economically dissociable’ from the others (see EC Commission v. United Kingdom (Case 353/85) [1988] STC 251, [1988] ECR 817.
29.   I would therefore hold in response to para 32 of the Court of Justice’s judgment .... that the transaction performed by CPP for Dr Howell is to be regarded for VAT purposes as comprising a principal exempt insurance supply and the other supplies in the transaction are ancillary so that they are to be treated as exempt for VAT purposes.   .....”
48.	The third authority in the group of five is the decision of this court in Customs and Excise Commissioners v. FDR Ltd [2000] STC 672 (“FDR”).
49.	The facts in FDR were briefly as follows.  FDR supplied credit card services to banks, including the effecting of transfers of funds through automated clearing systems known respectively as BACS (Bankers Automated Clearing Services) and CHAPS (Clearing House Automated Payments System).   The issue for the Court of Appeal was whether (as FDR contended) the supply was exempt under Article 13B(d)(3) as constituting ‘transactions .... concerning .... transfers’.   The Commissioners accepted that transfers of funds effected through CHAPS were ‘transfers’ within the meaning of that provision, but contended that transfers of funds effected through BACS were not.   FDR contended the contrary.   That, however, is not an issue which arises in the instant case.   The Commissioners further contended that in any event the “core supply” made by FDR was in the nature of bookkeeping or accountancy services, and hence was taxable.   The Tribunal concluded that “the principal service” supplied by FDR to the banks was that of “processing all their [credit] card transactions and settling their liabilities and claims under these transactions ....”, and hence that the supply was exempt under Article 13B(d) (3).   The Court of Appeal held (1), following SDC, that the transfers effected through BACS were ‘transfers’, within the meaning of Article 13B(d)(3); (2) that the services supplied by FDR constituted a single or core supply, of the nature described by the Tribunal; (3) that the making of ‘transfers’ was at the centre of that core supply, and hence that the Tribunal was right to conclude that the supply was exempt under Article 13B(d)(3).   
50.	On the question whether some or all of the services supplied by FDR should be treated as a core or principal supply (and thus a single supply) for the purposes of VAT, both sides were agreed that there was a core supply, but they differed as to what it was.   As already noted, the Commissioners contended that it was analogous with bookkeeping or accountancy services, whilst FDR contended that it was as the Tribunal described it.  
51.	The leading judgment was delivered by Laws LJ, with whom Ward LJ and Bell J agreed. Addressing the issue as to whether there was a core supply, Laws LJ began by quoting paragraphs 26 to 30 of the judgment of the Court of Justice in CPP.    With regard to the court’s reference (in paragraph 30 its judgment in CPP) to its earlier judgment in Madgett, Laws LJ quoted paragraph 36 of the Opinion of the Advocate General in Madgett, which the court in that case approved.   In that paragraph, the Advocate General said this:
“I consider that a service is ancillary if, first, it contributes to the proper performance of the principal service and, second, it takes up a marginal proportion of the package price compared to the principal service.  It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.”
52.	In paragraph 54 of his judgment, Laws LJ cited another formulation of the correct approach where a supply embraces a number of different elements, viz. that of Nolan LJ in Bophuthatswana National Commercial Corpn. Ltd v. Customs and Excise Commissioners [1993] STC 702 at 708 (an approach also adopted by Millett LJ in Customs and Excise Commissioners v. Wellington Private Hospital Ltd [1997] STC 445 at 462), viz. to inquire “what is the true and substantial nature of the consideration given for the payment”.   Adopting that approach to the facts of the case, Laws LJ concluded (in paragraph 62 of his judgment) that there was a “single or core supply” by FDR, of the nature which the Tribunal had found it to be.
53.	Addressing the issue as to the correct tax treatment of the core supply, Laws LJ concluded (in paragraph 63 of his judgment) that the making of ‘transfers’ was “at the centre of the core supply”, and hence that the supply was exempt under Article 13B(d) (3).
54.	The fourth authority in the group of five is the decision of the Court of Justice in CSC Financial Services Ltd v. Customs and Excise Commissioners (Case C-235/00) [2002] STC 57 (“CSC”).
55.	The facts of CSC were briefly as follows.   CSC provided a ‘call centre’ service for financial institutions including Sun Alliance.   Sun Alliance entrusted to CSC all communications and contacts with the public concerning a particular investment product under which investment was made by means of units in a unit trust, and paid CSC for its services.   CSC did not deal with the formalities of issuing and transferring the units in the unit trust; those functions were carried out by another company.   CSC claimed exemption under Article 13B(d)(5), on the footing that the services which it supplied to Sun Alliance constituted ‘transactions … in … securities’ or ‘negotiation .... in .... securities’.   The High Court referred to the Court of Justice the question whether the services supplied by CSC came with that exemption.
56.	In paragraph 35 of his Opinion, the Advocate General (Don Ruiz-Jarabo Colomer) said this:
“….   If the contractual authority conferred on CSC includes the powers needed to carry out, on behalf of Sun Alliance, any of those legal operations, I have no doubt whatsoever that they will be exempt from VAT.   If, on the contrary, that is not the case – if its involvement is merely ancillary and preparatory to conclusion of those legal operations – then in my opinion the exemption does not extend to it.”
57.	In paragraph 39 of his Opinion, the Advocate General said this:
“….   The idea of ‘negotiating’ refers to ‘settling’, ‘giving way’ and ‘dealing’: in short, the idea of managing one’s own rights and interests in order to arrive at an agreement.   The capacity to dispose of legal rights belongs only to the person vested with those rights or to his representative, either by operation of law (patria potestas or guardianship) or by agreement (power of attorney or other grant of representative capacity.”
58.	In paragraph 28 of its judgment, whilst not expressly adopting paragraph 35 of the Advocate General’s Opinion, the Court of Justice observed, citing SDC:
“[t]he supply of a mere physical, technical or administrative service, which does not alter the legal or financial situation would not, therefore, appear to be covered by the exemption laid down in art. 13B(d)(5) of the Sixth Directive.”
59.	Concluding its opening observations, the court said (in paragraphs 32 and 33), citing SDC para 65:
“32.   Lastly, the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt ....
33.   It follows from the foregoing that the words ‘transactions in securities’ refer to transactions liable to create, alter or extinguish parties’ rights and obligations in respect of securities.”
60.	Turning to the interpretation of the words ‘negotiation .... in .... securities’, the court said this (in paragraphs 38 to 40):
“38.   Clearly 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.   
39.   It is not necessary to consider the precise meaning of the word ‘negotiation’, which also appears in other provisions of the Sixth Directive, in particular, art. 13B(d) (1) – (4), in order to hold that, in the context of art. 13B(d)(5), it refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product, and whose activity amounts to anything other than the provision of contractual services typically undertaken by the parties to such contracts.   Negotiation is 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 and on behalf of a client, the detail of the payments to be made by either side.   The purpose of negotiation is therefore 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 terms of the contract.
40.   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.”
61.	The last authority in the group of five is Customs and Excise Commissioners v. BAA plc [2002] STC 327 (Etherton J) and [2003] STC 35 (the Court of Appeal) (“BAA”).
62.	The facts in BAA were briefly as follows.   BAA owned or managed a number of airports, both within the UK and abroad.   One of its subsidiaries set up a credit card scheme involving a credit card called ‘BAA WorldCard’.   The card was issued by a bank and promoted by BAA as part of is ‘customer loyalty’ strategy and in association with its bonus points scheme for customers.   Before a credit card was issued, the subsidiary carried out a selection exercise by identifying individuals on the company’s databases who satisfied the bank’s preconditions for the issue of a card.    Applications were returned to the subsidiary’s agent for checking, in order to ensure that the forms had been completed correctly and that there were no inaccuracies.   However, the bank alone assumed the risk in granting credit, and it had the final say as to which applications for a card should be accepted.   The Commissioners contended that VAT was chargeable on the commissions paid by the bank to the subsidiary in respect of the use of the card.   The Tribunal held that the services supplied by the subsidiary to the bank under the scheme were exempt as constituting ‘the negotiation of credit’ within the meaning of Article 13B(d)(1).   The Commissioners appealed to the High Court, contending that the word ‘negotiation’ in Article 13B(d)(1) meant the brokering of an actual exempt transaction (i.e. the grant of credit) by an intermediary who had the power to affect the substance of the transaction itself, which the subsidiary did not have.    Etherton J dismissed the Commissioners’ appeal, and his decision was upheld in the Court of Appeal.
63.	In the course of his judgment (with which Mummery and Tuckey LJJ agreed), Sir Andrew Morritt V-C said this:
“[29]   Counsel for Customs & Excise submitted that Etherton J was wrong for four basic reasons, namely: (1) the decision of this court in CSMA cannot survive the decision of the Court of Justice in CSC and is distinguishable on its facts;  (2) in CSC the Court of Justice did not provide any positive test by which to identify “negotiation of credit” and is distinguishable on its facts;  (3)  if and in so far as the decision of the Court of Justice in CSC did provide a positive test then the services of the negotiator must be independent of any of the parties to the grant of credit, different from the services typically undertaken by such parties and amount to a distinct act of mediation;  (4) the nature of the services provided by BAAE [BAA’s subsidiary] should have been characterised as the sale of a customer list alone or coupled with the joint promotion and marketing of a financial product.
 [30]   I do not accept that there is any relevant inconsistency between the decision of this court in CSMA and the decision of the Court of Justice in CSC when read in the light of their respective facts.  I have quoted the material passages in paras 18 and 22 above.   Both recognise that negotiation is an exercise preliminary to and connected with the relevant transaction.    In both the negotiator was remunerated by commission.   In neither is it suggested that the negotiator should be able to affect the terms of the relevant transaction.   
 [31]   It is true that the Court of Justice in CSC went further than this court in CSMA in excluding services typically provided by one or other party to the relevant transaction and in requiring a distinct act of mediation.   But both that exclusion and that requirement are consistent with the actual decision of this court in CSMA.  Similarly it is true that the description of the services of CSMA, in addition to those of an introducer, to which I have referred in paragraph 17 above cannot be used in connection with BAAE in this case;  but it does not follow that the services of BAAE were not those of a negotiator.
 [32]   I turn then to the second submission of counsel for Customs & Excise.   I accept that the judgment of the Court of Justice in CSC did not provide a precise and exhaustive definition of “negotiation”; that is what the court said in the first sentence of paragraph 39 .....   But it does not follow that the judgment does not provide a sufficient basis for determining whether, as a matter of fact, the services of BAAE were or were not those of a negotiator.   On the contrary the specific inclusions and exclusions indicated in paragraphs 39 and 40 go a long way to providing a precise and exhaustive test yet leaving room thereafter to include or exclude the unforeseen.   Plainly the facts in CSC are distinguishable from those in this case;  but whether the distinction is material depends on the application of the test to which the Court of Justice referred.
 [33]   The third submission of counsel for Customs & Excise imports a test of independence from either party to the transaction.   This is warranted by paragraphs 39 and 40 of the judgment of the Court of Justice in CSC.   Thus the negotiator must not be a party or a subcontractor of a party to the grant of credit.   Nor must the services he provides be those typically provided by such a party or sub-contractor.   But this submission leads nowhere.   It is quite clear that BAAE is not a party to the grant of credit by the issue of the co-branded credit card.  Nor are its services those typically provided by a bank or card-holder.   Of course, there is a contractual relationship between BAAE and [the bank] and for some purposes, no doubt, it may be accurately described as a joint venture.  What matters is not the relationship but the services rendered by BAAE thereunder.

[34]   Accordingly the outcome of this appeal rests on the fourth submission of counsel for Customs & Excise.  How should those services be characterised?    I do not accept that they amount to no more than the sale of BAAE’s relevant databases.   On the contrary BAAE is required to do all the introductory work not to all those on its databases but only to those who comply with the conditions imposed by [the bank].   Nor can they be confined to the joint promotion and marketing of a financial product.  The promotion and marketing is of the grant of credit which is the essential preliminary to obtaining any benefit under the BAAE Agreement by either party.

[35]   In my judgment Etherton J was correct to characterise the services of BAAE as the negotiation of credit within Article 13B(d)1 in the way that he did in paragraph 47 of his judgment.  First, the First Schedule to the BAAE Agreement contains the details of the credit to be offered to an applicant by the issue of a card unless and until varied by [the bank].   Whether and to what extent it was the result of negotiation between BAAE and [the bank] is immaterial.  The fact is that the introduction by BAAE of one of its members or customers to [the bank] is an introduction to a source of credit on terms agreed by BAAE and [the bank].

[36]   Second, the introduction is preceded by screening processes carried out by BAAE so as to ensure that those whom BAAE introduces comply with [the bank] pre-conditions.  Whether or not an application is accepted is a matter for [the bank] alone but the introduction is effected by BAAE.

[37]  Third, BAAE is remunerated by the commission payable by [the bank] in accordance with Clause 4 of the BAAE Agreement.  This comprises a commission and an introduction and processing fee.  The latter is payable, subject to certain conditions, in respect of each card account opened in a specified period.  The former is an ongoing commission based on the value of the usage of the card.  Thus the services of BAAE are remunerated by one party to the grant of credit as a distinct act of introduction or mediation.

[38]   Fourth, it is clear that BAAE is not itself a party to the grant of credit by [the bank] to a card-holder, nor is it a sub-contractor of such a party.   The introductory services it performs are, by definition, not typical of the services performed by the grantor or grantee of credit.

[39]   The true analysis, in my judgment, is that BAAE provides access to some of its customers or members for [the bank] to supply them with credit on terms previously agreed between BAAE and [the bank].   Of course, each derives benefits from the transaction.   Accordingly each is eager to promote the scheme and enlist the support of the other party for that purpose too.   But all the benefits to be obtained by either party depend on the issue of the co-branded credit card.   In those circumstances I agree with the parties in treating the services as composite.  Equally the introductory services of BAAE without which the card is not issued and the benefits cannot be obtained seem to me to be properly characterised as “negotiation of credit” within the European concept denoted by that phrase as described by the Court of Justice in CSC.” 

.............

[55]  It is clear from the judgment of the Court of Justice in CSC that it did not consider that it was an essential element in “negotiation” that the negotiator should have the ability to alter the legal position as between the grantor and grantee of the credit.  There is no trace of any such requirement in paragraphs 39 and 40 of the judgment of the Court of Justice .....   It follows that the decision of the Tribunal contains a fundamental error of law and must be set aside unless their order can be justified on other grounds.”

64.	Lastly, I turn to the decision of Keene J in Customs and Excise Commissioners v. Lloyds TSB Group Ltd [1998] STC 528 (“Lloyds TSB”).    Although this decision predates the decisions of the Court of Justice in CPP, CSC and SDC, it is relied on by Mr Roderick Cordara QC (for EDS) as an example of an approach which (as he submits) is fully in accordance with the principles established by those decisions.    
65.	In Lloyds TSB, the court had to assess the predominant character of a single composite supply which consisted of a number of separate elements, in order to determine whether the supply was exempt.    At page 535a-c Keene J said this:
“I therefore approach this matter on the basis that one should look at the package of supplies as a whole, and taking account of all the relevant circumstances seek to determine its predominant character.   That may well involve, and probably usually would involve, considering a range of different factors.   In a case such as the present it does, in my view, require one to consider the individual elements in the package, but at the same time it is necessary to take account of any evidence which may indicate the relative importance of each of those elements.   At the end of the process it is necessary to stand back and to assess the predominant character of the package being supplied.”

THE DECISION

66.	The Tribunal addressed first the issue whether the supply of services by EDS under the 1999 agreement is exempt under Article 13B(d)(1) as constituting the ‘granting [or] negotiation of credit’.   It did so notwithstanding that in its Particulars of Appeal EDS had not contended that the supply constituted the ‘granting’ of credit.   
67.	The Tribunal began by considering what was “the essential commercial activity” of EDS, under the 1999 agreement.    It concluded (in paragraph 68 of the Decision) that that activity was “the grant of a loan to a borrower on behalf of the Bank”.   It continued:

“Viewed broadly and as a whole, what [EDS] did was to act as the representative of the Bank in the granting of loans; [EDS] had the authority of the Bank to act as the representative of the Bank and to dispose of the legal rights of the Bank in connection with the granting of loans.   [EDS] bound the Bank to advance money to borrowers, and to accept repayments from borrowers, on terms set out in the loan agreements the details of which were agreed by [EDS] with the borrowers.”

68.	In reaching that conclusion, the Tribunal rejected a submission by Mrs Hall that it was the Bank and not EDS which granted credit since it was ultimately the Bank’s decision whether to make the loan.   The Commissioners took the view that the Bank was doing no more than operating a credit-rating system, through the ASM system (se paragraph 41 of the Decision, quoted in the Appendix).   As the Tribunal put it in paragraph 70 of the Decision:
“The ASM system did not make the decision to grant the loan and did not alter in any way the legal rights and obligations of the parties.   It contributed merely one element of a total validation procedure which had a number of elements, including the verification of documents and earnings which were undertaken by [EDS].   It was [EDS] which altered the legal position by sending to the borrower the loan agreement (signed by [EDS] on behalf of the Bank) at which stage the borrower had an offer of a loan subject to conditions, and it was [EDS] which released the funds to the borrower which rendered the loan a ‘live loan’.   We also consider it relevant that it was only [EDS] (and not the Bank) which dealt with the borrowers.”

69.	The Tribunal went on (in paragraph 71 of the Decision)  to reject a further submission by Mrs Hall to the effect that only the Bank had the capacity to create, alter or extinguish the rights and obligations in respect of the loans and so only the Bank could grant credit.   
70.	The Tribunal then turned to the authorities.   The first of the authorities which it considered in this context was SDC.   It noted that SDC was concerned primarily with the meaning of ‘transactions’ in Article 13B(d)(3), but it took the view that the ECJ’s conclusion (in paragraph 33 of its judgment in SDC, quoted earlier) that, having regard to the terms of Article 13B(d)(1) and (2), the identity of the person effecting the ‘transactions’ was irrelevant in determining whether a transaction was exempt under Article 13B(d)(3), applies equally to the expression ‘the granting and negotiation of credit’ in Article 13B(d)(1).    The Tribunal continued (in paragraph 76 of the Decision):
“…. and so it follows that these words define that part of the exemption according to the nature of the service provided and not according to the person supplying the service.   Thus, if the nature of the service provide[d] by [EDS] is the granting of credit, it does not appear to be relevant that the credit is supplied by the Bank.”

71.	In paragraph 78 of the Decision the Tribunal said:
“In the present appeal the services supplied by [EDS] were the performance of the essential, specific function of the granting of credit and so fulfilled the conditions for exemption.   The services supplied by [EDS] were not merely technical and electronic assistance to the Bank; further, it was not the Bank which performed the essential, specific functions of the granting of credit.”

72.	The Tribunal went on to note paragraphs 55 and 59 of the judgment of the Court of Justice in SDC (quoted earlier), where the court concluded that the fact that a transaction was effected by a third party but appeared to the end customer to be a service provided by the bank did not preclude exemption for the transaction.   The Tribunal continued (in paragraph 80 of the Decision):
“Applying those principles to the facts of the present appeal, even though the services of [EDS] are provided to the Bank, and are invoiced as services supplied to the Bank, it is as a result of the agreement between [EDS] and the Bank that the borrowers derived their rights to have the loans effected.   The fact that the loans are made by the Bank to the borrowers, although effected by [EDS], and appear to the borrowers to be a service provided by the Bank, does not preclude exemption for the transactions carried out by [EDS].”

73.	In paragraph 82 of the Decision the Tribunal went on to conclude, by reference to paragraph 66 of the judgment in SDC (quoted earlier):
“In the present appeal the services of [EDS], viewed broadly and as a distinct whole, amounted to the granting of credit on behalf of the Bank as described in Article 13B(d)(1).   The services of [EDS] had the direct effect of forming a contract of loan between each borrower and the Bank and releasing the funds of the Bank to the borrower.   The services of [EDS] also entailed changes in the legal and financial situations of the Bank and the borrowers because, as a direct result of the services of [EDS], the loan contract was formed between the borrower and the Bank and the funds of the Bank were released by [EDS] to the borrower.”

74.	In paragraph 85 of the Decision the Tribunal expressed its conclusion on this issue as follows:
“The principles enunciated by the Court of Justice in [SDC], applicable to Articles 13B(d)(3) and (5), appear equally applicable to the phrase ‘the granting and negotiation of credit’ in Article 13B(d)(1).   In the light of that authority we would conclude that the services of [EDS] in the granting of credit are exempt.”

75.	The Tribunal went on to refer in this connection to FDR and CSC, and in particular to paragraph 35 of the Opinion of the Advocate General in CSC (quoted earlier).   With reference to that paragraph, the Tribunal said (in paragraph 90 of the Decision):

“Applying that principle to the facts of the present appeal the operation subject to tax which, under art 13B(d)(1) of the Sixth Directive is exempt, is the legal operation between the Bank and the borrower including the entering into the loan agreement, the issue of the contractual documentation, and the release of the funds.    The contractual authority conferred on [EDS] includes the powers needed to carry out, on behalf of the Bank, all of those legal operations.   It follows that they should be exempt from VAT.   The involvement of [EDS] is not merely ancillary and preparatory to conclusion of those legal operations; the involvement of [EDS] is crucial and essential to the conclusion of those legal operations.”

76.	Returning to SDC, the Tribunal said (in paragraph 92 of the Decision):

“We find that decision to be of interest because the Court of Justice applied the analysis and principles enunciated in respect of Article 13B(d)(3) to Article 13B(d)(5) and that supports our view that a similar analysis should be applied to Article 13B(d)(1).   When the services of [EDS] are viewed broadly, to form a distinct whole, they fulfil the specific, essential functions of a service described in Article 13B(d)(1).   The services of [EDS] have the effect of the granting of credit and entail changes of a legal and financial nature.   They are transactions which create and, on closure, extinguish the rights and obligations of the Bank and the borrowers in respect of the loans.   The supplies of [EDS] are not merely the provision of routine, technical or electronic assistance such as the leasing of computers to the Bank, or the supply of cleaning services, or the supply of telephonic equipment, or a simple telephone answering service; on the contrary it is [EDS] who ‘issues’ the credit.”

77.	In paragraph 93 of the Decision the Tribunal repeated its conclusion that [EDS] granted credit within the meaning of Article 13B(d)(1).
78.	That conclusion was enough to dispose of the appeal in favour of EDS; but in case it should be wrong the Tribunal turned to the remaining issues.   It addressed next the issue whether EDS’ supply constituted the ‘negotiation’ of credit within the meaning of Article 13B(d)((1).   Referring to CSMA, the Tribunal said (in paragraph 97 of the Decision):
“This authority confirms the view that the exemption for the negotiation of credit is not limited to a supply by the person granting the credit.   If, contrary to our previous views, [EDS] is not granting credit, then the credit is granted by the Bank.   However, the exemption for the negotiation of credit is not limited to a supply by the Bank or to specific grants of credit.   The phrase includes actions antecedent to, and directly leading to, the grants of credit.   In this appeal, all the actions done by [EDS] before a loan becomes a ‘live loan’ would be the negotiation of credit.”

79.	The Tribunal then referred once again to CSC, and in particular to paragraph 39 of the Advocate General’s Opinion (quoted earlier).    In paragraph 101 of the Decision the Tribunal said this:
“In the present appeal we are of the view that the activity of [EDS] does amount to the provision of contractual services typically undertaken by a lender.   For that reason we regard the supply of [EDS] as rather being the granting of credit than the negotiation of it.   However, if we are wrong about that then the supply of [EDS] is the negotiation of credit.   It is a distinct act of mediation between the Bank and the borrower and does all that is necessary to enable the Bank and the borrower to enter into the contract of loan without [EDS] having any interest of its own in the terms of the loan.   This is not a case of the Bank entrusting [EDS] with some of the clerical formalities only; the Bank entrusts [EDS] with the whole of the function of granting credit.”

80.	After citing BAA at first instance (the appeal in BAA was heard in December 2002, some nine months after the release of the Decision), the Tribunal continued (in paragraphs 103 and 104 of the Decision):

“103.   In the present appeal if [EDS] does not grant credit then it acts as an intermediary and its role is to procure the completion of, and negotiate the terms of, loan transactions of behalf of the Bank who is one of the parties to each loan.   [EDS] communicates with the borrower and seeks to influence him to conclude a contract with the Bank.   [EDS] performs distinct acts of mediation between the borrowers and the Bank.   

104.   Our conclusion on the first issue in the appeal is that the supplies made by [EDS] to the Bank under the 1988 and 1999 agreements were the granting of credit within the meaning of Article 13B(d)(1); however, if we are wrong about that then the supplies were the negotiation of credit within the meaning of the same Article.   That means that the appeal is allowed and we do not need to consider the other issues.   However, as arguments were put to us we briefly express our views.”

81.	The Tribunal then turned to the issue as to whether the supply by [EDS] constituted ‘transactions, including negotiation, concerning ...... payments, transfers ....’ within the meaning of Article 13B(d)(3).
82.	In addressing this issue, the Tribunal began by considering the supply of services by EDS as a whole.   It concluded (in paragraph 109 of the Decision) that although EDS undertook transactions concerning payments, transfers and debts, nevertheless that was not an adequate categorisation of what [EDS] did.   The Tribunal continued:

“However, if the supplies of [EDS] were not to be exempt under Article 13B(d)(1) then in our view they should be exempt under Article 13B(d)(3) as [EDS] carries out all the operations necessary for a complete exempt supply of a financial service.”

83.	Turning to a submission by Mrs Hall that the fact that EDS took no financial risk, coupled with the fact that the relevant bank accounts were trust accounts, indicated that the commercial essence of what EDS did was not transfers and payments, the Tribunal agreed with Mrs Hall that EDS ran “very little risk indeed”.   It continued (in paragraph 113 of the Decision):

“However, we do not agree that the fact that [EDS] took little financial risk, and the fact that the relevant bank accounts were trust accounts, indicated that the commercial essence of what EDS did was not transfers and payments; neither do we agree that these arrangements had been put in place solely for the purposes of avoiding for value added tax.   We find that the function of the trust accounts was to protect the Bank’s funds in the (unlikely) event of the insolvency of [EDS].   We also find that the facts that [EDS] took little financial risk, and that the accounts were trust accounts, does not alter our categorisation of the essential commercial activity of [EDS].”

84.	In paragraph 115 of the Decision, the Tribunal expressed its conclusion on this issue as follows:
“…. if [EDS] did not grant or negotiate credit, then it did undertake transactions concerning deposit and current accounts, payments, transfers and debts within the meaning of Article 13B(d)(3).”

85.	The Tribunal then turned to the issue as to whether the supplies made by EDS under the insurance agreement were separate exempt supplies of insurance within the meaning of Article 13B(a) or whether they were ancillary to a main supply of standard-rated services.   It concluded (in paragraph 119 of the Decision) that had it been necessary to decide this issue it would have concluded that they were a separate supply, on the basis that:
“[n]ot only are they made under a separate agreement, for separate consideration, but they are made to a separate party.”

THE ISSUES ON THIS APPEAL
86.	Two preliminary points need to be noted.   
87.	In the first place, it will be recalled that the Tribunal’s conclusion that the supply of services by EDS under the 1999 agreement constitutes ‘the granting ..... of credit’ under Article 13B(d)(1) was not a conclusion for which EDS had contended in its Particulars of Appeal.   Before us, Mr Cordara submits that if this court were to conclude that the supply is not exempt either as constituting ‘the negotiation of credit’ under Article 13B(d)(1) or as constituting ‘transaction[s], including negotiation, concerning .... payments [and/or] transfers’ under Article 13B(d)(3), then the question of the meaning of the expression ‘the granting of credit’ should be referred to the Court of Justice.
88.	Secondly, both sides agree that the supply of services under the 1999 agreement falls to be treated as a single supply for VAT purposes, although they differ as to its essential nature.
89.	Subject to those two points, the two principal issues which arise on this appeal are as follows:
1.	Whether the supply constitutes ‘transaction[s], including negotiation, concerning .... payments [and/or] transfers ...’ and is thus exempt under Article 13B(d)(3).
2.	If not, whether it constitutes ‘the granting [and/or] the negotiation of credit’ and is thus exempt under Article 13B(d)(1).

90.	Success for EDS on either of these principal issues would result in the dismissal of the appeal.    In the event that EDS loses on both these issues, a further issue arises as to whether EDS’ supply of insurance services to Lloyds Insurance under the insurance agreement is nevertheless exempt.
THE ARGUMENTS ON THE APPEAL
91.	Mrs Hall places SUFA at the forefront of her argument with regard to the granting and negotiation of credit.   She submits that SUFA establishes the principle that the exemptions in Article 13B are to be construed strictly.   
92.	She submits that there are a number of further propositions to be derived from SUFA, which are relevant to the Commissioners’ case under Article 13B(d)(1).    The first of those propositions, she submits, is that if a taxable person engaged in exempt activities subcontracts some of the services which are necessary for the carrying on of that exempt activity, the subcontractor cannot claim the exemption merely by assimilating his position to that of the party claiming the exemption.   Hence, she submits, in the instant case it is nothing to the point that had the Bank supplied the services performed by EDS under the 1999 agreement direct to its customers, the supply would have been exempt.    She further submits that SUFA establishes that exemptions are independent concepts of Community law which must be placed in the general context of the common system of VAT.    She reminds us that the scope of the Sixth Directive is a wide one, covering the economic activities of producers, traders and persons supplying services.    
93.	Approaching Article 13B on that basis, she submits that there are three stages in the interpretation of the particular exemptions contained in the Article.   The first stage is to ascertain what Article 13B is intended to exempt.   The second stage is to ascertain what are the specific essential functions which are the subject of the particular exemptions.   The third stage is to determine whether, in supplying services under the 1999 agreement, EDS is performing such specific essential functions.   
94.	Mrs Hall submits that SDC and CSC are the key decisions of the Court of Justice in connection with the ‘outsourcing’ of financial services.   She summarises the points of principle established by those decisions as follows:
(a)   In order to be characterised as exempt transactions for the purposes of Article 13B(d)(3) and (5), the services provided by a data handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific essential functions of the exempt service.   In other words, the party claiming the exemption must perform or carry out the exempt activity.

(b)   A service which entails only technical assistance to the person performing the specific essential functions for the transactions in question (e.g. by making available a data handling system) does not fulfil the conditions for exemption.

(c)   The mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt.   It is not therefore sufficient that the supply in question should be an element of a financial service in which various operators participate and which, taken as a whole, constitutes a complete financial service.   

(d)   To constitute a ‘transaction .... concerning .... transfers’ the services in question must have the effect of transferring funds and must entail changes in the legal and financial situation.   In general, the services must be “…. liable to create, alter or extinguish rights and obligations in respect of [the exempt transaction]” (see paragraph 33 of the judgment in SDC, quoted earlier). The identity of the person effecting the transaction is irrelevant.  

(e)   The exemptions in Article 13B(d)(3) and (5) are not restricted to services provided to a bank’s end customers but are defined according to the nature of the services provided.   

(f)   The fact that a transaction appears to the end customer to be a service provided by the bank does not preclude exemption for the transaction.

(g)   The specific manner in which the service is performed does not affect the application of the exemption.

(h)   A ‘transfer’ within the meaning of Article 13B(d)(3) is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another, irrespective of its cause.   It is merely a means of transmitting funds, which involves a change in the legal and financial situation existing between the relevant parties.
95.	Mrs Hall also relies on the decisions of the Court of Justice in The European Commission v. Ireland (Case C-358/97 [2000] ECR 6301), Commissioners of Customs and Excise v. Mirror Group plc (Case C-409/98) and Commissioners of Customs and Excise v. Cantor Fitzgerald International (Case C-108/99) (both of which are reported at [2001] STC 1453) as providing further support for her submissions as to the approach which we should adopt to the interpretation of Article 13B.    She submits, by reference to these authorities, that it is not enough for the taxpayer to demonstrate that the transaction in question performs the same economic function as the exempt transaction: in other words, that the functions carried out by EDS under the 1999 agreement are functions which are typically carried out by banks.   She submits that it is necessary to determine what is the economic purpose of the 1999 agreement, and in what respects performance of that agreement satisfies the interests of the parties.   
96.	Mrs Hall also relies on the dictum of Lord Nicholls in Commissioners of Customs and Excise v. Sinclair Collis [2001] STC 989 at 997f-g that:
“…. commercial motivation is not determinative of the nature of the service supplied”.

97.	Turning to the issue whether the supply by EDS constitutes ‘the granting .... of credit’, Mrs Hall submits that, applying the principles established by SDC and CSC, the Tribunal ought first to have identified what are the essential functions of a transaction comprising the grant of credit.   Having done that, it should have asked itself whether the activities of EDS under the 1999 agreement are capable of creating, altering or extinguishing the legal rights and obligations embodied in or deriving from the loan agreement; and whether those activities directly affect the substance of that legal relationship.   
98.	Mrs Hall submits that the Tribunal failed to identify the specific essential functions of granting credit.   She acknowledges that the general guidance in SDC is helpful in this connection, but she submits that the Tribunal failed to distinguish between Article 13B(d)(1) and Article 13B(d)(3).   She submits that in the instant case the Bank has ‘outsourced’ the vast majority of its functions both prior to and subsequent to the actual making of the loan, but that it has not ‘outsourced’ the making of the loan; and that it is the making of the loan which constitutes ‘the granting ..... of credit’  within the meaning of Article 13B(d)(1).   She submits that the Bank did not pay EDS to take on the risk involved in granting credit.
99.	Mrs Hall submits that it is the loan agreement between the Bank and its customer which constitutes the grant of credit, since it is that document which gives rise to the debtor/creditor relationship which is the concomitant of a loan.   She points out that EDS is not a party to the loan agreement and acquires no rights and undertakes no obligations under it.    She submits that EDS is not capable of performing the specific essential functions of the granting of credit, and that that was the only conclusion open to the Tribunal.   
100.	She submits that the Tribunal confused the ‘outsourcing’ of the contract-making function (which is not exempt) with the ‘outsourcing’ of the exempt transaction itself; and that its conclusion (in paragraph 69 of the Decision) that the Bank had ‘outsourced’ to EDS the entirety of the function of granting and negotiating loans overlooked the fact that it was common ground that the Bank retained for itself the actual granting of loans in the sense that EDS was not party to the loan agreements.   She submits that the Tribunal wrongly focused on whether EDS’ services resulted in an exempt transaction, whereas it should have focused on whether those services comprised the exempt transaction.   She accepts the description of the services in question in the 1999 agreement as ‘loan arrangement and execution services’, but she submits that loan arrangement and execution services are not exempt unless in performing those services the taxpayer performs the exempt transaction.   In the instant case, she submits, EDS merely undertook the arrangements necessary to enable the Bank to grant a loan.   The Bank having done so, EDS then took the necessary administrative steps to give effect to the loan agreement.
101.	Mrs Hall accordingly submits that on the issue as to ‘the granting ... of credit’ the Tribunal reached a conclusion which was contrary to the only conclusion which was open to it on the facts.
102.	Turning to the issue as to whether the supply under the 1999 agreement constitutes ‘the negotiation of credit’ under Article 13B(d)(1) or ‘negotiation concerning ... payments [and/or] transfers’ under Article 13B(d)(3),  Mrs Hall accepts that  EDS is doing more than performing ‘the clerical formalities related to the contract’ (see CSC paragraph 40, quoted earlier), but she submits that its position is not that of an intermediary.   Rather, she submits that the position of EDS under the 1999 agreement is to be identified with that of the Bank, save only in respect of the granting of credit.   She submits that in carrying out its obligations under the 1999 agreement EDS is not performing distinct acts of mediation.
103.	Mrs Hall accepts that, as she put it in argument, the word ‘negotiation’ in Article 13B(d)(1), (3) and (5) has not as yet reached a refined state of definition, but she submits that an analysis of the 1999 agreement shows that EDS is in effect a subcontractor, providing services which are typically undertaken by a bank.   She submits that BAA is of little assistance in the instant case, and that such assistance as it does provide favours the Commissioners’ case.
104.	Mrs Hall submits that the 1999 agreement is not about making payments or transfers, and that the Tribunal’s conclusion that the commercial essence of the 1999 agreement is the granting or negotiation of loans was perverse.   She submits that on the basis of its conclusions (in paragraph 101 of the Decision) that EDS performed services typically undertaken by a lender, and that the Bank entrusted EDS with the whole of the function of granting credit, the only reasonable conclusion open to the Tribunal was that EDS did not negotiate credit.
105.	Turning to the issue as to whether the supply of services under the 1999 agreement constitutes ‘transaction[s] ... concerning ... payments [and/or] transfers’ under Article 13B(d)(3), Mrs Hall accepts that the services supplied by EDS under the 1999 agreement included services in relation to payments and transfers, but she submits that the latter services are, in effect, subsumed by the overall standard-rated supply of which they form part.
106.	She submits that, given the Tribunal’s finding that EDS’ essential commercial activity comprised the granting of loans, its conclusion that its services constituted transactions concerning payments and transfers was, once again, a perverse conclusion.   She reminds us that in paragraph 109 of the Decision the Tribunal took the view that although EDS undertakes transactions concerning payments and transfers, nevertheless that is not an adequate categorisation of what EDS does; and that it also found (in paragraph 69 of the Decision) that the functions performed by EDS were subsidiary to and part of the core supply of granting a loan.   She submits that those findings alone should have caused the Tribunal to reject the claim to exemption under Article 13B(d)(3).
107.	Mrs Hall submits (by reference to paragraph 47 of the Decision) that, in practical terms, all that the EDS operator does in relation to the release of funds is to press the appropriate computer key.   She accepts that in the context of the 1999 agreement pressing the appropriate computer key is an essential function, but she submits that it does not affect what she describes as the fiscal identity of the overall service.   
108.	She submits that the common sense and commercially fair approach of Laws LJ in FDR was adopted in the context of applying the principles enunciated in CPP, whereas to apply that approach to the question whether EDS is performing the specific essential functions of an exempt transaction would run counter to SUFA.   She submits that considerations of common sense and fairness cannot prevail over a strict construction of Article 13B. 
109.	On the subsidiary issue as to the supply of insurance services, should that issue arise, Mrs Hall submits, relying on CPP, that an examination of the terms of the insurance agreement demonstrates beyond reasonable argument that the supply of insurance services is inextricably bound up with, and therefore indissociable from, whatever principal supply EDS makes to the Bank.   She submits that a single supply can have two different destinations and be funded from different sources.
110.	Mr Cordara submits, by way of introduction, that the 1999 agreement confers on EDS a wide and binding legal authority to enter into, amend, perform and bring to a close a variety of loan transactions to which the Bank and its customers are parties.   EDS’ essential function, he submits, comprises the making of loans and the receipt of loan repayments.   This in itself, he submits, is sufficient to establish that the supply is exempt.   However, for good measure, in the course of discharging that function EDS moves large sums of money in and out of its accounts with the Bank.    Thus, in order to achieve its objective of effecting the making and repayment of loans, the Bank conferred on EDS power to effect money transactions altering the legal and financial position of the parties.   This, he submits, is the key to the case.
111.	He submits that EDS’ services under the 1999 agreement are closely analogous with the services in issue in FDR.   EDS does what a bank does; it performs the essential specific functions of the exempt transactions.
112.	Turning to Article 13B, Mr Cordara submits that Article 13B(d) is apt to provide exemption from VAT for all transactions which involve the dealing with or handling of money; and that the exemption is broad enough to include those who make arrangements for others to make those supplies.   Thus, as he puts it, a policy of fairly broad exclusion from VAT is in play.
113.	As to the approach to be adopted to the construction of Article 13B, Mr Cordara accepts that (following SUFA) the exemptions which it contains are to be construed strictly.   Nevertheless, he submits, that does not mean that one should adopt an interpretation of Article 13B which would ‘restrict the exemption in a way which is not supported by the wording of the provision in question’ (see SDC paragraph 56 and CSMA at 116a per Mummery LJ).   He relies on Expert Witness and Lubbock Fine for the propositions that a strict construction does not mean a restricted construction, and that the court is not required to adopt the narrowest interpretation where other interpretations are available.   He submits that the exemptions in Article 13B are broadly worded, and do not invite technical distinctions.   He invites us to give a precise meaning to broad and inclusive words.   
114.	He submits that, applying the principles laid down in SDC, the court must first understand the sort of transaction which the exemption is describing (see, e.g., the discussion as to the meaning of ‘transfer’ in paragraph 53 of the judgment in SDC).   He submits (relying on ibid. paragraph 56) that the court must not read into Article 13B ideas or concepts which could restrict the scope of the exemptions to an extent which is not warranted by the express words used.    Relying on paragraph 66 of the judgment in SDC, he submits that the next step is for the court to take the facts, ‘viewed broadly’, and to look at ‘the nature of service and not .... the way it is performed’.   This is to be contrasted with ‘a mere physical or technical supply, such as making a data-system available to a bank’, that is to say, something which within its four corners could be used equally for an exempt or a non-exempt purpose (see in this connection CSC paragraph 28, quoted earlier).   He reminds us that, as stated in SDC paragraph 64, ‘the invoicing is irrelevant for the application of the exemption in question, provided that the actions necessary for effecting the exempt transaction can be identified’, and the identity of the person effecting a ‘transaction’ is irrelevant (see SDC paragraphs 48 and 53-57).   
115.	Turning to CPP, Mr Cordara notes that before this court the Commissioners accept that there is a single supply (a concession which was not made before the Tribunal). However, he submits that CPP is nevertheless of importance in the instant case in that it gives the following relevant guidance on the approach to be taken to the interpretation of Article 13B:
(1)  regard must be had to all the circumstances of the transaction (paragraph 28), and all the essential features of the transaction should be ascertained in order to determine whether there are several supplies or one supply (paragraph 29);

(2)  each supply should normally be regarded as distinct and independent (paragraph 29) but a single economic supply should not be artificially split (ibid.);

(3)  there is a single supply where there is one principal and one ancillary element (paragraph 30); and 

(4)  a single price is not decisive (paragraph 31).

116.	Turning to the specific issues, Mr Cordara submits (as noted earlier) that if it should become necessary to decide the issue whether the supply under the 1999 agreement constitutes ‘the granting .... of credit’ under Article 13B(d)(1), we should refer the question of the meaning of that expression to the Court of Justice under what is now Article 234.   Much as he would like to support the decision of the Tribunal on this issue, he points out that there is as yet no reported decision on the meaning of the expression, and that a meaning must be accorded to it which will apply in all member states.    In the circumstances, he feels constrained to submit that the appropriate course would be a reference under Article 234.  However, he submits that the need for a reference does not arise because the Tribunal’s alternative grounds were correct.
117.	Mr Cordara turns next to the issue as to whether the supply under the 1999 agreement constitutes ‘transactions .... concerning .... payments [and/or] transfers’ within Article 13B(d)(3).
118.	On this issue, he submits (by reference to paragraph 66 of SDC) that the inquiry which the court has to make is whether the supply under the 1999 agreement has, as he puts it, sufficient critical mass to bring it within the exemption.   Thus, adopting the words of that paragraph, the inquiry is as to whether, ‘viewed broadly’, the services supplied by EDS under the 1999 agreement ‘form a distinct whole, fulfilling in effect the specific, essential functions of [an exempt service]’, and whether they ‘have the effect of transferring funds and entail changes in the legal and financial situation’.   To this extent he makes common ground with Mrs Hall.   
119.	He goes on to submit, however, by reference to paragraphs 27 and 30 of the judgment in CPP, that an important element in the analysis is the aim of the customer (i.e. in the instant case, the Bank).   He submits that under the 1999 agreement the Bank is asking EDS to provide services which comprise transactions concerning debts, payments and transfers of funds.   Mr Cordara also relies in this connection on the approach adopted by Lord Slynn in paragraphs 20 to 29 of his speech in CPP to the question whether the insurance elements or the non-insurance elements of the credit card protection plan in issue in that case were predominant.   He also relies on paragraph 25 and following in CSC.
120.	Mr Cordara reminds us that it is common ground that the supply under the 1999 agreement falls to be treated as a single supply for VAT purposes, and that the services involving movements of money via the BACS system would be exempt if they stood alone.   Moreover, he is content with Mrs Hall’s overall description of the supply (adopting the description which is contained in the 1999 agreement itself) as ‘loan arrangement and execution services’.   He submits (relying on the approach of Laws LJ in FDR) that transactions concerning payments and transfers constitute the essence of the supply, and that it is absurd to say that the services which comprise such transactions are ancillary to other elements of the supply in the sense that they are for the better enjoyment of those other elements: rather, the movement of money is the very aim of the ‘outsourcing’ under the 1999 agreement.   He submits that the instant case is a stronger case on its facts than FDR.
121.	As noted earlier, Mr Cordara also relies on the approach of Keene J in Lloyds TSB in assessing the predominant character of a single composite supply.   Standing back and assessing the predominant character of the supply under the 1999 agreement, Mr Cordara submits that the conclusion must follow that its predominant character is that of transactions concerning the movement of money.
122.	As to the meaning of ‘negotiation’, whether in Article 13B(d)(1) or in Article 13B(d)(3), Mr Cordara relies on CSC (in particular paragraph 39), CSMA and BAA.   He accepts that a commercial negotiation, where it is not carried out by the contracting parties themselves, will normally be undertaken by the agent for one or other of the contracting parties.   He submits, however, that it does not follow that in negotiating with an end customer EDS is acting merely as the Bank’s agent: rather, EDS is supplying negotiation services to the Bank, just as BAAE supplied negotiation services in BAA.
123.	Mr Cordara further submits that if, contrary to his earlier submission, applying the Lloyds TSB approach the predominant character of the supply under the 1999 agreement is not that of transactions concerning the movement of money, then its predominant character is that of the supply of negotiation services.
124.	On the issue as to the supply of insurance services (an issue which, as explained earlier, will only arise if EDS fails on the other issues), Mr Cordara accepts that the sale of insurance policies by EDS is closely connected with the sale of loans, and that in that sense the sale of the policies is subsidiary to the sale of the loans.   However, he submits that in selling the policies EDS is acting as an intermediary, performing a distinct act of mediation.   He reminds us that the insurance agreement was made not with the Bank but with Lloyds Insurance: we are therefore concerned with a different agreement made with a different customer.   Moreover, he points out that the Tribunal made no factual finding to the effect that the supply of insurance services is subordinate to the supply of services in relation to the loans.   He submits that two distinct types of commercial opportunity are involved – viz.  opportunities for the sale of loans and opportunities for the sale of insurance policies – and that the fact that, in relation to any one customer, the two opportunities may arise on the same occasion does not affect their distinct character.

CONCLUSIONS
125.	I begin by considering the guidance which the Court of Justice has given as to the general approach to the interpretation of the exemptions contained in Article 13B.   
126.	The starting-point is SUFA.   I agree with Mrs Hall (indeed, it is accepted by Mr Cordara) that SUFA establishes the general proposition that exemptions must be construed strictly.   However, that does not mean, in my judgment, that context and surrounding circumstances are to be left out of account.   As the Court of Justice said in SUFA (at paragraph 11), the exemptions “constitute independent concepts of Community law which .... should be placed in the general context of the common system of VAT introduced by the Sixth Directive”.   I take this to mean they are not to be interpreted in a rigid formulaic way, regardless of context, but rather in a manner which gives effect (for example) to the objective of the common system of VAT identified in Muys, viz. that of securing equal treatment for taxable persons.
127.	Thus, in SDC (to which further reference will be made below) the Court of Justice adopted a purposive approach to the interpretation of the expression ‘transactions .... concerning’.   Other examples of a purposive approach to the interpretation of the exemptions are the decisions of the Court of Justice in Lubbock Fine and in Muys.   Examples of the adoption of a similar approach in this jurisdiction are CSMA, FDR, Lloyds TSB and BAA.
128.	Moreover, the fact that the exemptions in Article 13B are expressed in wide and general terms means that, as Chadwick LJ explained in Expert Witness, a restricted interpretation is inappropriate.   
129.	There is, as it seems to me, a degree of inherent tension between on the one hand the need to interpret the exemptions strictly and on the other hand the adoption of a purposive approach to the interpretation of wide and general words.   In my judgment, that tension falls to be resolved by interpreting the exemptions in a way which does not have the effect of extending their scope beyond their fair meaning, as ascertained by adopting a purposive approach to their interpretation.
130.	A further aspect of the general guidance given by the Court of Justice in relation to the interpretation of the exemptions concerns the approach to be adopted to the question whether there is a single supply or separate supplies for VAT purposes; and if a single supply, how that supply is to be characterised in the context of a claim for exemption.   In the instant case, as already noted, both sides agree that there is only one supply by EDS under the 1999 agreement, and both sides are content that that supply be labelled ‘loan arrangement and execution services’; but they join issue on the question whether that single supply is exempt.    That in turn raises the question what is ‘the single or core supply’ (see Laws LJ in FDR, paragraph 62), ‘the essential feature of the scheme or its dominant purpose’ (see per Lord Slynn in CPP, at paragraph 25), or its ‘main objective’ (see ibid. paragraph 26) – to quote three different expressions of what seems to me to be the same concept.    Approaching the problem from the opposite angle, the question is whether one or more elements of the composite supply are properly to be regarded as ‘ancillary’ to some other ‘principal’ element or elements (see CPP paragraph 30).
131.	In CPP (at paragraph 29) the Court of Justice observed that ‘a supply which comprises a single service from an economic point of view should not be artificially split’.   It went on to say (in the same paragraph) that in order to determine whether there is a single supply or separate supplies ‘the essential features’ of the services in question must be ascertained.
132.	In paragraph 30 of its judgment in CPP, the Court of Justice, citing Madgett, concluded that ‘a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied’ (see also FDR at paragraph 51).
133.	It is with the above guidance in mind that I address the specific issues which arise in the instant case.
134.	I turn first to EDS’ claim to exemption under Article 13B(d)(3) on the ground that the (single) supply by EDS under the 1999 agreement constitutes ‘transaction[s] ... concerning .... payments [and/or] transfers’.   I do so because, as noted earlier, Mr Cordara placed this contention at the forefront of his submissions.
135.	For further guidance from the Court of Justice as to the interpretation of Article 13B(d)(3), I return to SDC.   As I read the court’s judgment in SDC, it supports the following relevant propositions:
•	An exclusively textual interpretation of the expression ‘transactions .... concerning’ is not appropriate: recourse must be had to the context in which the expression appears (paragraph 22).
•	The word ‘transaction[s]’ in Article 13B(d)(3) refers to the nature of the services provided, rather than to the party who supplies or (as the case may be) receives such services (paragraph 32).
•	The relevant services in a case like the instant case are the services provided by EDS to its customer the Bank, for which the Bank provides consideration: the services which EDS provides to customers of the Bank are “significant only as descriptors and as parts of the services provided by [EDS] to [the Bank]” (paragraphs 45 to 47).
•	The identity of the provider of the service or of the recipient does not affect the application of Article 13B(d)(3), save in cases where the services are such as, by their nature, are provided to customers of financial institutions (paragraph 48).
•	A ‘transaction .... concerning .... transfers’, within the meaning of Article 13B(d)(3), is “a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another”, where the transfer results in “a change in the legal and financial situation” of the relevant parties: the functional aspects of the transfer are decisive in this respect, irrespective of “cause” (paragraph 53).
•	It is nothing to the point, for present purposes, that the services provided by EDS will inevitably appear to the end customer to have been provided by the Bank (paragraph 58).
•	“[T]he mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt” (paragraph 65).
•	In the instant case: (1) the contractual links between the Bank and its customers do not affect the question whether the services supplied by EDS to the Bank are exempt under Article 13B(d)(3) (paragraph 55); (2) to fall within that exemption, the services provided by EDS “must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of” an exempt transaction (paragraph 66); (3) they must “entail changes to the legal and financial situation” (paragraph 66); and (4) EDS’ supply must amount to more than a supply which is “restricted to technical aspects” (paragraph 66.) 
136.	Following all the above guidance, I conclude on the facts of the instant case:
1.  That the expression ‘loan arrangement and execution services’ is an apt general description of the package of services supplied by EDS under the 1999 agreement.
2.  That, within that package, the ‘core supply’ (to use one of the expressions referred to earlier) is that of administrative services in connection with (‘concerning’) the making of loans.   That is the specific essential function of the supply. 
3.  The package of services is properly to be regarded as forming a ‘distinct whole’, and it would be thoroughly artificial to attempt to split it into separate elements, whether on economic or on any other grounds.
4.  The performance of the package of services crucially and inevitably involves the making of payments and transfers of funds: such transactions are not merely essential but absolutely central to the ‘core supply’.
5.  The functional aspects of the movements of money effected by EDS in performing services under the 1999 agreement result in changes in the legal and financial situation of the relevant parties.
137.	I accordingly agree with the Tribunal that the supply under the 1999 agreement is exempt under Article 13B(d)(3) as constituting ‘transactions …..  concerning ….. payments,  transfers’.   
138.	In my judgment, that conclusion does not involve any extension of the exemption: on the contrary, it seems to me that the supply in the instant case falls fairly and squarely within the exemption, and that to reach any contrary conclusion would be to impose on Article 13B(d)(3) a restrictive interpretation which could not be justified by reference to its context, or, for that matter, by reference to the natural meaning of the words used.    Nor is there anything in the judgment of the Court of Justice in SUFA which compels me to reach a contrary conclusion.
139.	As explained earlier, that conclusion is enough to dispose of this appeal.    However, since we have heard full argument from Mrs Hall on the remaining issues I advert to them briefly.
140.	So far as ‘negotiation’ is concerned, it is clear from the judgment of the Court of Justice in CSC (and, in a domestic context, from the decisions of this court in CSMA and BAA) that for the purposes of Article 13B(d) negotiation services form a separate category of services, which may be the subject of a discrete supply by an intermediary who is not a party to any resulting transaction.   On the other hand, a distinction falls to be drawn between such an intermediary and a mere agent or sub-contractor who does no more than carry out clerical formalities (see CSC paragraph 40).
141.	On the facts of the instant case I see the force of the Tribunal’s conclusion that, had the supply under the 1999 agreement not been exempt as constituting ‘transactions ... concerning ... payments [and/or] transfers’, it would have been exempt as constituting ‘negotiation’ under Article 13B(d)(3).    In the course of her submissions, Mrs Hall not merely accepted but positively asserted that EDS undertook “the vast majority of functions prior to and after the granting of the loan”.     I agree with that assertion, which seems to me to point towards the conclusion that, if the supply does not constitute exempt transactions, it is properly to be regarded as ‘negotiation’ within the meaning of Article 13B(d)(3).   However, it is not necessary for me to reach a concluded view on this issue and I do not do so.
142.	As to the ‘granting ... of credit’ under Article 13B(d)(1), had exemption under this head become a live issue I would have unhesitatingly accepted Mr Cordara’s submission that the appropriate course for this court to take would be to refer the question of the meaning of that expression to the Court of Justice under Article 234.   Since it is not in the event a live issue it would be singularly unwise for me to address it.   In the circumstances I will do no more than say that I should not be taken as necessarily agreeing with the Tribunal’s conclusion that the supply is exempt under this head.    The concept of granting credit is by no means a straightforward one, nor is it easy to define.   All in all there is, as it seems to me, real scope for argument as to what the words ‘granting ... of credit’ in Article 13B(d)(1) mean.   And that is where I shall leave that issue.
143.	Nor, in the circumstances, is it necessary for me to address the issue as to the supply of insurance-related services.
RESULT
144.	I would dismiss this appeal.
Lord Justice Potter :
145.	I agree.
Lord Justice Peter Gibson :
146.	I also agree.

APPENDIX
Extracts from the Tribunal’s Decision
The facts
10.	From the evidence before us we find the following facts.  After describing the Appellant and the Bank we describe the contents of the relevant documents which evidenced the agreements between the parties and then we describe how those agreements were implemented in practice.
The Appellant and the Bank
11.	The Appellant is a company incorporated in the United Kingdom and is a subsidiary of Electronic Data Corporation which is incorporated in the United States of America.  The Appellant is the representative member of a VAT group which was registered for value added tax with effect from 15 December 1985.
12.	On 28 June 1999 Lloyds Bank Plc changed its name to Lloyds TSB Bank Plc.  In this decision we refer to both as the Bank.  At the relevant time the administrative headquarters of the Bank were at Bristol.
1997 – The tender document
13.	Before 1997 the Bank granted loans to its customers through its branches.  Its then computer system meant that it could only offer one loan product, namely, a fixed rate, fixed term personal loan.  Very early in 1997 the Bank decided to out-source its arrangements for granting loans to enable it to offer more loans to its existing customers, to offer loans to non-customers, and to expand the range of products it offered.  (in this decision we use the word “customer” to refer to an existing customer of the Bank and the word “borrower” to refer to any person taking out a loan with the Bank through the Appellant).
14.	Accordingly, the Bank invited tenders for what was then referred to as a central lending platform.  The Appellant and others held discussions with the Bank and on 22 August 1997 the Appellant submitted its proposals which were contained in a document called “a response to a request from the Bank for a proposal”.  The response document said that the Appellant would “provide the engine” for the Bank’s personal lending business and would provide the Bank with a dedicated loan centre.  The Appellant would run, and be responsible for, the complete operation from initial contacts with borrowers through to the redemption of the loans.  The Bank would retain the functions of: sales and marketing; the setting of credit policy and the management of credit scoring; the management of collection and recoveries of loans; and legal and compliance mattes.  The Appellant’s response was accepted by the Bank in September 1997.
The 1998 agreement
15.	On 13 February 1998 the Appellant entered into the 1998 agreement with the Bank and agreed to provide a number of services.  The Appellant then began to set up the loan centre.  When the loan centre “went live” the 1999 agreement replaced the 1998 agreement.  The evidence before us related mainly to the 1999 agreement and the parties agreed that both agreements were similar.  Accordingly, we describe the contents of the 1999 agreement only.
16.	We saw a specimen invoice dated 1 April 1999 delivered under the provisions of the 1988 agreement.  It was sent from the Appellant to the Bank and was in respect of “loan arrangement and execution services”.  The amount charged was a single sum.
17.	On 27 April 1999 the Appellant received a standard licence from the Office of Fair Trading under the Consumer Credit Act 1974.  The Appellant was licensed for five years to carry on the business of consumer credit, consumer hire, credit brokerage, debt adjusting/counselling, debt collecting, and credit reference agency.
The 1999 Agreement
18.	On 30 September 1999 the Appellant entered into the 1999 agreement with the Bank.  That agreement came into effect on 12 July 1999 and re-stated and re-specified the 1998 agreement.  The core of the 1999 agreement was that the Appellant would perform stated services for the Bank in return for stated charges and that the Bank would perform certain responsibilities.
19.	Clause 7 referred to charges and clause 7.5.4 stated that the parties were of the opinion that the services of the Appellant under the agreement were exempt for the purposes of value added tax but the parties agreed on certain action in the event that Customs and Excise formed the view that the supplies were standard-rated.
20.	Clause 20 set out the Bank’s responsibilities.  These related mainly to providing information and access to the Appellant.  In particular, the Appellant was given limited access to the computers of the Bank.
21.	The services to be performed by the Appellant were set out in schedule 1 which took the form of a supplemental agreement.  It was in five sections and section 1 contained the definitions.  Paragraph 1 of section 1 stated:
 “The objective of all the Initial Services described below is to allow EDS [the Appellant] to perform loan arrangement and execution services on b behalf of the Bank.”
22.	Clause 3 of section 1 of the supplemental agreement contained some “general agreements”.  Clause 3.4 provided that the Appellant should present direct debits or cheques for payment but that, if a borrower did not make a payment on time, the Appellant had to notify the Bank who had the sole responsibility for dealing with arrears.  Management of all arrears was to be undertaken by the Bank and was outside the scope of the agreement.
23.	The principal functions of the Appellant were described in clause 4 of section 1 of the supplemental agreement as:
 (1)	the capture of applications; the Appellant was to receive initial applications for loans and record the details of the borrower; the borrower had to be identified and verified and details had to be recorded of the marketing campaign to which the borrower had responded;
 (2)	the validation of applications; applications had to be validated by the Appellant using the Bank’s credit scoring systems; the borrower had then to be given a quotation for the loan and insurance, based on the credit scoring system; if the credit scoring system revealed that the borrower had to be referred then information had to be supplied to the Bank; if a loan were rejected then the Appellant had to send a standard letter to the borrower;
 (3)	the sending of the documents to the borrower; when a loan had been validated the Appellant had to produce and forward to the borrower a loan agreement signed on behalf of the Bank together with a direct debit mandate and other documents;
 (4)	the release of funds; when all the signed documentation had been received from the borrower it had to be verified and the funds released to the borrower by BACS transfer (or by internal transfer if the borrower was a customer of the Bank); also the direct debits had to be set up;
 (5)	the collection of payments; payments were to be collected by the Appellant using the direct debit system; a summary report of cases had to be passed to the Bank;
 (6)	the collection of charges and fees; where charges or fees were appropriate (for example, there was a fee for early settlement) then these had to be collected and managed by the Appellant;
 (7)	the calculation and application of interest; the Appellant was to calculate and apply interest to the loans on a basis to be established by the Bank;
 (8)	the production of statements; the Appellant was to produce loan account statements on request, on the closure of the loan, and at other stated intervals;
 (9)	the closure of loans; the Appellant was to close loans on repayment by the borrower and was to produce a statement and covering letter;
 (10)	the maintenance of borrower details; the Appellant was to keep the details of borrowers up-to-date and produce standard letters when required, for example, on a change of address;
 (11)	the dealing with enquiries and complaints; the Appellant was to receive and respond to enquiries and complaints from borrowers about the services; complaints were to be categorised; those about loans and insurance were to be dealt with by the Appellant and those about product capability, price of loans, and rejection criteria were to be dealt with by the Bank; and
 (12)	the definition and maintenance of loan structures; the services supplied by the Appellant would help the Bank to define new loan structures or amend existing ones; the Appellant was to apply interest changes to relevant loan structures when notified by the Bank.
24.	Clause 5 of section 1 of the supplemental agreement dealt with more detailed matters.  Clause 5.5 concerned financial operations and settlement.  Part of clause 5.5 read:
 “For the purposes of settlement the Bank will open four separate bank accounts.  Three accounts will be in [the Appellant’s] name and will be used to manage [the Appellant’s] settlement responsibilities and one of these accounts will be the main [Appellant] settlement account (the “[Appellant’s] Settlement Account”).  The fourth will be in the Bank’s name (the “Bank’s Settlement Account”) and will be used for the Bank’s purpose.  The Bank shall clear to zero any outstanding balance on the [Appellant’s] Settlement Account by debit or credit at the end of the day by transfer to or from the Bank’s Settlement account.”
25.	Clause 5.5 of section 1 of the supplemental agreement also provided that the Appellant should produce a daily settlement report.
26.	Section 3 of the supplemental agreement concerned anticipated volumes and sizing assumptions.  Part A contained a table of the anticipated volumes of new loans; these showed an increase from nil in 1998 to 2,411,000 in 2008.  The business assumptions included an assumption that the Bank would run between 100 and 150 marketing campaigns each year.
27.	Section 4 of the supplemental agreement contained the provisions for charging and invoicing.  It contained a table showing separate prices for each telephone application, postal application, electronic application, loan advanced, loan executed and delinquent loan (the name for a loan in arrears).  That meant that the Appellant was paid by reference to the number of the applications and loans and not by reference to the value of the loans.
28.	Schedule 5 of the 1999 agreement contained a second supplemental agreement which contained the terms and conditions for the supply of additional services by the Appellant to the Bank.  This referred to matters such as software development, telephone marketing support, and product development.
29.	In summary, therefore, under the 1999 agreement the Bank retained the functions of advertising the loans and of dealing with delinquent accounts (borrowers who were in arrears) but the Appellant was to perform all the other functions in connection with the loans.  Also, when validating applications for loans, the Appellant was to use a computer-based assessment of credit worthiness using the Bank’s computer systems.
The insurance agreement
30.	On 31 August 2002 the Appellant entered into the insurance agreement with Lloyds Insurance which established the terms and conditions under which the Appellant was appointed as the agent of Lloyds Insurance in respect of loan protection insurance.  Such insurance related to loans sold to borrowers by the Appellant other than through the branch network of the Bank.  The agreement took effect as from 1 April 2002.  It was agreed that the Appellant should perform the marketing and sales activities outlines in schedule 1.  These included: receiving incoming calls; fitting the insurance to the borrower’s needs; processing applications; and providing information.  The charges were set out in clause 3 and were expressed to be a stated sum for each policy sold, the amount of the stated sum increasing by steps by reference to the “take-up rate” (the number of policies sold as a function of the number of loans agreed).  Clause 3.7.4 stated that the parties were jointly of the opinion that the services to be supplied under the insurance agreement were exempt from value added tax but the parties agreed on certain action In the event that Customs and Excise formed the view that the supplies were standard-rated.
31.	The cover provided by the loan protection insurance was two-fold.  If a policy holder lost his job then the insurer credited his bank account with the amount of the loan repayments on the same days that the direct debits transferred the amounts to the Appellant.  If a policy holder died the loan was paid off in full.

The implementation of the agreements

32.	We have found it convenient to describe the implementation of the agreements in the order in which we have described the agreements.

33.	Dealing first with the 1997 response document we find that the proposals were substantially implemented by the parties save that the Appellant undertook the collection of payment under normal loans whereas the Bank undertook the collection and recovery of loans which were in arrears.

The implementation of the 1998 agreement
34.  The 1998 agreement was implemented in the following way.  The Appellant acquired a Greenfield site at Peterlee in County Durham and built a loan centre there which it still operates.  The Appellant manages the building which includes, among other things, a mailroom for in coming and outgoing post with a facility for the electronic imaging (scanning) of incoming documents; training rooms; staff catering  facilities; and rooms for document storage.  The Appellant also manages all the services and functions of the loan centre, such as postal and telephone services; printing; and stationery.  The site at Peterlee occupies 50,000 square feet of which about 40,000 square feet are dedicated to the loan centre.  The loan centre is open seven days a week.  Externally the building shows the Appellant’s logo but all the indoor signs refer to the Bank.  Operational staff are employees of the Appellant but wear name badges in the name of the Bank.  This is to raise awareness amongst the Appellant’s staff that they re in effect working as a division of the Bank because they represent the Bank to the outside world.  The loan centre at Peterlee was referred to as “a virtual branch” of the Bank.

35.	The staff of the Appellant at Peterlee are organised in groups and, wherever possible, the same member of staff will deal with a borrower from the first contact until the loan is agreed.  The staff are carefully trained during their initial three to four weeks with the Appellant and we saw the training manuals.  These were impressive documents; they included training in the loan products available; on the relevant statutory and regulatory law; and in the sale of loan protection insurance according to professional guidelines.  The emphasis is on selling as many loans as possible.
The implementation of the 1999 agreement
36.	The loan centre “went live” on 15 September 1999 and the first application for a loan was received on that date.  The 1999 agreement has been implemented in the following way.  Loans are offered both to existing customers of the Bank and also to borrowers who do not have an account with the Bank.  The Appellant is authorised to offer four loan products, namely a fixed interest, fixed term loan; a deferred start fixed term loan; a personal reserve loan; and what is called a flexi loan.  All are offered with or without loan protection insurance.  The Bank sets the parameters of the individual loans; this means that: the interest rates are set by the Bank; the Bank also fixes both a minimum and a maximum amount that can be lent to any individual borrower; and the Bank has determined that a loan can be repaid over any term with a minimum of six months and a maximum of sixty months.  However, the Bank has set no upper limit on the overall amount which can be lent to all borrowers. We accept the evidence of Mr Wilkins that the overall commercial aim of the Appellant was to make as many loans as possible on behalf of the Bank.

37.	The marketing of loans is undertaken by the Bank.  There is no express mention of the Appellant in the marketing material but the marketing documentation gives the address and free-phone telephone numbers of the Peterlee loan centre.  Also, the Bank advertises the loans on-lines at its web site.

38.	The Appellant receives all the applications for loans from prospective borrowers.  The applications arrive either by post, by telephone, or electronically to the Bank’s web site.  In the month of July 2000 about two-thirds of applications were received electronically, about one-fifth were received over the telephone and the remainder were received through the post.  We describe in some detail the method of dealing with telephone applications.  Applications by post are opened in the automated mailroom at the loan centre where the documents are scanned and then routed electronically to an operator; thereafter queries are dealt with on the telephone and otherwise the same procedure is followed as for telephone applications.  Applications through the web-site are made by means of an application form which is printed out at the loan centre after which the procedure is the same as for telephone applications.

39.	A telephone call from a prospective borrower replying to an advertisement is answered by a member of the Appellant’s staff at the loan centre (the operator) in the name of the Bank.  The operator identifies where the call is coming from and how the caller found out about the loans.  The operator then asks the prospective borrower to supply information about, for example, his age, his income, his out-goings, the size of the loan required and the reason for the loan.  All the information given by the borrower is input into the Appellant’s computer which prompts the operator with responses and further questions.  The captured information is verified by comparing it with any relevant information known about the prospective borrower.  If the borrower has to telephone later to supply missing information he will speak to the same operator.

40.	The borrower and the operator will then discuss details of a possible loan and the operator will give illustrations of possible loans.  The computer system can generate illustrations of the cost of the loan, the repayment term and other details, and can generate written illustrations for posting to borrowers if required.  The borrower usually knows how much he wants to borrow and will usually have in mind an upper limit on the amount of his monthly repayments.  That will enable the operator to indicate the type of loan which is available.  The borrower might for example ask for a loan of £20,000.  The operator might advise the borrower that if he can afford, say £250 per month, and if he repaid the loan over four years, he would be looking at an loan in the region of £12,000.  the operator will discuss the borrower’s individual needs and will match the loan repayment period, the rate of interest, and the amount of monthly payments, to those needs.  The operator will also seek to match the borrower’s preferences with the most appropriate product.  Loan protection insurance will also be discussed.

41.	When the initial information has been captured, and the borrower has selected a loan product, the loan will be validated (credit scored).  To undertake this function the operator presses a key on his computer marked “credit score2 and this creates a link to a system at the Bank known as ASM (application scoring manager).  The ASM system is a credit scoring software system maintained by the Bank.  When the ASM receives a signal from the operator it sends a signal to external credit agencies to obtain an up-to-date credit rating on that borrower and also consults the data (if any) in the Bank’s own records (if the borrower is or has been a customer of the Bank), including the length of time he has been a customer and details of his account behaviour.  The ASM system is also told of the amount and period of repayment of the proposed loan.  From this data the ASM system scores the credit risk of that borrower for that loan and decides how much he can afford in monthly repayments.  The ASM procedure takes about fifteen seconds.

42.	The ASM system then gives a response to the operator which is either “accept” “decline”, “refer” or “downsell”.  If the response is “accept” the borrower is so informed by the operator, if the response is “decline” the borrower is so informed by standard letter sent by the Appellant.  If the response is “refer” the borrower is asked some more questions and then told to call back later and the application is referred to a group at the Bank known as the “wide of scheme” group.  That group then notifies the operator of their decision (accept, decline or downsell) and the operator notifies the borrower.  About 17% of all applications are referred to the wide of scheme group.  If the response from the wide of scheme group is “decline” then the borrower is so informed by standard letter sent by the Appellant.  If the response is “downsell” the operator might suggest that the borrower apply for another type of loan offered by Black Horse Personal Finance, or may seek to sell the borrower another loan product (for example, one which is either of a smaller amount than originally requested or which charges a higher rate of interest).

43.	When the loan has been accepted the operator gives the borrower an actual quotation and the borrower may then ask for an alternative quotation, For example to add or remove insurance, or to shorten or lengthen the term of the loan.  For example, if an application for a loan of 35,000 has been accepted with repayments of £100 per month the borrower might ask if he could increase the advance to £7,000 and the operator would then see if the term of the loan could be extended to accommodate that request.  The operator also asks the borrower for some further information, such as where he wants the money sent and the bank from which he will make the repayments.

44.	When the terms of the loan have been agreed the operator presses a key which generates the loan documentation.  The loan agreement is in standard form and complies with the Consumer Credit Act.  Two copies of the loan agreement are printed.  One copy has a signature on behalf of the Bank; this signature is applied electronically and for nine months was the signature of Mr Wilkins signing on behalf of the Bank.  The two copies are sent to the borrower; the copy signed on behalf of the bank is for the borrower to keep and the other copy is for signature by the borrower and contains a bar code for identification on its return.  Thus at the stage the borrower has an offer of a loan subject to compliance with certain conditions.  The documentation also includes a direct debit mandate which instructs the borrower’s bank to make payments to the Appellant on behalf of the Bank.  The borrower may also be required to supply verification documents (utility bills, wages slips or tax documents) so that money laundering checks may be carried out and so that earnings may be verified.

45.	The documentation is posted to the borrower by the Appellant from Peterlee, usually on the same day as the application for a loan is accepted.  The letters were drafted by the Appellant, approved for style by the Bank, and printed on stationery headed with the name of the Bank but signed by the operations manager of the Appellant on behalf of the Bank.  We saw a series of standard letters which were sent by the Appellant to prospective borrowers or borrowers.  These letters showed the Peterlee address and for nine months were signed by Mr Wilkins as ”Customer Service Manager”.

46.	When the documents have been returned to Peterlee by the borrower they are scanned by an imaging system and delivered in electronic format to that borrower’s operator.  The operator examines them and checks that they are in order.  If there are not, the operator telephones the borrower and asks for further information.  When the operator is satisfied that the documents are all correct, and that the transaction is ready for funding, the operator sends it through an automated sanction process and then passes it to the pay group.  There the loan is authorised; this is an automatic procedure which involves, for example, checking that the monthly payments match the interest rate and that the account numbers of the borrower’s bank match a check list of real numbers.  After authorisation comes audit, which involves another person looking at the total picture.  All these functions are undertaken by employees of the Appellant.

47.	When all these procedures have been completed a computer key is pressed by an employee of the Appellant and the funds are released.  The advance is paid straight into the borrower’s bank account.  At that stage the loan becomes a “live loan”.

48.	A different procedure applies after April 2000 where an existing customer of the bank wishes to take out a loan through his branch.  In such a case the branch completes an electronic application form and obtains price illustrations and a price quotation from the Appellant; the ASM system is accessed and if it gives an “accept” response the loan agreement is printed at the branch where the customer’s signature is obtained; the branch then notifies the Appellant who transfers the amount of the advance to the customer’s account.

49.	The Appellant sends the direct debit instructions received from the borrowers to the borrower’s banks and collects the repayments form the borrowers by means of the direct debit system.  This uses the BACS system is the borrowers’ accounts are not with the Bank.  The direct debit mandates ensure that the repayments are paid into the Appellant’s bank account 1 (described in more detail below).  The Appellant also receives cheques in respect of some repayments and settlements of loans; these cheques are paid into the Appellant’s bank account 1.

50.	For each loan a full borrower record is created by the Appellant with a complete financial breakdown of the loan over its life.  The Appellant also sets up a loan account for each borrower.  The Appellant has the sole responsibility for these loan accounts and makes all the entries in these accounts from the opening of each loan to its closing.

51.	During the lives of the loans the Appellant calculates and applies interest on a basis established by the Bank and debits interest charges to the borrowers’ loan accounts. Statements are provided at regular intervals and also on request.  During the lives of the loans the Appellant also deals with matters such as changes of address, marriages, deaths and changes to financial details such as current accounts.

52.	The Appellant has authority form the Bank to close down loans when requested by borrowers.  In such a case the Appellant calculates a settlement figure having regard to the loan interest rate and the loan type.  The Appellant gives the settlement figure to the borrower and asks whether the borrower will send a cheque or whether his bank account should be debited.  The Appellant also tries to sell the borrower a new loan in which case a more favourable settlement of the old loan might be possible.

53.	In addition to dealing with individual loans the Appellant also assist the Bank with its loan product development.  The Appellant creates a menu of possible loan products form which the Bank can choose which to offer.  This is done by first setting the parameters.  A product matrix is created with about 150 different functions and about 200 different features from which possible products can be identified.  In the words of Mr Wilkins this allows the Bank to “richen its product matrix”.

54.	Insurance claims and delinquent accounts remain the responsibility of Lloyds Insurance and the Bank respectively.  If a policy holder wishes to claim under his loan protection policy he contacts the Appellant who refers him to Lloyds Insurance. If a borrower misses a repayment the account is classified as delinquent and the handling of arrears is undertaken by the Bank.  When the account is brought yup-to-date it reverts to the Appellant.

The banking arrangements
55.	Clause 5 of section 1 of the supplemental agreement (which was schedule 1 to the 1999 agreement) provided that the Bank would open four separate bank accounts for the purposes of the settlement of transactions generated by the loan centre; three of those accounts were to be in the name of the Appellant.  To implement this agreement the Bank established a special branch at Bristol (where it has its administrative headquarters) for the sole purpose of handling the flow of funds to and from the loan centre.  The only business of that branch was to transact money exchanges between the Appellant and the borrowers.  The Bank issued a document called” Bank standards document”.  This defined the Bank’s internal requirements and standards for the performance of its business and these were notified to the Appellant so that the Appellant was aware of them when performing services for the Bank under the 1999 agreement.  Appendix A to this document was dated 30 July 1999 and was headed “Finance Requirements”.  This was written by Mr Peter Clare, the branch manager of the Bank.  Paragraph 2 described the background and contained the following statement:

	“In order to make the [Appellant’s] service to the ]the Bank] VAT exempt the contract requires [the Appellant] to take some financial risk in the lending process and or [the Appellant] to initiate the movement of funds.  This is to be achieved by [the Appellant] making the initial advance to a borrower through a settlement account in their name in trust for the Bank and which will be settled by [the Bank] on a daily basis.”

56.	On 2 September 1999 Mr Clare, on behalf of the Bank, wrote to the Appellant about the banking arrangements under the 1998 and 1999 agreements.  That letter stated that the Appellant would open and operate three bank accounts with the Bank as trustee of the Bank.  The letter appointed the Appellant as the trustee of the Bank for operating the accounts and for dealing with the Bank’s funds in the accounts.  The letter stated that all dealings on the accounts would be carried out by the Appellant as trustee of the Bank and any money standing to the credit to of the accounts would be held by the Appellant in its capacity as trustee.

57.	Four bank accounts were opened at the Bristol branch of the Bank, namely:

	Account 1 – this is called “[the Appellant] in trust for [the Bank] account 1” and is used for transferring advances by BACS to borrowers who are not customers of the Bank and for receiving repayments both by direct debit and by cheques;

	Account 2 – this is called “[the Appellant] in trust for [the Bank] account 22 and would be used for paying advances by cheque if advances were paid by cheque which, in practice, they are not;

	Account 3 – this is a suspense account for unallocated payments; and 

	Account 4 – this was set up at a later date and is used for transferring advances to borrowers who are customers of the Bank where transfers can be made without using the BACS procedure.

58.	Each account has a sort code and an account number.  The signatories on the accounts are employees of the Appellant.  They included Mr Wilkins when he was the operations manager of the Appellant at Peterlee.  The Appellant printed cheques for the Bank for use on account 2; these were signed on behalf of the Bank by Mr Wilkins electronically and were kept in a safe at Peterlee.  (In fact they were not used as no advances were made by cheques).  The Appellant does not earn any interest on credit balances and is not charged any bank charges for debit balances.

59.	To effect an advance the Appellant sends credit instructions to the borrower’s bank account.  If that is not with the Bank then the instructions are sent through the BACS system.  Account 1 is debited with the amount of the advance and acocutn1 is made good by the Bank at the end of the day.  If the borrower’s bank account is with the Bank then the Appellant credits the borrower’s account and debits account 4 without the use of the BACS system.  Payments can be made out of account 4 at any time of day; account 4 is made good by the Bank the following day.  The Appellant could, but does not in practice, send a cheque for the advance.  If cheques were sent they would be drawn on account 2.

60.	Account 1 is cast daily at 4.30 pm.  In accordance with clause 5.5 of the 1999 agreement each day the Appellant prepares a daily bank cash movement report which showed all payments out (mainly loans made) and all payments in (mainly repayments received).  The payment out are deducted from the payments in and the balance shown.  The Bank is advised of the balance.  Any shortfall is paid to the Appellant; if there is a credit balance that is transferred to the Bank.  The same process is followed for account 4 and would be followed for account 2 if advances were made by cheque.  Account 3 (the suspense account) is cleared daily and the amounts allocated to individual agreements wherever possible.

61.	Currently the Appellant pays out about £14M daily in advances.  If a loan were to be obtained fraudulently then the Appellant would be at risk if the correct procedures had not been followed.
The Appellant’s invoices
62.	The Appellant invoices the Bank on a quarterly basis until January 2001 and now invoices on a monthly basis.  We saw a specimen invoice dated 26 October 2000 from the Appellant to the Bank for work done from 1 July to 30 September 2000.  Attached to the invoice was a schedule.  This showed, separately for each of the three months, the number of applications, the number of loans advanced (in that period), the number of loans executed (in previous periods), then umber of delinquent loans, and additional services provided.  The number of applications showed separately mail, telephone and electronic applications with a different price for each.  For each category the price multiplied by then umber of applications gave the amount of remuneration.  There were also separate prices for loans advanced, loans executed, delinquent loans and additional services, and, again the price multiplied by then umber gave the remuneration.