Single supply of global support services

Update: The Upper Tribunal has now upheld the decision of the FTT in this case. See “Single supply of global support services confirmed”.

The FTT has held that supplies of intra-group services made between two UK group companies under a global master services agreement within the worldwide JPMorgan group amounted to a single supply of services: JPMorgan Chase Bank NA v HMRC [2023] UKFTT 856. On the facts, it was not possible to separate supplies between those which were general, taxable support services and supplies which could fall within the scope of the exemption for transactions in securities. Moreover, properly characterised, that single supply was a taxable supply and did not fall within the exemption for transactions in securities. The fact that the recipient company was entirely dependent on receiving all of the support services from the supplier under the global arrangements, all of which were essential to its proper functioning, suggested that there was a single supply that would be artificial to split.

Whilst highly fact dependent, the decision perhaps highlights the legal and practical difficulties of identifying specific, individual exempt outsourced supplies within the context of such an all-encompassing group support services agreement. The lack of any detailed description of and separate invoicing for outsourced services (which was not essential in a group context for other purposes) militated against the identification of individual services which might fall within the exemption.

Background

Both JPMorgan Chase Bank NA (CBNA) and JPMorgan Securities plc (SPLC) were members of the same VAT group. CBNA provided SPLC with supplies of wide-variety of support services under a global master services agreement (GMSA). Whilst supplies between members of the same VAT group would normally be disregarded, CBNA bought in services in order to enable it to make those intra-group supplies, bringing the situation within the scope of VATA 1994 s.43(2A). This provides that intra-group supplies are not disregarded in certain circumstances where an overseas member of a UK VAT group on-supplies bought in services to a UK member of a partly exempt group, unless those services would fall within the exemptions in VATA 1994 Sch 9. HMRC sought to apply s.43(2A) to the whole of the supplies made by CBNA to SPLC.

It was not disputed in this case that s.43(2A) applied in principle. However, CBNA argued that it did not make a single supply of services to SPLC under the GMSA. Rather, its supplies should be split between general support services (such as legal, HR, real estate) not specific to a particular part of SPLC's business (Support Services) and services related to the trading infrastructure which was necessary for SPLC to carry out transactions for clients (Business Delivery Services). Furthermore, CBNA contended that the Business Delivery Services fell within the scope of the VAT exemption for transactions in securities (Article 135(1)(f)) or for payments (Article 135(1)(d)).

Alternatively, CBNA argued that even if it did make a single supply of support services, the correct classification of that single supply was that of an exempt supply on the basis that the financial transactions by SPLC were overwhelmingly exempt.  

FTT decision

It was accepted that the starting point for the correct identification and characterisation of the supplies under consideration must be the contractual provisions. As such, the decision of the FTT contains a lengthy and detailed analysis of the GMSA. The GMSA provided the legal framework, terms and conditions under which services were provided on an inter-company basis between CBNA and affiliated entities, including SPLC. Each affiliate received its services pursuant to the terms of an Addendum to the GMSA. As such, the GMSA was a single global agreement which covered a range of ongoing technology and other services provided by CBNA to SPLC.

Various versions of the GMSA existed during the period of time covered by the dispute. From 2014, JPMorgan had been in discussions with HMRC concerning the possible application of exemptions to outsourced services under the GMSA. This led to changes to the GMSA in 2019 on the basis that the earlier versions did not adequately describe the intra-group services. Whilst the 2019 changes to the GMSA did not result in any alteration to the nature or number of services supplied, it did include a more granular description of the intra-group services in the GMSA. In particular, the GMSA included separate descriptions of Business Delivery Services and Support Services. Business Delivery Services included items such as transaction execution services, fund administrative management services and sales and relationship management services. Support Services included technology support, audit services, HR, corporate finance, legal, real estate and operational services.

Services provided under the GMSA were invoiced under a cost allocation system (SAPCO) without identifying the specific services provided. However, this was supported by an inter-entity tax invoicing tool which applied a service description to amalgamated services and produced inter-entity invoices using one of a broad set of categorisations. As these were services supplied within a VAT group, they were not VAT invoices, however, and did not determine the VAT treatment of the identified supplies. They were, however, intended to generate the consideration for a supply of services before getting to the question of classification as a semi-manual process carried out by the VAT team.

The GMSA did contain specific provision for standalone and distinct services to be identified and invoiced separately. However, in this case, CBNA had not prepared separate invoices for Business Delivery Services.

Identification issue

HMRC contended that the burden of proof in this case was on CBNA and CBNA had failed to discharge the burden of identifying any supplies that separately, distinctly and clearly fell within the scope of a VAT exemption. HMRC argued that, having regard to the contractual terms entered into which govern the relationship between CBNA and SPLC, there was a core contractual obligation on CBNA to make a supply of services if they were requested to do so by another legal entity within the JPMorgan group. That obligation was discharged when CBNA supplied those services. The contractual framework made clear that CBNA's services (and the consideration paid for those services) were defined by reference to its invoicing. However, none of the contractual framework or invoices identified specific sums due to specific exempt supplies that are capable of being verified.

On this point, the FTT agreed with CBNA, however. Since it was intra-group supplies involved in this case, it was unreasonable to expect the contractual documents to identify whether any given supply was taxable or exempt. The issue of VAT liability only arose when s.43(2A) was applied.

The supply issue

It was accepted that there was no predominant or principal supply in this case to which other supplies were ancillary. The question, therefore, was whether, from the perspective of a typical customer, the various elements of the service were so closely linked as to form a single, indivisible economic supply which it would be artificial to split.

Did, as HMRC contended, CBNA make a single supply of support function services, which included both Support Services (as defined by the GMSA prior to 2019) and also both Support and Business Delivery Services as disaggregated in the 2019 version of the GMSA? HMRC argued that it was difficult to distil any workable difference between services that are said to be sufficiently close to the transaction and those which are sufficiently distanced from the transaction to operate in a meaningful way. This was because CBNA provided everything to SPLC and SPLC needed all of it. So, from SPLC's perspective, whilst it could carry on business without trading, it could not carry on trading without having the whole of the supplies made to it as a business.

CBNA accepted that all the support services were necessary for SPLC to function. However, the default position was that every supply should be regarded as distinct and independent and, in this case. That particularly applied to the Business Delivery Services provided to meet the needs of the business in its markets business segment, with most of those supplies being exempt as the transactions entered into by the business area to which they related were exempt.

CBNA argued that, whilst the starting point in analysing the supplies was the contractual documentation, in this case the contractual documentation did not reflect the true agreement between CBNA and SPLC. Whilst the contractual documentation did provide "a high level of proximation of the economic reality", viewed individually it did not provide an exhaustive and definitive analysis for VAT purposes. The GMSA was primarily concerned with the number of supplies to be covered by the expense allocation process, primarily with transfer pricing and regulatory considerations in mind. Moreover, the GMSA was not specific to the supplies between CBNA and SPLC (governing all the worldwide JPMorgan group intra-group supplies) and accordingly did not include the same level of detail as might be expected in a commercial agreement negotiated at arm's length.

However, the FTT rejected the argument that this was a reason for considering that the contractual agreements did not reflect the economic reality. "The contractual arrangements concerned are those of a large multinational bank, with extensive resources available for the task, in circumstances where the Expense Allocation Policy expressly envisages that the invoicing arrangements deployed under the contractual arrangements will be used for addressing indirect tax consequences of intra-group recharging. There was nothing to prevent the adoption of a much more detailed framework agreement had it been considered appropriate to do. Therefore, on balance, I agree with [HMRC] that the contracts in this case do reflect the true agreement between CBNA and SPLC and, as such, it is not necessary to "go behind" them."

Taking the contractual documents as a whole, the FTT concluded that it was clear that CBNA made a single supply to SPLC providing everything that SPLC needed to enable it to carry on regulatory compliant trading in globalised markets. Under the earlier versions of the GMSA, CBNA provided undifferentiated Support Services. Although the 2019 GMSA did refer, separately, to Business Delivery Services and Support Services, that did not result in any change in the nature or number of services supplied or alteration to the business. As such, there was no change to the services provided.

The FTT considered that the different elements of the supply were closely linked. Whilst the Business Delivery Services were necessary for SPLC to carry out trades in the business areas selected, they were not sufficient on their own. The Support Services included essential functions which were necessary for SPLC to be able to undertake its business (such as legal and payroll). Any attempt to split the different elements into separate supplies would be artificial. Moreover, the different elements were not available separately and it was not possible for SPLC to decline services provided by CBNA as it would undermine the standardisation across the group to do so.

The FTT also considered that the typical customer would reasonably regard the different elements as a single supply, reflected by the fact that both Business Delivery and Support Services were essential for SPLC to carry on its business.

The correct classification of the resulting single supply was a taxable supply. In this case, it was impossible to identify any particular element as a principal element and as such (based on CJEU case law in Deutsche Bank AG (Case C-44/11)) that supply could not be covered by an exemption and must be a taxable supply.

Exemption issue

Whilst not strictly necessary to do so, the FTT went on to consider whether, if it had concluded there was a separate supply of Business Delivery Services, those services would have been exempt. CBNA argued that SPLC had, in essence, outsourced to CBNA the performance of key functional aspects that were specific and essential to a transaction in securities. By reference to hedging transactions as an example, CBNA pointed to the fact that its role was not limited to giving instructions or providing technical support, rather through the trading infrastructure it was pointing out trading opportunities and in some cases identifying and executing transactions itself with no involvement from the trader. In addition, to pointing out opportunities, CBNA played a specific essential and intrinsic role in setting the key economic terms of those transactions. HMRC contended that the services were essentially administrative or technical in nature and outside the scope of the exemption.

The FTT was not, however, persuaded. Quoting widely from the recent Court of Appeal decision in Target (covered in our recent article here), whilst accepting that SPLC would not be able to function without the trading infrastructure of CBNA, the FTT agreed with HMRC that the services amounted to no more than a technical or administrative services such as data/information gathering, collection, capture, transmission, holding, processing, monitoring, analysis, reconciliation, checking, verification, storage, management, giving or receiving instructions, none of which altered the legal and financial situation between SPLC and its clients or created, altered or extinguished those parties' rights and obligations in respect of securities and none of which could be characterised as an exempt supply.

Comment

The decision is clearly highly fact specific and based on the particular contractual provisions represented by the worldwide GMSA in this case. However, as a general point, the decision perhaps highlights the difficulties of identifying with sufficient precision specific exempt outsourced services when these are embedded within such an all-encompassing global support services arrangement.

It is also hard to escape the conclusion that the FTT was swayed by the lack, historically, of any separate identification of exempt business delivery services as part of the GMSA. The GMSA had essentially treated everything as support services and the invoicing processes were not aimed at identifying any individual exempt supplies within the global support services. This allowed the FTT to conclude that, since nothing changed in practice post the 2019 changes to the terminology, there could be no change to the nature of the supplies either. This was particularly the case in the absence of any distinct and separate invoicing.

More generally, and whilst the point is entirely obiter, the approach of the FTT to the question whether the business delivery services might attract exemption if provided separately is concerning. The Target decision is concerned with the exemption for payments and transfers where the CJEU jurisprudence has made it clear that the functional approach to such a potentially wide exemption is extremely important and requires the services provided to go much further than simply giving instructions which necessarily result in a payment or transfer being effected by another party (such as a bank). In applying this case law to the exemption for transactions in securities, the FTT appears to break new ground in suggesting that the relevant services must alter the legal and financial situation between the principal supplier and its customers.