HMRC are expected to consult on revisions to their published guidance to clarify the circumstances in which they will treat loan servicing in securitisation arrangements as exempt for VAT purposes.
In a typical loan securitisation, loan receivables are purchased by a special purpose vehicle (SPV) which raises the funds to purchase the receivables using the proceeds of a capital markets bond issuance. The transfer often takes the form of a beneficial title transfer, with the transferor retaining legal title. Because the issuer is an SPV, underlying borrowers typically continue to deal with the transferor of the receivables, which manages the loans and collects interest and repayments under the terms of a servicing agreement with the SPV.
VAT is chargeable in respect of any such servicing arrangements at the rate of 20% of the consideration unless an exemption applies. Following the 2010 CJEU decision in AXA, which extended the concept of non-exempt “debt collection” to cover the passive collection of income, the only exemption generally thought to be capable of applying to servicing arrangements of this type was the exemption for the “management of credit by the person granting it” (Item 2A, Group 5, Schedule 9 Value Added Tax Act 1994). However, the scope of this exemption has always been somewhat uncertain. In particular, it was not clear whether the exemption applied to a person who is “granting” credit (for example as a result of continuing to hold legal title to the loans) or to the person who originally “granted” the credit, as some of the other language versions of the Principal VAT Directive might suggest. We are also aware that in some instances HMRC have taken the view that the exemption does not apply at all in the securitisation servicing context.
New HMRC position
HMRC have recently indicated to us that they will accept that securitisation loan servicing can qualify for the “management of credit” exemption. We also understand that HMRC now intends to consult on proposed guidance which would treat the exemption as applying to the following types of servicer:
i. the originator (i.e. the original lender) holding legal and beneficial title to the loans
ii. the originator holding legal title only
iii. the originator holding neither legal nor beneficial title
iv. a new holder of the legal and beneficial title (where that new holder then securitises the loans)
We would expect this position to be capable of applying in relation to securitisation of assets which constitute “credit” for VAT purposes. This would include loans but also some types of finance leasing arrangements such as hire purchase contracts.
If this guidance is introduced it will represent a significant clarification of the application of the management of credit exemption to securitisations. Given that HMRC had been challenging the application of the exemption to securitisation servicing generally, their decision to revisit this approach following representations which we have made to them over the last few months is also to be welcomed.
The clarification is particularly helpful in the context of arrangements where an unexpected VAT assessment could have had structural or cash flow implications for the SPV (for example a reverse charge in relation to servicing by a foreign originator). The form of the guidance is yet to be finalised and we expect it to be subject to consultation, but those involved in securitisations should now begin considering existing and new securitisation structures in the light of the proposed changes.