UT/2024/000002 - [2025] UKUT 00188 (TCC)

CBNA argues that while the FTT was broadly correct to distinguish between mere technical or administrative services and those falling within the scope of the exemption, it erred in concluding that the Business Delivery Services did not alter the legal and financial situation or the rights and obligations of the parties. CBNA further contends that the FTT failed to identify the specific and essential functions of the transactions in issue and the way in which the Business Delivery Services performed them, and that it adopted an unduly restrictive approach to determining whether those services created, altered, or extinguished legal rights and obligations.

As HMRC’s submissions indicated, and as we accept, some of the propositions advanced by CBNA are uncontroversial. For example, it is correct that a transaction in securities is not confined to a single event or action, unlike a payment transaction. It is also clear that in principle a third party may perform specific and essential functions of a transaction in securities and, if so, may fall within the scope of the exemption. Nevertheless however complex the nature of the securities transaction and whatever the identity of the person performing the transaction, the key question remains whether the service in question has the effect of altering the legal and financial position of the parties. On the facts here it remains necessary to identify a role played by CBNA in an event or action that actually changes the legal and financial relationship between SPLC and its client or other counterparties.

To the extent CBNA argues that the reasoning in TargetCA is inapplicable to the securities exemption because it concerned only the payments exemption, then we disagree. The test applied by the FTT, by reference to the Court of Appeal’s reasoning in Target, aligns with the requirement applicable to both the payment and securities exemptions that the service must alter the legal and financial position of the transaction whether that is a transaction by way of payment or transfer, or a transaction in securities. That approach is also entirely consistent with the CJEU’s decision in CSC. Thus when we compare the interpretation of scope, adopted by the FTT and in particular the requirement that the service result in a change in the legal and financial position with the correct legal test, we find no error.

We also reject the suggestion that the FTT erred by adopting a narrow view of the exemption, excluding services with merely a causal effect on the legal position. The Supreme Court in Target made clear that the narrow view is the correct one. There is nothing in the reasoning of that case—or in principle—that suggests a different approach would not apply by analogy to the securities exemption where essentially the same formulation of the test is set out. While the particular nature of securities transactions may differ from payment transactions, we agree with Mr Beal’s submission that the exemption remains focussed on the transaction itself and does not extend to services that merely facilitate or cause such changes. The securities exemption, like the payments exemption, requires a functional focus on the transaction itself.

We did not in any case understand Mr Hitchmough, following his oral submissions, to be relying on a causality-based argument to justify the applicability of the exemption on the facts of CBNA’s case.

His overarching point was that securities transactions could be more complex than payment transactions and that the specific and essential functions of a transaction in securities were different from the specific and essential function in the rather more simple case of a payment or transfer. Thus while a focus on “execution” made sense in the context of payments that was not the case for securities transactions. In relation to which a focus on “execution” made sense.

We do not disagree that securities transactions may be more complex. However, we do not see how that necessarily assists CBNA in showing the FTT erred in its conclusion. While the relevant analysis may need to be applied to a transaction comprising multiple legs, and in the case of derivatives ongoing obligations, that does not mean the underlying test itself—whether the service alters the legal and financial relationship—is any broader. It just means there are in principle more elements, so long as they can be described as falling within the securities transaction to which that test might arguably be applied to.

In advancing its case CBNA put particular emphasis on various passages from SDC and CSC, but we do not accept that any of those when read in the context of the court’s reasoning broaden the scope of the exemption or impose any alternative tests.

Thus CBNA referred to paragraph [69] of SDC, where the Court described a relevant service in relation to a transaction in securities as forming “an integral part of the system of the market in marketable securities.” However, this was not put forward as a separate legal test for exemption but a description of the nature of the particular service in that case. The key point—undisputed there —was that trades in securities would clearly fall within the exemption. We reject any suggestion, to the extent this was made in CBNA’s written submissions, that the securities exemption through such alternative formulation did not also require the service to involve a change in the legal and financial situation.

CBNA also cited paragraph [72] of SDC, which states that the exemption should “include transactions on the market in marketable securities.” Again, this merely affirms that market trades are within the exemption and was clearly not being put forward as a separate test of whether a particular service qualified.

Mr Hitchmough also emphasised the phrase “liable to…” in the wording of the CJEU’s test but there is no indication in the CJEU’s reasoning that this was intended to mark any substantive reformulation of the CJEU’s view on the scope of the exemption. In the light of what we have said about the applicability of the Supreme Court’s reasoning in Target rejecting a causality-based test (the “wider” approach) for payment exemptions it clearly cannot mean that sort of test.

Similarly, the reference to the test for the securities exemption applying “mutatis mutandis” does not assist. While securities transactions may differ in nature, there is no indication in the Court’s reasoning that the key test of whether the legal and financial position is altered should be materially modified. If that were the case, it would have been expected that such change would be reflected explicitly in the CJEU’s description of the security exemption’s scope at paragraph [33] of CSC.

CBNA also put particular store by the Advocate General in CSC’s description at [29] (see [141] above) of the operations to which the securities exemption applied including “the issue, transfer, endorsement, payment, or redemption of the security”. It also submits in effect that the paragraph means that any other operation “capable of having an impact on the substance of the legal relationship of the parties” would be eligible for exemption. However, we consider that the paragraph relied upon actually supports rather than detracts from the countervailing view (advanced by HMRC) that the exemption is very much focussed on the transaction in securities itself. The transactional nature of the operations the Advocate General specifically described, and his preceding explanation that “Only operations which directly affect the legal relationship embodied in the security and are capable of having an impact on the substance thereof” (emphasis added) fall within scope make clear that was referring to operations that altered the legal position as a consequence of the transaction itself—not to services that merely affected the content or terms of the transaction. While his list of such operations was non-exhaustive, the operations he listed, and his emphasis on such operations “directly affecting the legal relationship” are not consistent with the words “capable of having an impact of the substance” of the legal relationship signifying any intention on his part to adopt a broader formulation of the test for exemption.

CBNA also invokes the concept of “intrinsic connection,” as developed in the context of the case-law on exemption for special investment funds (see K and DBKAG v Finanzamt Osterreich (Case C-58/20 and C-59/20) at [49]), and argues that it should apply similarly to the securities exemption. However, in agreement with Mr Beal, we do not accept that the intrinsic connection test should be imported into the securities context in a way that broadens the exemption. As discussed above the exemption in relation to special investment funds is concerned with activity whereas the securities (and payments) exemption is concerned with transactions. In the cases cited, the intrinsic connection test was applied in relation to “management” services. The special investment fund exemption is solely in respect of management of special investment funds whereas the exemption for securities specifically excludes management. In CSC the CJEU, when formulating the test of altering the legal relationship, noted that management is expressly excluded from the scope of the exemption. Further for the intrinsically connected service to fall within the exemption it has to have the effect of performing the essential function of management of a special investment fund.

Finally, it is argued that the “creation, alteration or extinguishing” of rights or obligations in respect of securities must include the settling of economic terms, such as price, timing, or hedging obligations. We do not accept that proposition. The setting of commercial terms may be important and necessary to the transaction, but it does not itself constitute a change in the legal and financial relationship. The exemption remains focused on services that effect such a change. (That is consonant with the way the Advocate General envisaged the test applying in CSC in referring to various transactional operations themselves, not the process by which those operations are agreed.)

In conclusion, as regards the central legal issue in dispute concerning the breadth of the exemption, we agree with HMRC that the exemption must be construed with a focus on the transaction which effects an alteration to the legal and financial relationship. That was the construction the FTT in essence adopted. We consider it was correct to do so.