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

Earlier in its section on its factual findings the FTT set out at length (at [151] to [235]) facts regarding CBNA’s role in supplying trading infrastructure in relation to SPLC’s transactions by reference to a selection of example securities transactions. The examples were intended to be representative of the range of transactions undertaken in the Markets business segment and covered both cash and derivative instruments. The cash transactions involved straightforward purchases of listed shares or bonds by clients, with no ongoing obligations following execution. Payment was made by the client, and SPLC delivered the securities. The derivative examples were more complex and included both exchange-traded and over-the-counter (OTC) instruments, such as call options, dividend-adjusted call options, credit default swaps, Euro interest rate swaps, and swaptions (options to enter into swap contracts).

In relation to CBNA’s role in such transactions, the FTT’s findings went on to detail provision of for instance trading models used in pricing and execution algorithms, risk management and hedging. The findings covered CBNA’s role in determining and agreeing the economic terms of the transaction as well as its role in performance and implementation of the transaction.

As to the relevant legal test the FTT relied on the reasoning from Target Group Ltd v HMRC [2021] EWCA Civ 1043.That included the passage below (from [79]- [81] of the CA’s decision). Target CA concerned the applicability of the payment exemption to a taxpayer company which administered loans made and whose activities included operating individual loan accounts and instigating and processing payments due from borrowers. The reasoning included analysis of some of the CJEU case law including that relating to the securities exemption (which we come on to address in more detail below):

“79…More specifically, following SDC it is clear that the exemption is determined by reference to the nature of the services provided, and not by reference to the person supplying or receiving the service. To fall within the exemption, the transactions in question must be financial transactions in nature, and not administrative or technical transactions in nature.

80.

The decisive feature of a transaction concerning payment or transfer is the existence of a transaction consisting of the execution of an order for transfer of a sum of money, involving a change in the legal and financial situation as between the relevant parties. Although a complex supply of services can be broken down into separate services which then constitute ‘transactions concerning transfers’, to be within the exemption the transactions must form a distinct whole that has the functional effect (irrespective of cause) of making the legal and financial changes that are characteristic of the transfer of a sum of money.

81.

Moreover, as the CJEU has said repeatedly, there is a distinction between a service which is indispensable for the performance of an exempt supply by another (which is insufficient for exemption) and a service which itself contains the essential elements of an exempt supply defined in art 135(1)(d) and is therefore an exempt supply. The mere fact of being an indispensable constituent element to completing an exempt transaction does not alter that position.

The FTT noted the service could be supplied by a third party but that exemption is determined by the nature of the services provided. It continued at [309]:

“…It is therefore necessary to consider whether the transactions in the present case are essentially administrative or technical transactions in nature and outside the exemption, as Mr Beal contends, or, as Mr Hitchmough contends, they are financial in nature and fall within the exemption.

310.

Mr Hitchmough contends that the evidence supports CBNA’s case. For example, with regard to the hedging transaction, described at paragraphs 234 and 235 above, he says it is clear that CBNA’s role isn’t confined to giving instructions or providing some elaborate form of technical support, rather that CBNA, through the trading infrastructure, was pointing out to SPLC’s front office traders opportunities to enter into other transactions in securities and in some case identifying and executing the hedging transaction itself with no involvement at all from the trader. In other cases where there is trader involvement, Mr Hitchmough contends that in addition to pointing out opportunities, CBNA will play a specific essential and intrinsic role in setting the key economic terms of that hedging transaction, such as the price.

311.

However, I do not agree. It would seem that, although it is accepted that SPLC would not be able to function without the trading infrastructure of CBNA, as Mr Beal submits what CBNA is in fact providing is a technical or administrative service for SPLC. He describes the services as provided by CBNA as data/information gathering, collection, capture, transmission, holding, processing, monitoring, analysis, reconciliation, checking, verification, storage, management, giving or receiving instructions, none of which alter the legal and financial situation between SPLC and its clients or creates, alters or extinguishes those parties’ rights and obligations in respect of securities and none of which could be characterised as an exempt supply.

312.

The fact that SPLC could not trade without the service it receives from CBNA is not, however, in itself not enough to bring it within the exemption as can be seen from the unsuccessful arguments advanced in Bookit, NEC and DPAS regarding the performance of services that were essential features of the transactions concerned, namely sales of Odeon or NEC tickets (in Bookit and NEC, respectively) or payment of dentists (DPAS).

Target CA was subsequently upheld on appeal to the Supreme Court in Target Group Ltd v HMRC [2023] UKSC 35 (issued after the FTT had issued its decision).

Target SC summarised what had been referred to in that litigation as the narrow and broad view the European Court’s formulation in [66] of SDC (set out below at [134]) that the services provided “have the effect of transferring funds and entail changes in the legal and financial situation”.The Supreme Court (at [28]) explained that what “…remained arguably unclear was whether the services must in themselves have that effect and make that change (‘the narrow interpretation’) or whether it was sufficient for them to have that causal effect (‘the wider interpretation’).

Target SC ruled in favour of the narrow interpretation setting out at [56] that:

“The narrow interpretation means that the services must in themselves have the effect of transferring funds and changing the legal and financial situation. It is not enough to give instructions to do so thereby triggering a transfer or payment. It is not enough to perform a service which is essential to the carrying out of the transfer or payment, nor one which automatically and inevitably leads to transfer or payment. It is necessary to be involved in the carrying out or execution of the transfer or payment – its ‘materialisation’. This requires functional participation and performance. Causation is insufficient, however inevitable the consequences.”

CBNA’s grounds of appeal as pursued before us in brief are that:

We address these issues in turn.