A recent European Court of Justice (ECJ) decision has reignited debate around the VAT treatment of credit management services and could have important implications for UK businesses involved in financing arrangements.
In the case of A Oy (T-184/25), the ECJ reaffirmed the long-established principle that VAT exemptions under the EU VAT Directive must be interpreted narrowly and strictly. While the ruling relates to EU legislation, it remains relevant for UK VAT practitioners and businesses because much of UK VAT law was originally drafted in line with the EU VAT Directive and ECJ judgments continue to influence the interpretation of UK legislation.
For businesses operating in the UK financial services sector, managing intercompany loans or restructuring funding arrangements, this decision highlights the importance of reviewing existing VAT positions and understanding potential future HMRC challenges.
The case concerned a company that granted loans to customers before transferring those loans to another company.
Under the arrangement:
The question before the ECJ was whether these ongoing credit management services qualified for VAT exemption under Article 135(1)(b) of the EU VAT Directive.
Article 135(1)(b) provides a VAT exemption for the "management of credit by the person granting it."
The ECJ concluded that while the services supplied by A Oy amounted to the management of credit, they were not being performed by the entity that originally granted the credit. As a result, the services did not fall within the specific exemption provided by the Directive.
Although alternative arguments were raised, the Court ultimately determined that the services were taxable because they fell outside the narrow scope of the exemption.
The ruling reinforces the consistent position underlying principle within EU VAT law that VAT exemptions should be interpreted strictly and only applied where all legislative conditions are met.
If comparable services were supplied in the UK, depending on the precise facts, they may be treated as VAT exempt, as UK VAT legislation allows exemption for the management of credit without the specific requirement that the person managing the credit must also have granted it.
The question arising from this case is what impact, if any, it could have on the future direction of UK VAT legislation and HMRC's interpretation of the exemption.
Financial arrangements are commonplace and frequently disputed with HMRC, given the complexity involved and the significant VAT amounts that can be at stake.
We are considering whether HMRC may seek to argue that UK VAT law was always intended to operate in line with the ECJ’s interpretation, potentially limiting the availability of the exemption in certain circumstances.
Many financing scenarios, including intercompany arrangements where loans are transferred, could become subject to future questions around VAT liability.
Getting the VAT treatment wrong can have significant and unintended consequences. Similarly, businesses restructuring internal supplies may overlook areas of current or future VAT risk, particularly where multiple entities or jurisdictions are involved.
As with many financial services VAT issues, the precise facts and underlying agreements matter. There is no one-size-fits-all approach.
Financial services VAT remains one of the most complex areas of UK taxation, particularly where financing arrangements, loan transfers and credit management services are concerned.
Our VAT specialists work with businesses across London and the UK to:
If you have any doubts over the management of any financing arrangement or anything VAT related, our VAT consultancy team will happily pick up the phone with you to discuss your questions further. Get in touch with VAT Partner Jas Dhillon or VAT Manager Adamas today for practical, commercially focused VAT advice.
