In the recent case of AXA UK (Taxation) [2010] EUECJ C-175/09, the European Court of Justice (ECJ) was asked by the UK Court of Appeal whether the service of passing payments from patients to dentists was exempted from VAT.

Denplan Limited (Denplan), a member of the AXA UK plc (AXA) VAT group, provided services to registered dentists by collecting a monthly fee from private patients who had signed up to a plan with their dentist. Denplan would then deduct a fee from the monthly payment and an insurance premium, and account to the dentist for the balance.

Under the Sixth EU Council Directive (mplemented in the UK by the Value Added Tax Act 1994), any "transactions concerning…payments, transfers…but excluding debt collection and factoring" are exempted from the payment of VAT. Her Majesty's Revenue and Customs (HMRC)'s view was that the monthly fee charged by Denplan in return for its services was not consideration for a financial service that fell within the exemption. AXA argued that the services provided related wholly to payment handling services which are exempt from VAT.

The ECJ ruled that Denplan's services were not exempt from VAT. Firstly, the court found that the services provided formed a single transaction for the purposes of VAT. The ECJ noted that several formally distinct services which could be supplied in isolation must be considered a single transaction when they are not independent. The various actions performed by Denplan were "indissociably connected", as the economic purpose of those actions was to transfer the sum due each month from the patient to the dentist.

Secondly, the court found that although exemptions must be interpreted strictly, the interpretation must not deprive the exemption in question of its intended effect. As such, the exemption was not limited to financial institutions where the transactions in question related to financial transactions. As Denplan was responsible for the recovery and management of the debts for the dentist, Denplan's services were an exempt transaction unless they were 'debt collecting or factoring', a term which the court said had to be interpreted broadly. 'Debt collecting or factoring' referred to financial transactions designed to obtain payment of a pecuniary debt. Therefore, a supply of services which consist, in essence, in requesting a third party's bank to transfer to the service supplier's account, via direct debit, a sum due from that party to the service supplier's client is covered by the term 'debt collecting and factoring' and so is subject to VAT.

This decision may be of concern to those involved with the outsourcing of financial services, as the ECJ seems to suggest that where payment handling services are combined with debt management and collection, the VAT exemption may not be available.