On 19 August 2016, the First-tier Tribunal (in Dollar Financial UK Ltd v HMRC1) held that electronically-supplied services of a “lead generator”, whereby the supplier referred potential borrowers to a payday lender, were exempt for VAT purposes under the financial services intermediary exemption (Item 5 of Group 5 to Schedule 9, VATA 1994).

The lead generator “assessed” potential borrowers who came to its website before passing  his or her details on to one of its customers (including the appellant in this case). The lead generator decided which customer to (first) put in contact with the borrower by identifying those customers for whom the borrower satisfied the loan criteria and was not seeking an amount that exceeded that customer’s maximum loan amount. Of the shortlisted customers, the lead generator (first) chose that customer offering the highest referral fee. If the customer refused the referral, the lead generator would move the next customer from the shortlist, and so on. All this happened in a matter of seconds, electronically. The appellant paid commission to the lead generator if it purchased a lead (meaning that the introduction resulted in a loan offer being made to the borrower).

Very few borrowers arriving at the lead generator’s website would, ultimately, take out a loan with the appellant, because:

  • the lead generator had a number of customers, with differing loan criteria and loan limits
  • another customer might “outbid” the appellant for the lead by offering a greater commission
  • only about 1% of the leads offered to the appellant would be offered a loan. The main cause of rejection was due to the lead already being known to the appellant
  • a little over half of the borrowers offered a loan by the appellant would accept it.

The Tribunal drew some principles from decided cases involving insurance intermediaries,  due to the similarity between the statutory exemptions for supplies by insurance and financial services intermediaries. It was also accepted that supplies made purely by electronic means can qualify for exemption, and that a novel arrangement was no barrier to exemption. Rather, the focus should be on the substance of the supply, and not who makes it and how.

The Tribunal was not persuaded by HMRC’s arguments that the lead generator acted only as a mere conduit, failing to properly “assess” the borrowers. Although the appellant’s loan criteria were straightforward, they were not identical to those of every other lender. Some filtering therefore did, in the Tribunal’s eyes, take place. The lead generator therefore fell the right side of the line between mere conduit/advertiser on the one hand, and “introducer” on the other.

The decision can be viewed here.