Tax

The European General Court has handed down a significant decision in A Oy (Case T-184/25), in which it found that debt servicing provided by an original lender, to a different owner of the loan, was not exempt from VAT as “the management of credit by the person granting it”. This case may have implications for securitisation structures such as ABS warehouses, where the originator of the debt usually continues to provide servicing.

In A Oy, a Finnish bank made housing loans to borrowers and then immediately transferred these loans to its wholly owned subsidiary. The subsidiary then issued bonds secured by the loans. There was no suggestion in the case that the originating bank retained any legal title to the loans (which may not be possible under Finnish law), but the bank continued to manage the loans (including customer correspondence and payment collection) in exchange for a cost-plus fee charged to the subsidiary. In February, the Advocate-General filed a controversial opinion with the court, suggesting that the services provided by the bank (as originator of the debt) were no longer VAT exempt after the debt had been sold to the subsidiary because it was not intended for credit management outsourced to a third party to attract more favourable tax treatment, it was more appropriate for the exemption to be used e.g. where one syndicate member manages a loan on behalf of the whole syndicate, and exempting the original grantor but not a third party servicer was inconsistent with fiscal neutrality. The court did not apply all of the A-G’s arguments, but found that the exemption was only available in the context of the original credit relationship and not after the loans had been transferred to a third party. It also found that an exemption for transactions relating to debts did not apply to loan management services.

UK VAT law includes the same exemption from VAT for “the management of credit by the person granting it”. In a securitisation context, HMRC has long-standing published guidance that the exemption is available not only where an original lender manages a loan on its own account, but also where (1) the original lender performs the servicing role or (2) the legal title is assigned to a third party servicer who manages the loan on behalf of the beneficial owner. In scenario (1), it is generally understood in the UK market that the originator should retain legal title (which may also be appropriate for regulatory reasons). VAT grouping may also enable a servicer to benefit from these exemptions, even where it is not itself the originator of the debt or holder of the legal title.

VAT is particularly sensitive in securitisation structures, as it is usually not possible to recover any VAT suffered. The unavailability of VAT exemption may therefore result in tax leakage from both existing and future structures or adversely impact originators whose fees are typically expressed to be VAT inclusive. Classification of services for VAT is complex, and HMRC’s guidance reflects a number of court and tribunal decisions involving credit-related services.

We have been closely monitoring this case, and while we anticipate a brief period of uncertainty, ultimately we expect the exemption to continue to be available in the UK for typical securitisation structures. The decision is not binding on UK courts, although given the close alignment between UK VAT law and EU VAT law, some concern that HMRC may be influenced by the decision is inevitable. The alternative argument considered by the court (that the services benefit from the exemption relating to debt transactions) is not usually used in the UK, where clear guidance has been available from HMRC on the management of credit exemption. More fundamentally, the Finnish case involved the transfer of all rights and obligations associated with the loan, whereas in a typical UK structure the originator will retain legal title to the debt (and usually will assign only the beneficial ownership of the receivables). The existing HMRC guidance is also consistent with the plain meaning of the relevant UK VAT law, whereas this decision contended with ambiguity arising from different language versions of the EU VAT directive. Other jurisdictions, such as the Netherlands for example, may be more likely to be impacted by the decision.

The decision may place the UK at an advantage for certain securitisation structures, if HMRC accept that the decision should not be followed in the UK because of the distinction between legal title retained by the originator and beneficial ownership held by a securitisation SPV. We look forward to revised guidance being published by HMRC to address the impact of this decision.

If you have any questions about how this decision may affect your organisation, please reach out to your usual Weil contact.