The High Court ruled that Hagemeyer Ireland plc’s activities under two contracts for purchasing debts and arranging their collection were subject to VAT. The decision means the company may claim an input credit where one arises under the VAT legislation and the Sixth VAT Directive.
In a judgment delivered on 9 February 2007, Mr Justice Charleton considered Hagemeyer’s judicial review challenge to the Revenue Commissioners’ treatment of its invoice discounting and factoring services. The dispute followed correspondence in which Revenue’s 2003 letter accepted that factoring was taxable, while a letter in 2005 set out a different interpretation of Hagemeyer’s arrangements and said it was liable for VAT on the debt collection service without entitlement to deduct that VAT.
Hagemeyer argued that it bought debts without recourse to the sellers if the debtors failed to pay, and therefore bore the risk of default. It said that the sellers’ continued collection of the debts as its agents did not change the nature of the purchases. Revenue argued that, read together, the contracts amounted to an exempt financial service and that Hagemeyer had not assumed the entire risk of default.
The court examined the contracts together. Under the first, Hagemeyer could choose which debts to buy, and the debts were sold without recourse for non-payment or delay. Under the second, the seller collected the debts on Hagemeyer’s behalf and passed on payments received. The judge found that Hagemeyer owned the debts and could withdraw the collection work from the seller and arrange collection itself or through another party. The seller’s obligation to pass on money it had actually collected did not make it responsible for the debtor’s default.
The judge concluded that Hagemeyer took on the risk of non-payment and provided an economic service for consideration: the seller received payment earlier and was relieved of that risk, while Hagemeyer received a discount on the debts. He treated factoring and debt collection as separate exclusions from the VAT exemption for certain financial services. The debt purchase and the collection service were each VATable transactions.
The judgment also addressed Hagemeyer’s claim that Revenue should be prevented from changing its position because of the 2003 letter. The judge said that, had he ruled against Hagemeyer on the VAT issue, he would not have found a legitimate expectation could confer a right to be taxed contrary to the Directive. As he ruled for Hagemeyer on the main issue, he did not need to resolve the wider arguments about legitimate expectation.