Is the zero rating for the issue of a bank note restricted to newly printed banknotes?
Jan Garioch CA discusses a recent case, Clydesdale Bank v HMRC, which saw the First Tier Tribunal get a grip on banknotes.
The dispute
The First Tier Tribunal has adjudicated in a dispute between Clydesdale Bank plc and HMRC regarding the extent of zero rating available on the issue of banknotes. HMRC argued zero rating is available on the issue of new banknotes only. The appellant counterargued that a note was issued each time a note-issuing bank passed one of its own notes carrying a promise to pay the bearer on demand into circulation.
HMRC’s view
HMRC contended that the issue simply hinged on the interpretation of law and that the factual background was not relevant to the case. They held that their historic approach for the period from the introduction of VAT until the issue of their policy reinterpretation in 2016 had been erroneous. Since that reinterpretation they held zero rating was only intended to protect note-issuing banks from the cost of designing creating and issuing bank notes. The zero-rate should not allow VAT recovery on costs common to all retail banks for which non-issuing banks are not permitted the same level of recovery.
They were so wedded to the idea that consideration of facts was unimportant in this case that they did not cross-examine the appellant’s witness who gave evidence on how the appellant dealt with banknotes. This approach did not chime with the Tribunal, and their judgement gave a metaphorical slap across the knuckles, saying: “one of the primary roles of the First-tier Tribunal is to find the facts in any appeal and thereafter to apply the relevant law. The law does not stand in isolation and…this appeal is no exception”.
HMRC also argued that the purpose of the legislation was to provide equivalence to the issuing banks with the Bank of England by allowing zero-rating in relation to the first issue only of a banknote. They contended the word ‘issue’ in Group 11 must be read restrictively and cannot extend to activities that non-issuing banks are able to undertake such as passing banknotes into circulation. The Tribunal rapped the metaphorical cane over the knuckles again because HMRC had produced no evidence in relation to the purpose of the VAT legislation when drafted.
Clydesdale Bank’s view
Turning to Clydesdale Bank’s case, they argued that when a banknote is returned to them and the promissory note embodied therein honoured, the second or subsequent issue of that banknote also qualifies as “the issue by a bank of a note payable to bearer on demand” since that is a new promise. The supply is the same as on the first occasion. The only difference is the fact that the banknotes have not been newly manufactured but rather removed from, and then restored to, circulation. Clydesdale Bank did not see their supply as the transfer of a physical note. Instead, they contended their supply was making a promise.
Conclusions
The Tribunal took a swipe at both parties for trying to rely upon The Royal Bank of Scotland Group plc v HMRC which it did not find to be germane to the present dispute. Although that case touches on ATMs and issue of banknotes, it was about the VAT liability of fees for providing reciprocal services. Instead, the Tribunal revelled in a deep dive into the history of bank note issue. In addition to enjoying the history of Sir Walter Scott’s involvement on the history of Scottish bank notes, the Tribunal found that The Bank Note (Scotland) Act 1845 and its successor The Banking Act 2009 made it clear that a bank note could be issued more than once. They found that “issue” meant issue into circulation of a promise to pay the bearer on demand.
The Tribunal gave thought to HMRC’s gripe that it would be unfair if banks which are not permitted to issue their own notes were denied a VAT advantage bestowed on note-issuing banks. It was recognised that a customer requiring cash would not care if it came from a Clydesdale Bank ATM or a non-issuing bank ATM or even cashback from a supermarket.
However, the Tribunal found a crucial distinction between issuing and non-issuing banks because only the former must comply with the backing assets obligations and record keeping. Therefore, Clydesdale Bank’s appeal was upheld and a hit to their partial exemption method was avoided.
