VAT and fees charged for selling goods in satisfaction of a debt

The CJEU has held that a fee charged by a pawnbroker for selling pledged goods in satisfaction of a customer’s debt was not exempt from VAT: Companhia União de Crédito Popular SA v Autoridade Tributária e Aduaneira (Case C-89/23). The Court rejected the argument that the services performed by the pawnbroker in selling the goods to recover its debt were ancillary to the exempt grant of credit.

The taxpayer, CUCP, was a Portuguese company which acted as a pawnbroker in granting loans secured by movable property. That activity is exempt from VAT under Article 135(1)(b) of the VAT Directive which includes the granting and negotiation of credit. Where a borrower did not recover the pledged assets or was more than three months in arrears in repaying the amount lent or interest, CUCP was entitled to auction off those assets for which it received a sales commission charged to the borrower of 11% of the hammer price of the goods. In essence, this was a fee for arranging the sale of pledged goods.

CUCP argued that the service of arranging the auction of the pledged goods was ancillary to its grant of credit and so exempt as part of a single exempt supply.

The Court noted that the service of organising the auction could not be regarded as inseparable from the grant of the pawnbroker. The need to auction the goods was neither an inevitable part of the grant of credit and nor need the pawnbroker itself be the person organising that sale.

Moreover, the Court suggested that the auction of pledged goods pursued an objective independent from the grant of credit. Whilst it is in the very nature of the pawnbroker's loan agreement, reserving the right of the lender to enforce its security by means of a forced sale of the pledged asset, to recover the principal and the interest, that did not mean that the auction service was ancillary to the grant of credit. Although a sale was for the repayment of the principal and interest relating to a loan, it was not merely a means of for the customer to better enjoy the service relating to the grant of that loan, but an end in itself.

The Court also noted that an assessment of the distinct and independent nature of the services relating to the organisation of the auction of pledged goods was consistent with the need to interpret the exemptions in Article 135(1) of the VAT Directive strictly.

Comment

It is worth noting that it does not appear that the taxpayer in this case argued that the fee for arranging the sale fell within the concept of the exempt management of credit by the person granting it.

HMRC guidance on pawnbroking services is contained in VATFIN3180. This guidance states that “where a trader makes a charge (provision for which is made in a loan contract) for selling unredeemed pledges, which may include an element for cleaning and repairing the goods before they are put on display, this fee is seen to be a further charge for the granting of credit and is exempt under item 2”. On the face of it, this broad exempt treatment of associated fees charged by a lender for the sale of goods held as security would appear to run counter to the CJEU decision. Though, firstly the decision is no longer binding in the UK and, secondly, perhaps it could be argued that the fee would fall under the concept of the exempt management of credit by the person granting it (rather than simply ancillary to the grant of credit).

HMRC guidance more generally on the VAT treatment of the sale of business assets in satisfaction of a debt can be found at VATSC03130.