Hastings Insurance Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 January 2018 |
| Neutral Citation | [2018] UKFTT 27 (TC) |
| Date | 19 January 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0027 (TC)
Judge Harriet Morgan, Member Mr Nigel Collard
Mr Andrew Hitchmough QC and Ms Barbara Belgrano, counsel, instructed by Ashurt LLP, appeared for the appellant
Mr Raymond Hill, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
Value added tax – Recovery of input tax on suppliers of broking, claims handling and underwriting support services – Appeal allowed.
The First-tier tribunal (FTT) found that input tax incurred against insurance services supplied to a Gibraltar company were recoverable under the specified services order.
The dispute concerned where the Appellant's supplies to Advantage Insurance Company Limited (Advantage) a related company based in Gibraltar took place. If in the UK they would be exempt with no Value added tax (VAT) recovery and if in Gibraltar they would allow VAT recovery.
The FTT set out the law as it applied from January 2010. Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121), enacted under VATA 1994, s. 26(2)(c) applied, implementing art. 169 Council Directive 2006/112/EC allowing for input tax recovery where insurance intermediary services were supplied to persons outside the EU. The basic UK rules for business to business supplies are set out in VATA 1994, s. 7A(2)(a) which defines where a person belongs and in which country a supply is made, enacting Principal VAT Directive (Council Directive 2006/112/EC) (“the PVD”) art. 44.
The European Court of Justice (ECJ) has considered where jurisdiction lies for tax accounting in various cases and where a taxpayer has its business establishment (BE) is the usual starting point. Council Implementing Regulation 282/2011 (The Regulation) introduced in March 2011 defined BE as where central administration is carried out including where essential decisions are made and management meets, art. 10. Article 11 defined a fixed establishment (FE) as having a sufficient degree of permanence and a suitable structure in terms of human and technical resources. Article 21 further develops the provisions for where there is a BE and FE in different countries.
The Appellant's case was that it supplied services to Advantage at its BE in Gibraltar. Advantage supplied insurance to customers in the UK, albeit through the Appellant as intermediary.
HMRC argued that Advantage had a FE in the UK from where it supplied its UK customers, using the Appellant's staff and technical resources subject to approval by Advantage, The effect would be irrational if supplies were deemed as made to the BE in Gibraltar and a distortion of competition.
The Appellant said that for Advantage to have an FE in the UK it would have to have control over the Appellant's resources showing it had the technical resources to supply customers with insurance services. The reality was that resources such as underwriting, assessing risk, pricing, reinsurance, regulation and investment were held in Gibraltar, see the AG's opinion in Welmory sp z oo v Dyrektor Izby Skarbowej w Gdańsku (Case C-605/12) [2014] BVC 47.
HMRC believed Welmory to be out of kilter with C & E Commrs v DFDS A/S (Case C-260/95) [1997] BVC 279. The Appellant had a close relationship, with common ownership links and a requirement for Advantage to approve the Appellant's business activities with its resources available to Advantage.
The FTT saw a lack of precision in case law as to defining the FE test but found guidance in ARO Lease BV v Inspecteur der Belastingdienst Grote Ondermingen, Amsterdam (Case C-190/95) [1997] BVC 547, where the ECJ referred to the need for stability arising from the permanence of human and technical resources and the ability to supply services independently.
HMRC said that DFDS was the only ECJ case where the subject of permanence had been dealt with in depth, whereas the Appellant rejecting this argued that DFDS was an exceptional case following the comments of the Advocate General in Welmory.
The FTT concluded that there was an insufficient degree of permanence for the Appellant's resources to be considered a FE of Advantage, see para. 527 of the decision. The FTT agreed following Welmory, both parties were involved in a single economic activity of insurance but that itself was insufficient to create a FE, see para. 536 and 537. Although they had close links through common ownership the necessary resources to run the insurance business were held by Advantage in Gibraltar through the human and technical resources it had there.
Following R & C Commrs v RBS Deutschland Holdings GmbH (Case C-277/09) [2011] BVC 138, a business is free to choose where to establish its business. Advantage chose Gibraltar and the specified services order rules allowed the Appellant to recover VAT against such supplies, see para. 610. The Appellant's human and technical resources did not form a FE of Advantage and even if it did the BE in Gibraltar was the place of belonging.
This case demonstrates the problem HMRC faces when exempt taxpayers organise their activities in such a way as to take advantage of the rules. Had the Appellant supplied Advantage in the UK it would have had no VAT recovery. It remains to be seen whether HMRC will appeal this matter, although in RBS the ECJ has confirmed that arms-length arrangements reflecting commerciality and economic reality are acceptable even where the outcome is a loss of revenue.
[1] The appellant is an insurance services company operating in the UK. The appeal relates to whether, for VAT purposes, the appellant can recover or obtain credit for (“recover”) input tax it incurred in the period from 1 February 2009 to 31 December 2013 (the “Period”), which is attributable to supplies of broking, underwriting support and claims handling services (the “services”) made to Advantage Insurance Company Limited (“Advantage”).
[2] Advantage is a company related to the appellant based in Gibraltar which underwrites UK private and commercial motorcar and motorcycle insurance. During the Period Advantage made supplies of insurance to UK customers, acting through the appellant as its broker or intermediary, and using the other services provided by the appellant.
[3] The applicable law is set out at [13] to [29]. In summary, it was common ground that, if the supplies of the services were made in the UK, they fall within the exemption from VAT for certain insurance services (under item 4 of Group 2 of Schedule 9 to the Value Added Tax Act 1994 (“VATA”)). A taxable person, such as the appellant, is not entitled to recovery of input tax attributable to exempt supplies made in the UK. However, the appellant is entitled to recovery of the input tax if the supplies of services were in fact made to a taxable person which “belongs” outside the EU member states. Advantage was at all relevant times a taxable person. Gibraltar was not and is not an EU member state for VAT purposes. The dispute was whether Advantage “belongs” outside the EU or not for this purpose.
[4] Where a person “belongs” for this purpose is set out in the UK place of supply rules. These rules changed during the Period but, in effect, under both sets of the applicable rules, a taxable person “belongs” for this purpose:
- where it has a business establishment (BE); or
- if different, where it has a fixed establishment (FE); or
- if it has both a BE and a FE (or several such establishments), where the establishment is located which is most directly concerned with the supply.
[5] It was not disputed that Advantage had a BE in Gibraltar. The question was whether it also had a FE in the UK and, if so, whether the supplies of services were made to that FE rather than to its BE in Gibraltar. The place where Advantage's supplies of insurance were made was also relevant to the analysis and is also to be determined by reference to where Advantage “belongs”. This similarly depends on whether Advantage made the supplies of insurance from its BE in Gibraltar or from a UK FE. Those supplies also fall within the insurance exemption referred to in [3] above if made in the UK.
[6] These UK rules are to be interpreted in accordance with the relevant EU VAT law, which the UK rules are intended to enact, as interpreted by the Court of Justice of the European Union (“CJEU”). The CJEU has considered in a number of cases the question of when, for the purposes of deciding in which country a supply is made (and so which country has taxing rights), a FE may be held to exist and when it is appropriate to allocate taxing rights to any such FE rather than to a taxable person's BE. The CJEU has consistently held that the place where the BE is located is the primary point of reference unless that gives an irrational result. The case law is set out at [407] to [482].
[7] There was no definition or further explanation of the terms BE and FE in the UK or the EU rules until the introduction in March 2011 of Council Implementing Regulation 2011 (282/2011/EU) (the “Regulation”). The Regulation includes a provision defining a FE, for the purposes of the place of supply rules, as based on the previous case law in the CJEU, as an establishment other than a BE:
“characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”
[8] The parties took different views on the correct application of the FE test in the Regulation and the interpretation of the FE test set out in the cases. (The case law remains relevant, as the terms of the Regulation which reflect the test as set out in the cases suggest and as has been confirmed in the CJEU more recently.)
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