WHA Ltd v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lloyd |
| Judgment Date | 28 February 2003 |
| Neutral Citation | [2003] EWHC 305 (Ch) |
| Court | Chancery Division |
| Date | 28 February 2003 |
| Docket Number | Case No: CH/2002/App/0400 |
[2003] EWHC 305 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Lloyd
Case No: CH/2002/App/0400
Roderick Cordara Q.C. (instructed by Deloitte & Touche for the Appellants)
Jonathan Peacock Q.C. (instructed by the Solicitor for the Customs & Excise for the Respondent)
Hearing dates: 11–14 February 2003
JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)
This judgment concerns several appeals from decisions of the VAT and Duties Tribunal, on appeals by the two Appellants against decisions of the Respondent Commissioners as regards various linked VAT matters. I do not need to go into the interrelationship between the various decisions and the appeals against them. Large sums of tax are in dispute. It is common ground that three issues arise for decision. Two of them were decided wholly against the Appellants, and the other partly against the Appellants. Insofar as the latter was decided in favour of the Appellant, the Commissioners do not challenge this. But the Appellants challenge the rulings against them on all three points.
The Commissioners have served a Respondent's Notice, by which they seek to uphold the decision of the Tribunal, if necessary, on other grounds. I have not yet heard argument on those points, which only arise if the appeals would otherwise be successful. It has been agreed that I should decide the points on the Appellant's Notice, and then there should be argument, if necessary, as to the fate of the points in the Respondent's Notice, which might require a reference to the European Court of Justice, or an adjournment pending the result of another reference which has already been made.
The underlying subject matter of the transactions under consideration is motor breakdown insurance. Purchasers of cars, mainly but not only second hand, may purchase, through the car dealer, a form of warranty or extended warranty by which they are protected against the cost and some consequences of the breakdown (otherwise than by wear and tear) of the vehicle upon failure of any of its parts. This warranty may take a number of different forms, and may last for a shorter or a longer period. It may involve insurance, either directly or indirectly, or there may be no insurance element. In the latter case the organisation providing the warranty takes its own risk as to the level and amount of claims. It may, however, be more attractive to car buyers to have an element of insurance in the package, so as to provide more confidence in the arrangements. An insured warranty might be one whereby the provider of the warranty covers itself, giving the car owner no direct benefit. The insurance may however be the primary content of the scheme, as it is in the present case. The car owner buys an insurance policy through the garage, under which he is promised the relevant protection in the event of breakdown. The cover might be expressed as a financial indemnity, covering the cost of having the car repaired. Alternatively, as here, it may be expressed as an undertaking to have the repairs done.
As regards VAT, the implications of a simple arrangement for a motor breakdown warranty are these, in summary. The garage will be registered for VAT and will charge the standard rate of tax on its supplies of labour and parts. If the car owner is not registered, or the car is not used for business purposes, then the car owner cannot recover the VAT on the repairs by deduction from output tax charged. If the insurer indemnifies the car owner against the cost, then it also has to pay the VAT as part of that cost. Even if the repairs were done for the benefit of the insurer, so that a supply of services was made to that body, in the normal way it could not recover that input tax, because insurance is exempt and insurance undertakings cannot recover their input tax. For an insurer in any substantial way of business, that inability to recover the input tax represents a substantial addition to the costs of the business, which have to be covered by premiums.
The present case concerns arrangements put in place in March 1998 which were set up in order to seek to reduce the costs of the warranty business by making it possible to recover the input tax. There was some evidence as to the previous position, but it does not seem to me that anything turns on the detail of that for present purposes. The new arrangements were set up as part of a project which the Tribunal referred to as Project C.
The arrangements involve an insurance company, which I will call NIG, and a number of other companies which are part of a group known as Oriel. NIG issues motor breakdown insurance policies to car purchasers. An Oriel company called Warranty Holdings Ltd acts as its agent in getting this business, and car dealers act as introducers. The security of NIG as an insurer is offered to the car owners. The real commercial risk, however, is taken elsewhere, in the Oriel Group. The whole of NIG's risk under the policies is reinsured with an Oriel company incorporated and trading in Gibraltar, called Crystal Reinsurance Company Limited. In turn 85% of the risk is retroceded to another Gibraltar based Oriel company, Viscount Reinsurance Company Ltd. The task of claims handling is passed down the line with each of these arrangements, and Viscount therefore has responsibility not only for its own risk but also for the share which rests with Crystal. Viscount delegates the task of claims handling to another Oriel company, this one based in the UK, WHA Limited. WHA sets up systems and arrangements with approved garages under which the work that may be necessary in the event of the breakdown of an insured's car will be done at appropriate rates, and paid for by WHA so long as it is within the terms of the policy. The intention of these arrangements is that, when a garage repairs a car under the policy, the taxable supply of services for VAT purposes will be made by the garage to WHA, and WHA will therefore be able, in principle, to deduct the input tax suffered by it on paying the garage's bill. The next question is whether WHA has to charge VAT to Viscount on any of its services, WHA claiming that its services are exempt. If it is exempt then because its supplies are to a customer outside the EU, input tax is recoverable. Thirdly, if it does have to make such a charge, then it is said that Viscount can recover the input tax so charged under rules relating to supplies to traders in third countries, because its customer in turn (Crystal) is also outside the EU.
The first two of these issues are related, in that they both require an analysis of what supplies of what services there are and to whom, and of the nature of WHA's business. The third issue is distinct.
The documents
I heard submissions as to the approach to be taken in deciding what supplies of services take place in a given situation, to which I will refer in due course. On any basis, however, the starting point is to look at the terms of the relevant documents. I will therefore start with the typical policy issued to car owners. On page 1, under the heading "contract of insurance", there is the following passage:
"Your contract of insurance is between you … and [NIG]. Warranty Holdings Ltd acts as agent for NIG in respect of the issue of this policy. In return for the premium, NIG provides the benefits described in this policy booklet. These are on and subject to the terms and conditions in this policy booklet."
On the same page there is this separate text:
"WHA Limited will deal with any claims arising under your policy. If your vehicle breaks down please call WHA's Customer Support line… for advice on the best course of action and the nearest approved repairer."
On the next page, under a heading "Your questions answered", information is given as to the extent of the cover under the policy, including that breakdown due to normal wear and tear is not covered. The point is made that all claims must be made in accordance with the claims procedure, described elsewhere, and the terms and conditions. Car owners are advised to contact WHA in the event of breakdown, to be advised of the best course of action and told of the nearest approved repairer. The point is also made that if the insured wishes to use a garage which has not been approved in advance by WHA, this is possible so long as the garage in question follows WHA's claims procedures, which will include getting authorisation for the work, and sends their invoice with the necessary supporting documentation, quoting the authority reference, to WHA at an address given.
Under the heading "How to make a claim", insured car owners are given the following instructions. They should contact WHA's Claims department to have the claims procedure explained. They should book the vehicle in with the dealer or a recommended repairer, and give permission for the work necessary to diagnose the fault to be done to the car. They should agree to pay the costs of dismantling and repairing the vehicle if the cause of the problem is not covered by the policy and, if it is covered, then any costs which exceed the limit of cover. The repairer must telephone WHA, quoting the policy type and number, and seek authority to do the repair. If the claim is accepted, the repairer will be told how much will be paid under the policy and an authority number will be given. Any amount billed which exceeds the authoriised amount has to be met by the insured. When the repairs are complete the repairer must submit an invoice addressed to WHA showing the authority number and all other relevant information.
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