WHA Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Reed,Lord Carnwath agree,Lord Hope,Lord Mance,Lord Walker |
| Judgment Date | 01 May 2013 |
| Neutral Citation | [2013] UKSC 24 |
| Date | 01 May 2013 |
| Court | Supreme Court |
[2013] UKSC 24
Lord Hope, Deputy President
Lord Walker
Lord Mance
Lord Reed
Lord Carnwath
Appellant
Roderick Cordara QC
Tim Eicke QC
Hui Ling McCarthy
(Instructed by Forbes Hall LLP)
Respondent
Jonathan Peacock QC
James Eadie QC
Aidan Robertson QC
Patrick Goodall
(Instructed by Her Majesty's Revenue and Customs)
Heard on 21, 22, 23 and 24 January 2013
Lord Reed (with whom Lord Hope, Lord Walker, Lord Mance and Lord Carnwath agree)
This appeal concerns the effectiveness of a scheme, known as Project C, which was designed to minimise the overall liability to VAT of a group of companies involved in motor breakdown insurance ("MBI"). Summarising matters which I shall at a later point explain in greater detail, the supply of insurance is exempt from VAT. It follows that insurers do not charge VAT on premiums, and do not account to the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") for VAT in respect of their insurance business. It also follows that, if an insurer incurs costs in respect of supplies of goods or services which it uses in the course of its insurance business, on which VAT is chargeable, it is unable to deduct the amount of the VAT which it has paid from any VAT which it has received in respect of that business. Instead, it has to bear the VAT element of its costs.
MBI insurers normally undertake to indemnify the insured against the cost of repairs. Whether the garage invoices the insured, who is then reimbursed by the insurer, or invoices the insurer directly, in either case the garage's invoice will include VAT (provided the garage is registered for VAT, as is normally the case). In such circumstances, the cost of the repair is the cover which the insurer has contracted to provide to the insured under the insurance policy. It is not the cost of a service supplied to the insurer for the purposes of its business, and no possibility arises of the insurer being able to deduct the VAT element of the cost.
In principle, however, an MBI insurer might undertake not to indemnify the insured in respect of the cost of repair, but to repair the insured's vehicle; and it could then arrange with a garage for the repair to be carried out, and pay the garage's bill. Even in such a case, however, the insurer would not be able to deduct the VAT element of the bill, since, even if the garage were regarded as supplying a service to the insurer for the purposes of its insurance business, the insurer would not be liable to account for any VAT in respect of that business, and would therefore not have received any VAT from which the tax paid to the garage could be deducted.
The VAT paid to garages represents a substantial element of the costs of an MBI insurer's business, which has to be covered by premiums. The inability to deduct VAT as input tax is perceived by MBI insurers as placing them at acompetitive disadvantage relative to businesses, such as car dealers, offering uninsured warranties under which they contract to repair vehicles in the event of a breakdown. Since businesses of the latter kind are not treated as being exempt from VAT, they can set the VAT element of their costs against the VAT which they receive, with the result that the effect of the tax upon their business should in principle be neutral. The competitive disadvantage of the insurers was exacerbated in 1997, when insurance premium tax was imposed on MBI premiums at a rate of 17.5%.
The purpose of the scheme with which the appeal is concerned was to redress that competitive disadvantage by enabling the VAT element of the cost of repairs to be recovered by one or other of the members of a group of companies to which an MBI insurer belonged, thereby reducing costs and enabling the insurer to offer lower premiums.
The National Insurance and Guarantee Corporation plc ("NIG") is a UK insurer. It has underwritten MBI policies for many years. The policies cover the cost of repairs and replacement parts following breakdowns of second hand cars. The policies are marketed and sold by another UK company, Warranty Holdings Ltd ("Warranty"), which is a member of the Oriel group of companies, the holding company of which is Oriel Group plc. Prior to the implementation of Project C, NIG reinsured the risks under the policies with Practical Insurance Company Ltd ("Practical"), a Gibraltar-based reinsurer which is another member of the Oriel group.
Until the implementation of Project C, Warranty was appointed by NIG to handle all claims made under the policies. In the event of a breakdown the insured contacted Warranty, which directed the insured to take the vehicle to an approved repairer, or a repairer of the insured's choice, or the dealer (all of which I shall refer to as "the garage") for repair. The garage provided repair services and billed Warranty for the cost or, if the cost of the repair exceeded the insurance cover, for the amount of the cover. As claims handler, Warranty made arrangements with approved repairers which were designed to keep down the cost of repairs.
These arrangements resulted in the VAT paid by Warranty on the repair services and parts supplied by the garage being irrecoverable. This was the problem which Project C was designed to solve.
Project C had two strands, each of which was based on the operation of statutory provisions. The aim was that the first strand should be enough to secure the recovery of the VAT paid on the repairs. The second strand was designed to provide a fall-back position should the first not hold.
Putting the matter very broadly, the first strand was based on legislation designed to ensure that there was no VAT burden on the supply of certain insurance and financial services by UK businesses to consumers outside the EU. The legislation gave credit for input tax which was incurred for the purpose of businesses making certain specified types of supply to a person outside the EU. The specified supplies included the provision of assistance in the administration and performance of insurance contracts, including the handling of claims. The legislation was interpreted by those responsible for Project C as enabling a UK insurance claims handler to recover input tax incurred for the purpose of its supplying claims handling services to a non-EU recipient.
Project C sought to avail itself of this legislation by having the first appellant, WHA Ltd ("WHA"), a UK member of the Oriel group, supply claims handling services to the second appellant, Viscount Reinsurance Company Ltd ("Viscount"), a Gibraltar-based member of the group, with which 85% of the risk under NIG's MBI policies issued through Warranty was ultimately reinsured. Provided (1) the garages made supplies of labour and parts to WHA (and not, as previously, to the insured car owner) and invoiced WHA for those supplies, (2) WHA then invoiced Viscount for claims handling services and (3) the latter invoice covered the amounts invoiced by the garages, WHA would be able to recover the VAT charged by the garage, and would not have to charge VAT on its onward supply of claims handling services to Viscount. That, in short, was the thinking behind the first strand of Project C.
The first strand envisaged, as I have explained, that no VAT would be chargeable on the supplies to Viscount. The second strand of Project C was designed to provide a fall-back line of defence if that was disputed by the Commissioners: if, for example, they maintained that WHA did not use the garages' supplies for the purpose of making its own supplies of claims handling services to Viscount, or contended (as actually happened) that WHA's supplies to Viscount were wholly or partly chargeable to VAT as being supplies of repairs or parts rather than supplies of claims handling services. Again putting the matter very broadly, the second strand relied upon UK VAT legislation which was interpreted as enabling Viscount to recover the VAT which it paid to WHA so long as Viscount itself made supplies to a non-EU recipient. For the purpose of the second strand, it was therefore necessary to instal another non-EU entity between NIG and Viscount. That entity was Crystal Reinsurance Company Ltd ("Crystal"), another Gibraltar-based member of the Oriel group. It reinsured 100% of the risk under NIG's MBI policies issued through Warranty, and in turn retroceded 85% of the risk to Viscount. The NIG policies were the only reinsurance business carried on by Crystal and Viscount.
The end result of the first strand of Project C was thus intended to be that WHA (1) would be the recipient of the repair services on which the garagescharged VAT, (2) would not have to charge output tax on its onward supplies to Viscount, and (3) would therefore be entitled under the relevant legislation to recover the input tax from the Commissioners. The end result of the second strand was intended to be that, if proposition (2) did not hold and WHA had to charge output tax on its supplies to Viscount, Viscount would nevertheless be entitled to recover that tax from the Commissioners.
Following the implementation of Project C in 1998, the Commissioners refused the claims made by WHA and Viscount for the repayment of tax. WHA and Viscount then appealed to the Value Added Tax and Duties Tribunal ("the tribunal"). Before the tribunal, the Commissioners challenged the effectiveness of Project C on the basis that none of its three central planks was sound. First, they maintained that there was no supply of services by the garages to WHA: if that contention were accepted, it was fatal to the success of the scheme, since both strands of Project C depended upon its being accepted...
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