The Court of Appeal has dismissed HMRC's appeal in the (joined) InsuranceWide and Trader Media cases and confirmed that their services fell within the VAT exemption for the services of insurance intermediaries.
Whilst the decision itself is probably not groundbreaking, the reasoning behind the decision is worthy of note as it may mean that some intermediary services that are currently being treated as standard rated for VAT purposes should, in fact, be treated as exempt.
Background – VAT and insurance intermediary services
The provision by an 'insurance broker' or 'insurance agent' of any of the services of an 'insurance intermediary' is exempt from VAT. The exemption is found in article 135(1)(a) of Council Directive 2006/112 EC (previously article 13B(a) of the Sixth Council Directive 77/388 EEC) and in domestic legislation, Schedule 9, Group 2, Item 4 of the Value Added Tax Act 1994.
Background - facts
Both taxpayers in this case operated websites through which they introduced 'customers' of their website to insurance companies. Importantly, both taxpayers performed 'behind the scenes' functionality including:
- The identification of suitable insurance companies for their target market (based on their understanding of the experience and demographics of their customers) 'bearing in mind the competitiveness of their pricing and products and their level of consumer service';
- Drafting a suitable 'risk profile' questionnaire which operated as an interface between their customer and the insurance company;
- On occasions, directing customers to the most appropriate insurers to match customer requirements.
HMRC argued that the taxpayers were neither 'insurance brokers' nor 'insurance agents', primarily because they did not enter into any legal relationship with either 'the insurer or the insured or the prospective insured' and were 'mere conduits' or 'sub contractors' in the scheme of the insurance transaction. Further, HMRC argued that both Trader Media and InsuranceWide were 'nothing more than the provision of a "click through" facility to a broker, agent or insurer'. Accordingly, it argued that neither was entitled to rely on the VAT exemption.
The Court found that both Trader Media and InsuranceWide were entitled to rely on the VAT exemption.
In reaching its decision, the Court drew together the key principles that had been espoused in earlier European cases and in particular found:
- It is an 'essential characteristic of an 'insurance broker' or an 'insurance agent', that they are engaged in the business of putting insurance companies in touch with potential clients or, more generally, acting as intermediaries between insurance companies and clients or potential clients'.
- It is not necessary, in order to claim the benefit of the VAT insurance intermediary exemption 'for a person to be carrying out all the functions of an insurance agent or broker. It is sufficient if a person is one of a chain of persons bringing together an insurance company and a potential insured and carrying out intermediary functions, provided that the services which that person is rendering are in themselves characteristic of the services of an insurance agent or broker'.
- It is not necessary for a person to have legal relations with insurers or insureds in order to be an 'insurance broker' or 'insurance agent'.
- It was considered 'immaterial that neither InsuranceWide nor Trader Media had anything to do with the negotiation of the terms of the insurance contract or its preparation or the collection of premiums or the handling of claims'.
- The exemption for "related services" only applies to services performed by persons acting as an 'insurance broker' or an 'insurance agent'. 'Whether or not a person is an 'insurance broker' or an 'insurance agent' depends on what they do. How they choose to describe themselves or their activities is not determinative'.
- It is possible to import definitions of 'insurance broker' and 'insurance agent' given elsewhere in European law into VAT law but only 'to the extent, that they should be taken into consideration as reflecting legal reality and practice in the area of insurance law'. It is not necessary, 'in order to invoke the exemption for the taxpayer to perform precisely the description of activities given elsewhere in European law'. However, falling within the definitions given elsewhere (such as the "insurance mediation" definition which gives rise to a requirement to be authorised by the Financial Services Authority or equivalent EU regulator) will not automatically mean the taxpayer will fall within the VAT insurance intermediary exemption.
Impact of the Decision
Two key considerations flow from the decision:
- Insurance intermediaries currently falling outside of the exemption may wish to consider their arrangements in light of the case and review whether they may now fall within the exemption.
- Insurers who currently pay (irrecoverable) VAT on the services of insurance intermediaries may wish to consider asking those intermediaries to review their services in light of the guidance given by the Court.
European Commission Review of the Insurance Exemption
The EC is currently investigating the extent of the VAT insurance exemption.
The proposal, which consists of both a new directive and a new regulation, redefines the scope of exempt services to ensure that the exemption better reflects the complexity and diversity of the modern insurance market whilst staying broadly within the limits of existing provisions. The proposal also increases the opportunities for banking and insurance companies to opt to tax their services if they wish. Such an option to tax already exists but it is currently at the discretion of Member States and not widely adopted. The proposal intends the option to be equally accessible across the EU. There is also the introduction of an industry specific exemption from VAT on cost sharing arrangements, including those which are cross border. This will enable institutions to pool their operations and to share costs between group members without creating additional non-recoverable VAT.
A link to the case can be found here.