Are collision damage waiver payments classed as insurance for VAT purposes?

Background

Supercar Drive Days Ltd v Revenue and Customs Commissioners concerned a business (‘Supercar’) that was providing supercar driving experiences in the UK. Drivers would drive expensive high-powered cars accompanied by a qualified instructor.

Supercars customer contracts stated that each customer would be liable for the first £2,500 plus VAT of any damage beyond normal wear and tear. However, customers were able to pay a fee of £25-£30 to purchase collision damage waiver insurance that would mean that they were no longer liable to pay the first £2,500 of damage.

The VAT issue

Supercar had been registered for VAT since August 2012, but provided collision damage waivers for customers without charging VAT on these payments.

HMRC challenged this VAT position and begun to make enquiries into this in 2015.

Subsequent to HMRC’s original interest, Supercar arranged for insurance to cover its own risk of having to pay £2,500 (itself being the insured person) where the collision damage waiver payments had been made.

The fundamental question for the tribunal was whether or not the nature of the collision damage waivers was such that they qualified for exemption under the VAT insurance provisions or whether Supercar still had to account for VAT on them.

The arguments

Supercar submitted that the EU law interpretation of ‘insurance transaction’ was the correct one to apply.

Supercar argued that the supplies that it made in exchange for the collision damage waiver payments bore all of the characteristics of insurance, and that Supercar had undertaken reinsurance to cover their risk of paying out.

HMRC argued that Supercar’s supplies of collision damage waivers were not insurance, but instead an optional coverage to vary the terms on which the driving experience was undertaken and reduce a customer’s financial liability. As such, the collision damage waivers were taxable at the standard rate for VAT purposes.

The decision

The tribunal held that the provision of collision damage waivers to customers for a specified fee was not a supply of insurance, so Supercar should have accounted for VAT to HMRC.

The tribunal found that although the practical effect of making a collision damage waiver payment was similar to purchasing insurance, the legal nature of the transaction was significantly different because it only varied the potential liability of the customer under the original contract.

Interestingly, the tribunal stated that the outcome of the case might have been different if:

  • Supercar’s contract with customers specifically provided that the excess was always payable by Supercar in the event of accidental damage, and
  • the contract also made express reference to the ability to insure against that liability through an insurer by means of a policy through Supercar.

It was deemed crucial that there was no risk against which a customer could insure himself or herself, as the waiver only removed the obligation on the customer to pay the excess. The insurance that was subsequently purchased only covered Supercar itself.

As the contract was varied by the purchase of the collision damage waivers, the waivers could not be construed as insuring against the customers’ liability as there was no liability to insure against.

This case highlights the importance of clarifying whether you are securing insurance for yourself or third parties (e.g. customers). Even if collision damage waiver payments share many of the characteristics of insurance, if the liability is created and removed within the same contract they may not be classified as such.