The Supreme Court has delivered its judgment in the case of WHA v HMRC [2013] UKSC 24, denying the tax payer recovery of input tax on a complicated scheme designed to recover VAT on garage repair services paid for under motor breakdown insurance. The decision is another reminder, in the wake of Redrow [1999] 1 WLR 408 and Aimia [2013] UKSC 15, that all the underlying facts and economic reality must be closely examined to determine VAT liability and recovery, especially where there is a complex web of contractual relationships.

As the supply of insurance is VAT exempt, recovery of related input tax by an insurer is restricted. In practice, this input tax constitutes a substantial element of the costs of a motor breakdown insurer’s business.

The scheme inWHA was created to enable recovery of this VAT by other members of the insurer’s corporate group. In this particular case, one company (the insurer) underwrote the policies, a group company marketed and sold them and another (in Gibraltar) reinsured them. The scheme depended on the VAT free supply of claims handling services to a non-EU recipient (the Gibraltar company) and recovery of related input tax on those services by the claims handler (another group member). Vitally, this treatment relied on the repair services being supplied by the garage to the claims handling company.

The Supreme Court decided against the tax payer on this crucial component, unanimously finding that there was no supply of services by the garage to the claims handler (so the tax payer’s argument failed). As supported by the policies and intercompany agreement, the insurer undertook only to pay the cost of the repairs and not to carry out the repairs themselves; the claims handler’s role was only to negotiate, investigate, adjust, settle and pay claims (and not to partake in repairs either). The claims handler’s commitment to pay for the authorised repairs did not render it the customer of the garage and there was no evidence that the garage’s supply of labour and parts was used for the purposes of the claims handler’s business. This was simply an example of third party consideration: in economic reality, when the claims handler paid for the repairs it merely discharged the insurer’s obligation to the insured. It acted as paymaster - that is all – and “the interposition of the claims handler did not, by some alchemy, transmute the discharge of the insurer’s obligation to the insured into the consideration for a service provided to the reinsurer’s agent”.

The Court of Appeal had also found against the tax payer, on the grounds of abuse of rights. However, on the basis of the above decision the Supreme Court did not need to consider abuse.

The full judgment can be found here