Between two brokers: Leadx v HMRC
A VAT tribunal has ruled that the provision of an internet-based bidding system which allowed brokers to buy and sell leads for potential customers was not within either the insurance or finance-related exemptions from VAT.
Services related to insurance performed by insurance brokers and agents and services involving the negotiation of credit are exempt from VAT under Article 135.1 EC Directive 2006/112/EEC (VAT Directive).
The exemption for services related to insurance is enacted in UK legislation by an exemption for the provision by an insurance broker or insurance agent of any of the services of an insurance intermediary if those services relate to an insurance transaction and are provided in the course of acting in an intermediary capacity (1). An insurance broker or agent acts in intermediary capacity if they act as an intermediary between a person providing and a person seeking insurance (2). Services are services of an insurance intermediary if they involve the bringing together people who are seeking insurance and persons providing insurance or if they involve work preparatory to the conclusion of an insurance contract (3).
The credit-negotiation exemption is incorporated in UK law by an exemption for the provision of intermediary services in relation to the granting of any credit, whether or not any transaction is finally concluded, by a person acting in an intermediary capacity (4). Intermediary services are defined as the bringing together of persons who are or may be seeking financial services, with persons who provide such services, with a view to the provision of financial services, while acting in an intermediary capacity involves acting as an intermediary between persons seeking and persons providing financial services.
The exemptions should be construed strictly under general principles of European law. Their scope has become the subject of an increasing number of UK tribunal decisions in recent years; particularly in relation to insurance transactions as chains of transactions leading to insurance contracts have become increasingly complex. In one respect - in relation to insurance aggregator services - the exemption has been very recently clarified. Provided the supplier is actively involved in matching insurance companies and customers their services will be within the exemption (5). However click-through internet introduction services which passively provide information to its customers will not (6). These rules were a welcome clarification for aggregators which provide a service for consumers to input their details via computer and which then provides a quote comparison service, i.e. for aggregators with a clear relationship with both the insurer and the consumer, but did not clear up the applicability of the exemption for aggregators which match up bids between brokers.
Leadx provided a computerised trading platform whereby brokers with unsold leads would provide the information about potential customers and Leadx’s computer software would analyse the information into lead types. A buying broker would enter bids for specific types of leads and the software would allocate the specific lead to the highest bid recorded on the software platform.
Both buying and selling brokers would pay Leadx in return for non-exclusive access to Leadx’s software platform. Leadx was paid when a lead was passed on to a buying broker, whether or not a lead was ultimately converted into a sale. Leadx’s business objective was thus to achieve the highest price for the lead, rather than ensuring that products suited customers’ requirements. As such, its operations were wholly geared towards making the leads more marketable.
Leadx had a contractual relationship with the brokers (albeit expressly not an agency relationship), was never in contact with any insurers or loan providers and only superficially with consumers. Leadx occasionally contacted customers by telephone to record their personal details and insurance requirements. If consumers were contacted however, it was for the purpose of achieving a better fit with the criteria laid down by the buying broker, rather than in order to match the customer with the most appropriate broker on the basis of the customer’s requirements.
Out of character with the finance exemption
The tribunal considered the character of the supplies and concluded that they were about selling leads rather than the making and negotiation of credit. As the UK legislation uses the concept of an intermediary rather than negotiation, the tribunal also considered the requirement for intermediary services of bringing together persons wanting to buy and sell financial products with a view to the provision of financial services. The tribunal concluded on the facts that Leadx brought brokers together for the purpose of marketing leads and that Leadx’s supplies had no direct link with the process of negotiating credit arrangements between brokers and potential customers.
No relationship with insurance
The tribunal considered the VAT Directive and stated that to be an insurance agent, a supplier had to have a relationship with both the insurer and insured parties. The tribunal held that a more structured relationship was required than mere telephone contact with one of the parties to a potential insurance contract. The chairman then cited the Opinion of the Advocate General in Arthur Anderson to suggest as a minimum a declaration of agency by the supplier of services and a relationship with both the insurer and insured (7). The tribunal also held that to qualify for the exemption as related services, Leadx’s operations needed to have the character of insurance services; being part of the chain of transactions leading to a potential transaction was not enough. The chairman stated that Leadx’s supplies were a discrete and self contained activity between brokers with no connection to an insurance transaction and therefore not within the exemption.
Turning to the UK concept of an insurance intermediary, the same findings of fact that the supplies were a self-contained activity and the lack of relationship with consumers or insurers were enough to persuade the tribunal that Leadx did not bring together the insurer and insured with a view to an insurance transaction or carry out of work preparatory to an insurance contract.
While the judgement in this case is not a surprise, it is useful in that it highlights the fact that placing oneself somewhere within the chain of supply and consumption will not necessarily afford supplies the protection of the intermediary services exemption. Providing a link between two intermediaries might appear to be the safest place for an intermediary to be, but unless the supplies in the case of finance are to do with the making and negotiation of credit and in the case of insurance involve a relationship with the customer and the insurer, their place in the chain may not be enough to qualify for the VAT exemption.