The Supreme Court has held that the provision of repairs and parts by garages under motor insurance breakdown policies did not amount to a supply of services to the policy provider for the purposes of its business, in addition to or instead of a supply to the insured party, such as to enable the insurance provider to recover input VAT. The appellant companies (W and V) appealed against a decision by the Court of Appeal that a scheme designed to minimise their liability to VAT was to be struck down as an abusive practice under EU law.

W and V were part of a group of companies providing motor breakdown insurance. The insurance policies were issued by a UK based insurer (N) and covered the cost of repairs and replacement parts. The policies were sold by W, another UK based company. W handled all claims under the policies. The particular garage would invoice W, with W paying irrecoverable input VAT on the repair costs and parts. Under the implemented arrangements, designed to redress a perceived competitive disadvantage with businesses such as car dealers, W supplied claims handling services to V, a Gibraltar based reinsurance company and therefore outside the EU, which had been retroceded 85% of the reinsurance business from another group company. The aim was that W would be able to recover the input VAT. Alternatively, V would be able to recover any VAT chargeable in respect of W’s services. HMRC argued that the arrangements were so artificial they amounted to an abusive practice. The VAT and Duties Tribunal concluded that the garages made supplies of repairs and parts to the insured, and not to W. The High Court upheld W and V’s appeal, but the Court of Appeal held that the sole purpose was to achieve a tax advantage and the arrangements constituted an abusive practice. The central issue in the instant appeal was whether there was a supply of services by the garages to W for the purposes of W’s business, in addition to or instead of a supply of services to the insured, on which W could claim deduction of input VAT.

HMRC contended that it was a classic example of third party consideration as the economic reality was that the insured vehicle owner was the person to whom the supply of services was made by the garage, and that the insurer, or claims handler, was obliged to pay for those services.

In the Supreme Court, their Lordships considered that under the insurance contract, N undertook to the insured that it would meet the cost of the repair; it did not undertake to repair the vehicle. If N was to perform the contract by paying the garage, that would be an example of third party consideration within the meaning of Directive 77/388 Article 11(A)(1)(a), namely, consideration for a supply which the person providing the consideration did not themselves receive, but which they paid for.

In the instant circumstances, it was in order to discharge an obligation owed to the recipient of the supply. On that hypothesis, the garage supplied a service to the insured by repairing their vehicles, and N met the cost of that supply because it had undertaken to do so, and had received premiums from the insured as consideration for that undertaking.

The cost of the repair was the cover; it was not the consideration for a service provided to the insurer. The interposition of insurers did not alter that position. Nor, on the facts found by the tribunal, did the interposition of W. In economic reality, when W paid for the repairs, it was merely discharging the insurer’s obligation to the insured to pay for the repairs. Its role was to act as the paymaster of costs which fell within the cover provided by the policies, and its interposition did not transmute the discharge of the insurer’s obligation to the insured into the consideration for a service provider to the reinsurer’s agent. That conclusion was supported by a number of considerations: first, the CJEC had consistently stressed that the deduction of input tax was meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of its economic activities, Revenue and Customs Commissioners v Loyalty Management UK Limited 9, was considered. In the instance case, W did not bear the burden of the VAT paid to the garage; it paid the garage out of the float provided by V, and its profit or loss was unaffected by the VAT. Second, the consequence of the deduction on input VAT was that the tax was charged, at each stage in the production and distribution process, only on the added value, and was ultimately borne only by the final consumer. W added no value in respect of its supply of “footing the bill”; its inputs and outputs in relation to that aspect of the business were identical. The final consumer of the services supplied by the garage was the insured, and VAT was borne on that supply. W did not obtain anything in return for the payment to the garage which was used for the purposes of its business. On the contrary, its business was the making of that payment.

Comment

The decision confirms that “economic reality” analysis can be invoked by HMRC to combat VAT avoidance schemes.

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