Facts
Homeserve, an insurance intermediary, arranged assistance
insurance (such as plumbing and drainage cover) for homeowners. The
insurance provided cover against repairs and an emergency response
service that promised an approved engineer on site within two
hours.
Under its agreement with the insurer, Homeserve arranged and
administered the insurance policies and dealt with the payment of
premiums, renewals and complaints. The insurer provided the cover
and was responsible for contracting with a separate claims handling
company.
All the marketing materials and insurance documents were careful
to inform the homeowner that he would have a contract with the
insurer and a separate contract with Homeserve ("to arrange
and administer your policy").
The cost of the cover was stated to be "the total amount you pay
as detailed in the policy documentation, which consists of the
arrangement and administration fee of £14 and the
premium".
The issue was whether this £14 administration fee was subject to
insurance premium tax (IPT).
Insurance premium tax
Under the Finance Act 1994 (as amended by the Finance Act 1997),
IPT is charged on the receipt of premium by an insurer in
connection with a taxable insurance contract.
A premium is defined as "any payment received under the contract
by the insurer" and includes any payment "wholly or partly
referable to… cost of administration" (s. 72(1)).
This definition is widened by section 72(1A), which provides:
''Where an amount is charged to the insured by any person in
connection with a taxable insurance contract, any payment in
respect of that amount is to be regarded as a payment received
under that contract by the insurer unless … the amount is charged
under a separate contract and is identified in writing to the
insured as a separate amount so charged'' (s. 72 (1A)
(b)).
Homeserve argued that IPT should not be charged on the £14
administration fee. The fee was consideration for arranging and
administering the insurance contract. It was not a payment received
by or on behalf of the insurer and it was charged under a separate
contract identified in writing to the insured.
HMRC argued that there was no contract between Homeserve and the
homeowner. At most, there was a three-party contract between
Homeserve, the insurer and the homeowner, which could not be
described as "separate".
Decision
The tribunal held IPT was payable on the £14.
Homeserve did not merely act as the insurer's agent in arranging
the cover. It owed the homeowner a number of contractual duties
under the terms and conditions of the cover, including finding an
alternative insurer or refunding the full premium if an engineer
failed to attend an emergency within 2 hours. As a result, it
clearly gave the homeowner something in return for the £14
payment.
But in the context of IPT, this was not a "separate contract"
from the taxable insurance contract. The tribunal was satisfied
that the phrase in the Act had been specifically chosen to
emphasise that the contract had to be independent or
separable.
In this case, however, both contracts related to the same cover
and were offered as a package. One could not be created without the
other. There was considerable overlap between the services
Homeserve provided to the homeowner and those it provided to the
insurer in administering the insurance contract.
In addition, the price quoted to the homeowner was a single
price, even though the wording of the various documents repeatedly
stressed the existence of a separate contract between the homeowner
and Homeserve.
Commentary
The tribunal gave the phrase "separate contract" a special
meaning for IPT purposes. It did not merely mean "another"
contract, but one that was completely independent of the insurance
contract.
Up until now, IPT has been a relatively straightforward tax,
giving rise to few disputes. But this decision may have a
significant impact in cases where (as here) insurers have gone to
some lengths to separate the provision of insurance from the
administration of the policy to reduce their IPT bill.
