Facts
The Bank of Ireland had an arrangement with the Post Office to
sell motor insurance to Post Office customers.
To do this, it entered into a separate contract with an
intermediary, Junction, to whom it referred Post Office customers
in return for a sales-based commission. Junction acted for a panel
of insurers, including Norwich Union, who competed with each other
to quote for the business.
There was no dispute that the services provided by the bank to
Junction under this contract were insurance intermediary services
exempt from VAT under the VAT Act 1994.
Sales proved disappointing, however, so the bank decided to
"skew" the panel by appointing Norwich Union as primary insurer. On
31st March 2006, it entered into a contract with Norwich Union
under which, in return for a commission, the bank promised to
procure that Junction would give Norwich Union the opportunity to
undercut the lowest of the quotes offered by other panel
members.
The existing agreement between the bank and Junction was amended
on the same date to reflect the setting up of the skewed panel.
The new arrangement proved successful, in that not only Norwich
Union but also the other panel members wrote more business for Post
Office customers.
The exemption
Under the Sixth VAT Directive, insurance and reinsurance
transactions, including related services performed by insurance
brokers and insurance agents, are exempt from VAT.
In the UK, the VAT Act 1994 provides that the services of an
insurance intermediary are exempt if they are related to an
insurance transaction and are provided by the broker or agent in
the course of his acting in an intermediary capacity.
The services of an insurance intermediary are further defined in
the VAT Act as the bringing together of insurers and (prospective)
insureds, carrying out work preparatory to the conclusion of
insurance contracts, assisting in the administration and
performance of such contracts and the collection of premiums.
The issue was whether the arrangement between the bank and
Norwich Union was exempt from VAT or whether it fell outside the
proper scope of the intermediary exemption.
HMRC said the agreement was not for the supply of intermediary
services. It merely gave Norwich Union preferred status on the
panel in return for payment. That was a different sort of supply
and did not qualify for the VAT exemption.
The bank argued that it was providing exactly the same service
as under the previous arrangement. The Norwich Union contract
simply altered the way in which insurance intermediation services
were already being provided under the bank's contract with
Junction.
Decision
The Tribunal held that commissions paid by Norwich Union to the
bank were VAT exempt.
The relationships between the various parties were fundamentally
changed by the Norwich Union contract. Insurers on the panel were
no longer competing for business on the same terms. But the bank
was still bringing about the writing of contracts of insurance,
albeit indirectly and with Norwich Union being given an
advantage.
The Tribunal concluded that it was not possible to regard the
supplies made under the Norwich Union contract in isolation from
the original contract between the bank and Junction. There
was sufficient nexus between the bank and the ultimate customer,
via Junction, to satisfy the requirement for an
exemption.
If it was wrong to find that the Norwich Union contract was part
and parcel of the same principal supply of insurance intermediation
services, the Tribunal considered it was ancillary to that
principal service and so was also exempt.
Commentary
In 2005, the European Court of Justice in the Arthur Andersen
case held that, for the purposes of the VAT exemption, an insurance
agent must be instrumental in bringing the parties together. HMRC
postponed applying the decision in the UK until the European
Commission has completed its ongoing review of VAT and financial
services.
Nevertheless, as this case shows, HMRC is clearly not suspending
analysis of VAT exemption issues while the European review is
underway and it continues to review closely referral or
intermediary arrangements which are outside the "norm". Care still
needs to be taken on VAT in this area.
The way in which the Tribunal looked at the contractual
provisions to support its approach also demonstrates the continued
importance of making sure the contract reflects the intended VAT
outcome.
