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Insurer had no fixed establishment in UK for VAT, says Tax Tribunal

A Gibraltar based insurance underwriter which supplied insurance to UK customers through a UK based broker, did not have a fixed establishment in the UK for VAT purposes,  the First Tier Tribunal has decided, in a case involving Hastings Insurance.19 Feb 2018

Hastings provided broking, underwriting support and claims handling services to Advantage, an associated company which was based in Gibraltar. Advantage underwrote UK car and motorcycle insurance, supplying insurance to UK customers through Hastings.

Hastings sought to recover its input VAT attributable to the services it provided to Advantage on the basis that the supplies were made to a taxable person belonging outside the EU. Gibraltar is not an EU member state for VAT purposes.

Hastings could only recover the VAT if it could show that Advantage did not 'belong' in the UK. The UK place of supply rules provide that a person belongs where it has a business establishment; or if different, where it has a fixed establishment. If it has more than one establishment, it belongs where the establishment is located which is most directly concerned with the supply.

Both HMRC and Hastings accepted that Advantage had a business establishment in Gibraltar. However, HMRC argued that the Hastings' UK personnel and technical resources which were used to sell the insurance constituted a fixed establishment of Advantage in the UK which was more directly concerned with the supply of insurance.  Hastings argued that Advantage had no fixed establishment in the UK.

The Tribunal decided that Hastings's UK resources did not comprise a fixed establishment of Advantage in the UK. It decided that even if it was wrong on this point, Advantage’s business establishment in Gibraltar would still be where it belonged for VAT purposes. 

The Tribunal considered the arrangements between the parties in detail. It found that the functions required to operate an insurance business were split between the two entities.  Advantage acted as the insurer which entered into policies with customers through Hastings and met claims.  As the insurer Advantage decided what risks to insure for what risk price, set the reserving policy and claims handling guidelines and dealt with large loss claims, reinsurance, regulation and accounting, investment of funds received and the making of actuarial reserves and auditing.  The Tribunal said that it was clear that Advantage managed its own business and was the decision maker on all of these functions albeit that, as regards underwriting and claims handling, it did so with support provided by Hastings.

Hastings dealt with the customer facing side of the business selling insurance policies on behalf of Advantage and handling subsequent claims within the claims guidelines as regards small claims and otherwise subject to direction by Advantage.  It also provided technical and analytical support services to enable Advantage to carry out its underwriting function. 

HMRC argued that through the contractual arrangements Advantage retained sufficient control of Hastings's resources on an on-going basis for Hastings to comprise Advantage's fixed establishment.

The Tribunal said that the fact that parties operate in close-cooperation as part of a single economic activity is not of itself determinative of whether one forms a fixed establishment of the other. It said that common ownership may be a factor to be taken into account, as indicating dependence, but it is not conclusive. 

The Tribunal found that although Hastings and Advantage were related companies, the services agreements were negotiated on an arm’s length basis and the division of functions between the two businesses was set commercially as though the parties were independent of each other.

The First Tier Tribunal also decided that Hastings' resources were not available to Advantage with a sufficient degree of permanence for them to constitute its fixed establishment.

"Whatever view of the FE [fixed establishment] test is taken, it is clearly not envisaged that the resources of an entity comprise a FE of another legal (albeit related) entity as a result of the provision of services under commercially agreed contractual arrangements where, in fact, each entity operates a separate business with its own commercial imperatives and financial risk taking," Judge Harriet Morgan said. 

The tribunal also considered that the resource available to Advantage through the arrangements with Hastings was not sufficient for making insurance supplies on an independent basis.

"In a business involving on-going supplies of insurance services, clearly the supplies could not be made without the resources to sell and administer the policies.  However, in our view, equally, such supplies could not be made without the resources which provide the ability actually to underwrite the risk or, in other words, to provide the insurance cover," Judge Morgan said. 

She said it was Advantage which, as the insurer, using its own staff and resources in Gibraltar, provided the insurance product and the insurance cover.  It decided what risks to insure for what risk price and, having written the policy, assumed liability and paid out the funds on settlement of a claim under the policy. 

"[Hastings's] resources did not provide a key element of what was required for the supply of insurance services, namely, the ability to decide what/who to cover for what risk price.  Without that essential function [Advantage] could not have sold insurance cover to UK customers at all. There would not have been a product for it to sell," Judge Morgan said.

On this basis the Tribunal held that Advantage did not 'belong' in the UK for VAT purposes.