VAT dispute: supply of insurance or insurance intermediary services?
Jan Garioch CA discusses a recent case about the VAT treatment of insurance provided to self-storage customers. The Tribunal considered the CJEU decision in Card Protection Plan.
When Safestore Limited v HMRC was heard by the First Tier Tribunal, the opposing sides rolled onto the battlefield and took up their positions. Safestore argued that it provided intermediary services to its Guernsey resident insurance captive, Assay Insurance Services Limited. It held that such a supply to a non-EU resident gave entitlement to recover, which justified a reclaim of £793,830 of underclaimed input VAT. HMRC’s counterargument was that Safestore itself supplied insurance to its UK customers. In a belt and braces approach, if that argument failed to land a fatal blow for HMRC, its subsidiary argument was that Safestore provided insurance intermediary services to a fixed establishment of Assay in the UK. Therefore, HMRC rejected the input VAT reclaim and raised an assessment for £72,615 of over recovered input VAT.
The commercial background is that Safestore stores goods for its customers in a number of depots around the country. (Prior to 1 October 2012, its supplies of storage facilities were exempt, but after that date Item 1(k) Grp 1 Sch 9 VATA rendered them taxable).
Safestore insists that stored goods are insured by the customers. Whilst commercial customers can choose their own insurer and make their own arrangements, Safestore insists that domestic customers use Assay for their insurance cover. (Assay reinsures with Royal & Sun Alliance, and it is the latter which deals with all claims, and makes payments to customers from funds provided by Assay). The insurance premium plus IPT is initially collected from customers by Safestore. Thereafter, 70% of the premium plus 100% of the IPT is passed to Assay which accounts for the IPT and submits IPT returns. The remaining 30% of the premium is retained by Safestore.
Card Protection Plan (CPP) case
The Tribunal considered the relevant legislation and case law at length. Unsurprisingly, the Card Protection Plan (CPP) case loomed large in arguments brought in this case. To recap, CPP was the holder of a block insurance policy under which its customers were insured. The ECJ held that CPP “procures for [its] customers, for payment, in its own name and on its own account… insurance cover by having recourse to an insurer. Consequently, for the purposes of VAT, there is a supply of services between [the insurer] and CPP on the one hand, and between CPP and its customers on the other. It is true that the exemptions …are to be construed strictly. However, the expression 'insurance transactions’ is broad enough to include the provision of insurance cover by a taxable person who is not himself an insurer but, in the context of a block policy, procures such cover for his customers by making use of the supplies of an insurer who assumes the risk insured.”
Safestore’s counsel approached from the angle that CPP had a cake which is shared with the insureds. He sought to distinguish Safestore, arguing that it is not a ‘cake sharer’ because it is not insured under the policy itself. Instead there is a direct contractual relationship between Safestore’s customers and Assay. Therefore, he sought to differentiate its position from a linear relationship where an insurance company has a contract with a middleman and the middleman can disseminate benefit of the contract to third parties.
The HMRC view
HMRC objected that this was a false distinction from the CPP case because CPP was not an insured person under the relevant contract either. Cardholders were added to the policy and could claim directly against the insurer, which matches how Safestore customers can claim directly against the insurer. Multiple insurance contracts are not produced in the Safestore scenario. Instead Assay produces one group policy at the start of the year and Safestore is the legal holder and it extends the benefits to its customers.
The Tribunal concluded that Safestore supplies insurance services rather than acts as an insurance intermediary. Factors which convinced them included the following. They found there was an agreement between Safestore and Assay, and that was evidenced by the fact some of the terms were of more interest to Safestore itself than to its customers. They found evidence to support that insurance cover was provided to Safestore’s customers under Safestore’s master insurance policy/open cover. Additionally, study of the reinsurance arrangements showed there was one policy of insurance under which cover would be extended to each customer to whom a confirmation of insurance cover was issued rather than a series of individual insurance contracts taken out with each Safestore customer.
The Tribunal was not shaken from its view by Safestore’s arguments that CPP provided a package of services, whilst it did not. The distinction was not persuasive, and in any event Safestore customers were sold a package of storage services plus compulsory insurance. Nor was it impressed by the argument that CPP customers received a multiple supply and did not pay a specific insurance premium. In its CPP decision the ECJ had focused on the fact CPP procured insurance under a block policy, which happened in the Safestore case too. The Tribunal regarded the terminology used (block, open cover, master or group) as immaterial.
Finally, it dismissed attempts to distinguish CPP’s promise to provide insurance to its members backed up by an enforceable contract, and concluded that Safestore’s insistence that its customers take out insurance which it had obtained from Assay on per agreed terms was not sufficiently different to result in a different VAT treatment.