Damage limitation is often the name of the game. It can sometimes go too far, though, and Revenue & Customs Brief 59/2009 of 21 September may be a case in point.
This outlined the HMRC position following the High Court judgment in InsuranceWide.com Services Ltd v R & C Commrs; R & C Commrs v Trader Media Group Ltd  BVC 412 (see issue 97 of CCH VAT NEWS at p. 344), a joint appeal over the treatment of a certain type of insurance introductory services, which the taxpayers succeeded in arguing were VAT-exempt. The matter is going further on appeal but, in the meantime, the point to note is that HMRC say they don’t see the judgment as applying, in any case, to other introductory services, notably those relating to finance. Even if, in other respects, they are on ‘all fours’, there are differences in the corresponding law.
Is this wishful thinking, I wonder? It may just be trying to curb some people’s legitimate expectations. See what you think.
A little of the background
I don’t propose to rehearse all the details of the InsuranceWide/Trader Media Group case. Whether or not those taxpayers will eventually succeed is not what this article is about. That will ultimately be settled by another Court and is not really the point.
Suffice it to say, both companies provided broadly similar services.
Trader Media, a publishing company, specialised in classified ads for motor vehicles in magazines like Auto Trader. It also had an internet website, which did the same. This had a number of features, one of which provided details of finance, insurance and other products. For insurance products, there was what they called an ‘Insurance Centre’, which people browsing the site could use to get quotes for car insurance from a panel of selected insurers.
In 2005 Trader Media set out to find a partner to provide and sell these products, eventually linking up with a company called BISL. BISL took over the running of the Insurance Centre, with initial and continuing input by Trader Media on things like what customers were asked and the panel of insurers. How it worked was that, if a customer clicked the Insurance Centre link on the Auto Trader web page, he or she would be automatically transferred to the centre run by BISL. Questions were then asked about the person’s insurance requirements and, if an insurance contract resulted between the customer and one of the panel of insurers, Trader Media received a commission.
InsuranceWide’s position was, in many respects, the same, although the facts were very different. They started out with an agreement with Freeserve (the internet service supplier, now Orange), whereby InsuranceWide was appointed its sole designated provider of insurance products. Would-be customers for insurance were passed via Freeserve, initially, to a company known as Cox, which owned Equity Red Star, an underwriting syndicate for motor and household business. There was a panel of insurers to which InsuranceWide passed customer particulars and, if an insurance contract resulted, InsuranceWide, like Trader Media, got a commission.
Most of InsuranceWide’s income in fact came from these insurance commissions, although it also received income from advertisers on its website, which it accepted was taxable at the standard rate.
Now this may strike a chord. It was accepted that InsuranceWide didn’t have authority to bind Cox; nor did it, at any stage, handle claims, collect premiums or prepare insurance policies. It just didn’t have the staff to deal with such things. Also, in contrast with Trader Media, its terms and conditions said it accepted no responsibility whatsoever for the insurance provider’s websites; it didn’t represent, warrant or endorse the suitability of any insurance products or services – nor the accuracy or reliability of information provided. As if to underline its position even more, the terms and conditions then made it clear that the company didn’t sell insurance or enter into insurance contracts, was not an insurance company, broker or intermediary and didn’t act as agent for the customer or for the insurer. They were just a referral service.
Nonetheless, InsuranceWide did play a more active role in setting up, maintaining and developing the insurance business than was the case with Trader Media.
In short, as HMRC put it, InsuranceWide had a comparison website providing ‘click thru’ services to insurer or broker websites; Trader Media provided ‘click thru’ services from its Auto Trader car auction site to a third party co-branded broker website.
Both taxpayers had argued before the tribunal that the commissions they got from insurers were exempt. In the event, Trader Media lost the first round, but InsuranceWide didn’t. However, both later succeeded when their joint action came before the Court.
The technical issues in domestic law
I said earlier that the point of what HMRC say in their Revenue & Customs Brief is that there are differences in the wording in the law itself. Essentially, I think this means UK law, because, although there are differences in the wording when it comes to the directives, I suspect these may be more apparent than real. I will come back to these shortly, but, in the meantime, I want to start by looking at what’s in the VAT Act.
The exemptions on which the taxpayers relied are found in UK law in Sch. 9, Grp. 2 of VATA 1994. Item 4 of that Group gives, so far as intermediary services are concerned, exemption for:
‘4. The provision by an insurance broker or insurance agent of any of the services of an insurance intermediary in a case in which those services–
(a) are related (whether or not a contract of insurance or reinsurance is finally concluded) to an insurance transaction or a reinsurance transaction; and
(b) are provided by that broker or agent in the course of his acting in an intermediary capacity.’
All very straightforward, but, as readers will know, you then have statutory Notes, which, in this case, qualify all this by saying:
‘(1) For the purposes of item 4 services are services of an insurance intermediary if they fall within any of the following paragraphs:
(a) the bringing together, with a view to the insurance or reinsurance of risks of–
(i) persons who are or may be seeking insurance or reinsurance, and
(ii) persons who provide insurance or reinsurance;
(b) the carrying out of work preparatory to the conclusion of contracts of insurance or reinsurance;
(c) the provision of assistance in the administration and performance of such contracts, including the handling of claims;
(d) the collection of premiums.
(2) For the purposes of item 4 an insurance broker or insurance agent is acting “in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries, between–
(a) a person who provides insurance or reinsurance, and
(b) a person who is or may be seeking insurance or reinsurance or is an insured person…
(7) Item 4 does not include–
(a) the supply of any market research, product design, advertising, promotional or similar services; or
(b) the collection, collation and provision of information for use in connection with market research, product design, advertising, promotional or similar activities.’
Now, from what I said earlier, it’s clear that neither Trader Media nor InsuranceWide were insurance brokers or insurance agents as ‘the man on the Clapham omnibus’ would recognise. However, they were accepted by the Court as being intermediaries for the purposes of these provisions. Following the opening words of Note (1), therefore, their services were exempt if they fell within any of the descriptions in (a) to (d) which followed. It was not the case that they had to come within all of them; just coming within one was enough.
Herein, then, lies the rub. The corresponding provisions in the case of finance are not quite the same.
So what is there about finance, then?
Well, the finance provisions in Schedule 9 are found in Group 5. There are currently nine items in the Group detailing the different types of financial supplies, but I won’t bore you by listing them all. Suffice it to say, the relevant one for the purposes of this article is item 5. This reads:
‘5. The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity.’
Again, you have to look at the statutory Notes:
‘(5) For the purposes of item 5 “intermediary services” consist of bringing together, with a view to the provision of financial services–
(a) persons who are or may be seeking to receive financial services, and
(b) persons who provide financial services,
together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities.
(5A) For the purposes of item 5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary, or one of the intermediaries, between–
(a) a person who provides financial services, and
(b) a person who is or may be seeking to receive financial services.
(5B) For the purposes of notes (5) and (5A) “financial services” means the carrying out of any transaction falling within item 1, 2, 3, 4 or 6.’
At first glance, these words in the statutory Notes look to have much the same effect as those for insurance in Group 2 set out earlier. However, note the subtle difference. In this case, the services:
- not only have to consist of bringing together the customer and the supplier;
- they also have to be provided together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts.
Thus, it’s not a multiple choice or an either/or situation at all. And that’s where I suspect HMRC draw the distinction because they say a key aspect of the decision in InsuranceWide/Trader Media Group was the fact that UK VAT insurance law allows exemption for businesses that are either bringing together the parties or carrying out work preparatory. For finance, you need to do both.
But is that the right approach?
Now let’s look at the directives
At the end of the day, of course, the deciding factor will be what the relevant directive says. Domestic law is subordinate and, if the effect of the directive isn’t properly implemented, the directive will usually prevail.
What this means is that the directive has direct effect and can, in appropriate cases, supplant domestic law if, for example, the taxpayer is otherwise disadvantaged. And this is where my point on legitimate expectation comes in.
The exemptions we are looking at are those currently found in art. 135 of Directive 2006/112 (previously, art. 13(B) of the 6th Directive, Directive 77/388). Skipping the bits that aren’t especially relevant in the context of what we’re talking about, what this says is:
‘(1) Member States shall exempt the following transactions:
(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;
(b) the granting and the negotiation of credit and the management of credit by the person granting it;
(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
(e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest;
(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);
(g) the management of special investment funds as defined by Member States;’
The wording on insurance is, of course, even more obviously different from that on finance that we have in our domestic law. However, that’s not really a problem, it seems to me. If you look at art. 135(1)(d), (e) and (f), you will see they begin with the words ‘transactions, including negotiation…’. And therein, I think, lies the key.
Neither Directive, as it happens, contains any definition of the words insurance brokers and insurance agents. When it came to it, the Court in the InsuranceWide/Trader Media Group case therefore sought the nearest approximation to a definition of those words in EU law from Council Directive 77/92/EEC of 13 December 1976. This was made for the purpose of regulating the freedom of establishment throughout the EU of professions like insurance brokers and insurance agents and art. 2 of that directive provides:
1. This Directive shall apply to the following activities falling within ex ISIC Group 630 in Annex III to the General Programme for the abolition of restrictions on freedom of establishment:
(a) professional activities of persons who acting with complete freedom as to their choice of undertaking, bring together, with a view to the insurance or reinsurance of risks, persons seeking insurance or reinsurance and insurance or reinsurance undertakings, carry out work preparatory to the conclusion of contracts of insurance or reinsurance and, where appropriate, assist in the administration and performance of such contracts, in particular in the event of a claim …
(b) professional activities of persons instructed under one or more contracts or empowered to act in the name and on behalf of, or solely on behalf of, one or more insurance undertakings in introducing, proposing and carrying out work, preparatory to the conclusion of, or in concluding, contracts of insurance, or in assisting in the administration and performance of such contracts, in particular in the event of a claim
(c) activities of persons other than those referred to in (a) …who, acting on behalf of such persons, among other things carry out introductory work, introduce insurance contracts or collect premiums,’
Thus, all in all, we’re looking at something not so very different from what we have in Group 2 of Schedule 9, which I summarised earlier – in fact, provisions on which, as I recall, the wording of the Group was based.
The Court in InsuranceWide/Trader Media also drew on Directive 2002/92EC for guidance on the meaning of insurance mediation, which was defined by art. 2 as:
‘… the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts in particular in the event of a claim.’
You will note, of course, that nothing in all of this suggests that the intermediary must do anything other than fit into one of several categories.
Now, going back to what I said about the corresponding exemption for finance, and looking at art. 135(1)(d), (e) and (f), the words ‘transactions, including negotiation…’ must then have some significance, must they not? They can only, surely, indicate that there must be a range of activities within which the service of the intermediary can fall – a range not dissimilar, perhaps, to the range of options for insurance intermediaries? It also shows it’s not a case of all or nothing.
And the future?
Well things aren’t cast in tablets of stone and changes are afoot at Community level for the treatment of insurance and finance. Much of this is, of course, tied up with the debate on outsourcing following the Skandia, SDC and Arthur Andersen cases.
The original draft of the relevant proposed new Regulation read, emphasis added:
1. For the purposes of point (9) of Article 135a of Directive 2006/112/EC, an activity shall constitute a distinct act of mediation at least where one or more of the following conditions is fulfilled:
(a) the intermediary has the authority to bind the supplier or the customer of the exempt insurance or financial service;
(b) the activity may result in the creation, continuation, alteration or extinction of parties’ rights and obligations in respect of an exempt insurance or financial service;’
This thus gave a range of possibilities. The ability to result in a change to the legal and financial situation was clearly important, but, overall, it was pretty much like the rules we have in the UK on insurance. The latest version, however, contains the words:
‘“Intermediation in insurance and financial transactions” means a distinct act of mediation rendered by a third party who has the authority to bind the supplier or the customer of the exempt service and whose purpose is to do what is necessary in order for the parties to enter into, renew, alter or terminate a contract in insurance or financial transactions as referred to in points (a) to (i).’
Having the authority to bind the supplier or the customer is something new, perhaps, but I suspect that may not be the end result. Only time will tell and, for now, the Business Brief seems to have taken things just a bit too far.