WHA Ltd & Anor v Revenue and Customs [2013] UKSC 24

A VAT avoidance scheme ("Project C") routed motor breakdown repair payments through a claims handler, WHA, to recover input tax. The Supreme Court held the garages supplied repair services to the insured car owners, not to WHA, whose role was merely to pay. Appeal dismissed.

Facts

The appeal concerned the effectiveness of a VAT planning scheme known as “Project C”, devised for a group of companies engaged in motor breakdown insurance (“MBI”). Because insurance is an exempt supply, MBI insurers cannot deduct the VAT charged by garages on repairs as input tax, and must instead absorb it in premiums. This was perceived as placing insurers at a competitive disadvantage to car dealers offering uninsured warranties, a disadvantage exacerbated by the imposition of insurance premium tax on MBI premiums in 1997.

The National Insurance and Guarantee Corporation plc (“NIG”) underwrote MBI policies marketed by Warranty Holdings Ltd, part of the Oriel group. Project C interposed a chain of Gibraltar reinsurers — Crystal Reinsurance Company Ltd (100% reinsurance of the NIG risk) and Viscount Reinsurance Company Ltd (85% retroceded) — together with a UK claims handler, WHA Ltd. The first strand of the scheme relied on legislation giving credit for input tax incurred in making specified supplies (including claims handling) to non-EU recipients: if the garages supplied repair services to WHA, and WHA made exempt onward supplies of claims handling to Viscount in Gibraltar, WHA could recover the VAT charged by the garages. The second, fall-back, strand relied on UK legislation said to allow Viscount to recover VAT charged to it by WHA, provided Viscount itself made supplies to a non-EU recipient (Crystal).

The sample policy examined by the court showed that NIG undertook to meet the cost of repairs, not to carry out repairs. The insured chose the garage, authorised the investigatory and repair work, and remained liable for any cost exceeding the policy limits. WHA was described in the policy as appointed “to deal with all matters relating to claims handling and settlement, including payment, of claims”. Under its agreement with Viscount, WHA was paid the cost of claims plus £17.60 per claim settled and paid, and met claims out of a cash float of about £2.5m provided by Viscount. Provisions purporting to pass title in parts up the chain were accepted to be ineffective.

Procedural history

The VAT and Duties Tribunal rejected all three central planks of the scheme. Lloyd J in the High Court ([2003] STC 648) held that WHA received a supply from the garages and made exempt supplies to Viscount, so the first strand worked. The Court of Appeal ([2004] STC 1081) agreed that the garages supplied services to WHA, but held WHA’s onward supply was taxable, and that Viscount could recover the tax. In its final judgment ([2007] STC 1695) the Court of Appeal held the scheme abusive and reinstated the tribunal’s decision.

Issues

Four issues were identified before the Supreme Court: (1) whether the garages made a supply of repair services to WHA for the purposes of its business, as well as or instead of a supply to the insured, on which WHA could deduct input tax; (2) if so, the application of the EU law doctrine of abuse of right; (3) whether the UK legislation relied on by Viscount was ultra vires and void ab initio; and (4) whether the Commissioners could raise that ultra vires point for the first time in the Supreme Court, having regard to legitimate expectation and the tribunal’s jurisdiction. Because Lord Reed answered question (1) in the negative, the remaining issues did not arise and were not addressed.

Arguments

For WHA it was argued that the VAT system works on the basis that the person who pays for a supply within a reciprocal relationship is usually its recipient; WHA had such a relationship with the garages, paid their bills in the course of its taxable business of discharging the insurer’s liabilities using funds provided by Viscount, and, applying Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408, obtained a genuine benefit for business purposes from the repairs. Fiscal neutrality, it was said, required deduction.

The Commissioners contended that there was simply no supply to WHA capable of generating an input tax credit. They expressly did not contend that WHA was liable to account for output tax while being denied deduction. The economic reality was that the insured vehicle owner consumed the repair services and was the recipient of the supply; the insurer, or the claims handler contracted to fulfil the insurer’s obligation, merely paid — a classic case of third party consideration.

Judgment

Lord Reed delivered the only reasoned judgment, with which Lord Hope, Lord Walker, Lord Mance and Lord Carnwath agreed. The appeal was dismissed and the Court of Appeal’s decision affirmed, though for different reasons.

Lord Reed began from the principle, drawn from Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited [2013] UKSC 15, that VAT outcomes are highly fact-sensitive, that all the circumstances of the transaction must be considered, and that where a scheme operates through a construct of contractual relationships the arrangements must be viewed as a whole to determine their economic reality. The contractual position is the most useful starting point but is not conclusive.

On the contracts, the policy obliged NIG to meet the cost of repairs, not to repair; the reinsurance and claims handling agreements envisaged WHA’s role as negotiation, investigation, adjustment, settlement and payment of claims, with “no indication that WHA’s role included undertaking responsibility for the carrying out of repairs”. There was no finding that the garage undertook to WHA to carry out repairs properly or at all, while the insured authorised the work and remained liable for uncovered costs.

Lord Reed therefore identified two mistaken factual premises underlying the reasoning of Lloyd J (who had said the garage supplied WHA with “the service of repairing the insured’s car, thereby satisfying the obligation of NIG to the insured” (para 40)) and of the Court of Appeal: that the insurers were obliged to repair the car, and that WHA was obliged to Viscount to have repairs done. He added that “the fact that A’s payment of B discharges an obligation owed by A to C does not eo ipso mean that A has received a supply from B”, illustrating the point with an insurer paying for a policyholder’s dental treatment. Four of the five features relied on by Neuberger LJ required qualification or correction, including the fact that in an appreciable number of cases the insured paid the garage directly and was reimbursed.

The Court of Appeal’s further concern that, otherwise, nobody could recover the input tax was rejected as question-begging: deductibility depended on the answer to the very question in dispute, and the pre-existing position was precisely that the VAT was not deductible.

Applying the analysis, payment by NIG of a garage would be third party consideration within article 11A(1)(a) of the Sixth Directive; the breakdown is the risk and the repair cost is the cover, not consideration for a service to the insurer. Neither the reinsurers nor WHA altered that:

The interposition of WHA does not, by some alchemy, transmute the discharge of the insurer’s obligation to the insured into the consideration for a service provided to the reinsurer’s agent.

Three supporting considerations were given. WHA did not bear the burden of the VAT, paying out of Viscount’s float with its profit unaffected. WHA added no value in “footing the bill”, its inputs and outputs being identical, whereas VAT falls on added value and is ultimately borne by the final consumer — here the insured. Finally, the Redrow questions posed by Lord Hope (p 412) and Lord Millett (p 418) must be understood as requiring a realistic appreciation of the transactions, and on that basis WHA obtained nothing used for the purposes of its business: “WHA’s business was the making of the payment”. Fiscal neutrality did not assist, the Commissioners having disclaimed any output tax liability.

Implications

The decision confirms that identifying the recipient of a supply for VAT purposes requires a realistic appraisal of the economic reality of the whole set of arrangements, not merely of the contractual paper trail or of who pays the invoice. Payment by one party which discharges an obligation owed to another does not itself make the payer the recipient of a supply; it may instead be third party consideration under article 11A(1)(a).

The judgment also clarifies the reach of Redrow: Lord Millett’s “anything at all” test is not satisfied merely by showing a contractual right to require work to be done and a liability to pay for it, but must be applied with a realistic appreciation of the transaction, consistently with Aimia. Where a purported recipient neither bears the economic burden of the VAT nor adds value, that is a strong indicator that it is not receiving a supply for the purposes of its business.

For insurers, reinsurers, claims handlers and their advisers, the case demonstrates the difficulty of converting an exempt insurer’s cost of cover into deductible input tax by interposing a paymaster. It matters practically to VAT practitioners structuring claims handling arrangements and to insurers seeking to address the competitive disadvantage arising from exemption.

Two limits should be noted. First, the decision is closely tied to the terms of the policies and agreements found by the tribunal, in particular that the insurer undertook only to meet the cost of repairs and that WHA was not obliged to ensure repairs were carried out; different contractual and practical arrangements might yield a different analysis. Secondly, the Supreme Court expressly found it unnecessary to decide the abuse of rights issue, the vires of the legislation relied on by Viscount, or the legitimate expectation and jurisdiction questions, so the Court of Appeal’s abuse reasoning was neither approved nor disapproved and those points remain unresolved at this level.

Verdict: The appeal was dismissed. The Supreme Court held that the garages made no supply of repair services to WHA for the purposes of its business, so no input tax was deductible; the Court of Appeal’s decision (reinstating the tribunal’s decision) was affirmed, albeit for different reasons. The remaining issues concerning abuse of rights, the vires of the legislation relied on by Viscount, and legitimate expectation were not addressed.

Source: WHA Ltd & Anor v Revenue and Customs [2013] UKSC 24