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Such policies were issued by an English company, NIG. NIG reinsured its liabilities with a Gibraltar based company, Cristal, which in turn surrendered 85% of the reinsurance to another Gibraltar company, Viscount. Viscount contracted with an English company, WHA to instruct garages to carry out works under the policies and to pay for those works.
The garage would issue an invoice to WHA. WHA rendered an invoice to Viscount which WHA said was VAT exempt and, assuming this was correct, it could then claim repayment of input tax. Alternatively, if VAT was chargeable, Viscount argued that it was entitled to recover the VAT that it had to pay on the invoices.
In 2004 ([2004] STC 1081), the Court of Appeal held that scheme worked. HMRC now raised further arguments alleging the artificiality of the scheme, saying that it amounted to an abuse of rights and that it should be redefined as abusive practice.
The Court of Appeal said that from the point of view of fiscal neutrality, an insurer who provided VAT exempt insurance services in the EU could not recover input tax attributable to those services. The effect of the scheme, according to the decision in 2004, was that the input tax was recoverable, but the scheme was contrary to the Sixth Directive.
It was, furthermore, the sole purpose of the scheme, particularly the retrocession arrangement between Crystal and Viscount and the creation of the claims handling chain so as to include Viscount, to minimise any VAT liability by enabling the input tax paid by WHA to be reclaimed by Viscount.
Thus the two requirements for the establishment of abuse laid down in Halifax v CCE (Case C-255/02) [2006] STC 919 had been satisfied and there was no reason why the scheme should not be redefined.
HMRC's appeal was allowed.
WHA Ltd and another v CRC, Court of Appeal, 17 July 2007
