Correct And Straightforward

RICHARD CURTIS reports a VAT tribunal decision on the scope of the exemption for insurance 'related services'.

'MEMBER STATES SHALL exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse.' How many practitioners are now thinking: 'correct and straightforward', if only tax were that simple I could go home on time? In fact, would there be any work left for me to do? I could phone my insurance broker, cash in my pension plan, use the lump sum to buy that boat, go back to that island in the Mediterranean and live off my annuity and the odd fishing charter. But, for better or worse, tax (and life) is not that simple and the day that you buy that boat would be even further away if your insurance broker had to charge VAT. This brings us neatly back to the wording of Article 13B of the EC Sixth Directive ('Other exemptions'), which then continues to extend the exemption to '(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents'.

Winterthur Life UK Limited was the representative member of a VAT group, which includes Personal Pension Management Limited (referred to here as 'the management company'). This management company was a specialist provider of third-party administration services to companies that wish to provide self-administered personal pensions, but do not have, or want, the facilities to deal with these 'in house'. Scottish Equitable plc operated such a pension scheme, 'Reflex Control', and the administration and performance of the self-invested part of the scheme was provided by the management company to the pension scheme members (with their full knowledge) on behalf of Scottish Equitable. The management company's functions included:

• carrying out data and investment administration;
• dealing with queries from members;
• processing Equitable's application forms and other paperwork;
• preparing Inland Revenue returns;
• record-keeping;
• recording and banking monies (premiums, dividends, tax reclaims) into an account of which it was an authorised signatory; and
• operating a helpline, which it answered as Scottish Equitable.

On the retirement, death or transfer of a member, the management company dealt with obtaining authorities, reconciling and liquidating fund assets and paying these out as directed.

Scottish Equitable had, naturally, treated its supply of the pension scheme to its customers as exempt from VAT under section 31 of, and Item 1 of Group 2 of Schedule 9 to, the VAT Act 1994. However, with regard to the management company, Customs advised that it should charge VAT on the supply of services to Scottish Equitable on the basis that these did not fall within the exemptions afforded by either Group 2 of Schedule 9 (insurance services) or Group 5 of Schedule 9 (financial services). Winterthur appealed, arguing that the services were exempt as agency services in connection with the supply of insurance. In support, it argued that Item 4 of Group 2 of Schedule 9 to the VAT Act 1994, read in the light of Article 13B(a), should apply.

Item 4 provides exemption for 'The provision by an insurance broker or insurance agent of any of the services of an insurance intermediary in a case where those services:

• are related … to any such provision of insurance or reinsurance …; and
• are provided by that broker or agent in the course of his acting in an intermediary capacity.

Article 13B(a) includes in the exemption 'insurance and reinsurance transactions including related services performed by insurance brokers and agents'.

So, to be eligible for this exemption, a business had to show that:

• it was an insurance agent or broker (Item 4 of Group 2);
• it provided the services of an 'insurance intermediary' (Note 1 of Group 2);
• its services related to the provision of insurance (Item 4(a) of Group 2); and
• it acted in an 'intermediary capacity' between the insurance provider and the insured (Note 2 of Group 2).

Was there 'insurance'?

Customs did agree with Winterthur that the Reflex Control pension schemes qualified as policies of 'insurance' as (quoting from the finding in Fuji Finance Incorporated v Aetna Life Insurance Co Ltd & Another [1996] 3 WLR 871) 'the essence of life assurance was the right to benefits related to life of death'. However, they did not accept that, as a consequence, the management company's separate supply of the non-insured element of the scheme was also exempt. Customs referred to Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] STC 270, where the European Court of Justice held that 'the essentials of an insurance transaction are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of the materialisation of the risk covered, with the service agreed when the contract was concluded'.

The 'intermediary capacity'

The management company argued that it was acting in an 'intermediary capacity' as it acted on behalf of Scottish Equitable with the pension scheme members and it was immaterial that it only acted with regard to the self-invested part of the scheme.

Customs argued that this condition was not fulfilled because:

• they did not agree that the management company was an agent (as argued above); and
• there was no 'close nexus' between the service supplied and the insurance transaction and they returned to the argument that the company was providing a separate and distinct supply.

Services related to the provision of insurance

The case of Century Life was referred to. It noted that the Court did not distinguish between insurance transactions and compliance services stating that 'compliance with the rules … goes to the very heart of insurance business'. Upholding that decision, the Court of Appeal agreed with the reasoning of Mr Justice Moses that:

• pensions were 'insurance transactions';
• Century Life's services related to those transactions;
• Century Life was an insurance agent, so the services were supplied by an insurance agent; and
• the exemption therefore applied.

Consequently, if a pensions review could be a related service, then the management company's assistance in the administration and performance of contracts must also be a related service. It is interesting to note the comments of Mr Justice Jacob in the Court of Appeal with regard to the confusing terminology of the United Kingdom legislation: 'One wonders why a (United Kingdom) draftsman implementing a directive or other international treaty provides his own elaborate language attempting to set out what the implemented law is supposed to be. I have commented on the unnecessary complications that this process causes'.

The tribunal's decision

The tribunal did not think that a pension policy contract should be dissected into its constituent parts; instead, the policy should be looked at as a whole. It supported this argument by saying that, if it had wished, Scottish Equitable could have carried out the administration itself, but chose instead to entrust this to the management company. Furthermore, this approach was supported by the policy documentation and, in its administration role, the company was in fact acting as agent to both Scottish Equitable and the scheme members.

The tribunal also agreed with the appellant's argument concerning related services. However, these are only exempt if performed by an insurance agent or broker. The tribunal agreed that the management company was acting as an agent and for clarification it also looked at Council Directive 77/92/EEC, by which assisting in the administration and performance of insurance contracts is an activity of agents and brokers. The company not only had 'permanent authority', but was 'closely concerned' with the administration of part of the insurance transaction, i.e. the self-administered scheme. While agreeing that exemptions must be narrowly construed, the tribunal had no hesitation in confirming that the services of the company clearly came within Article 13B(a).

Looking then at the United Kingdom legislation, the tribunal noted that Note 1(c) of Group 2 of Schedule 9 does include, in the services of an insurance intermediary, 'the provision of assistance in the administration and performance of such contracts including the handling of claims' and this must fall within the Article 13B(a) exemption for related services.

The tribunal could also not say, with reference to Note 2 of Group 2 that an agent who gives advice that does not lead to a contract between the individual and the insurance company is acting in any way less as an intermediary, as compared to when advice does lead to a contract.

Finally, the tribunal held that the pension plan was a single exempt supply of insurance and, under both Article 13B(a) and Item 4 of Group 2 of Schedule 9, the management company's services to Scottish Equitable were an exempt supply.

The company's appeal was therefore allowed.

(Winterthur Life UK Limited (17572).)

Commentary

So, with little thanks to the wording of the United Kingdom legislation, a satisfactory conclusion for Winterthur Life and Personal Pension Management Limited was reached. It was satisfactory also, one presumes, for the policyholders of Scottish Equitable (and other companies) who would, no doubt, have ultimately had to bear the cost of any VAT charged, especially as it is understood that Customs will not be lodging an appeal against this decision. Their (our) hopes of a happy retirement in the sun are, perhaps, now fractionally closer.

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