Case analysis – WHA Limited v Her Majesty’s Revenue and Customs

Introduction

This case involved a group of companies involved in motor breakdown insurance (“MBI”) and the essential question was whether, in circumstances where the repairers repaired the insured’s vehicle and WHA (a group entity) paid the repairer (or reimbursed the insured who had paid the repairer), there was a supply of repair services by the repairers to WHA instead of, or as well as, a supply to the insured.

This decision provides an illustration of how the Courts in the UK seek to characterise the VAT implications of a transaction by reference to the “economic reality” of the transaction. The Supreme Court observed that the contractual position is “the most useful starting point” but is not conclusive of the taxable supplies being made between the participants in the arrangements.

The position in Australia, after the decision of the High Court in Qantas is not so clear. In that case, the High Court focused on the terms of the contract between Qantas and its customers and expressly rejected the relevance of concepts such as the “essential purpose” of the transaction.

The facts

Before outlining the facts, it is helpful to provide some background as to why the arrangement was entered into.

The supply of insurance is exempt (or input taxed in the Australian context). Accordingly, insurers do not charge VAT on its premiums but cannot deduct credits with respect of costs incurred. In the context of MBI insurers, these costs included the amounts paid for the repair of vehicles, which are either paid directly to the garage or to reimburse the insured for the costs paid to the garage. The MBI insurer cannot recover credits for those amounts.

The inability to recover credits was seen by MBI insurers as placing them at a competitive disadvantage relative to other businesses, such as car dealers offering uninsured warranties, which were not exempt (meaning that credits could be claimed). The purpose of the arrangement was to redress that competitive advantage by enabling credits to be recovered from the costs of repairs.

The previous arrangement can be described as follows:

  • NIG was a UK insurer, which had underwritten MBI policies for many years. The MBI policies were sold by another UK company, Warranty, which was a member of the Oriel group of companies. Warranty was appointed by NIG to handle all claims made under the policies, and Warranty paid the costs of the repairs but could not recover credits on those payments.
  • NIG reinsured its risks under policies with Practical, a Gibraltar based reinsurer which was a member of the Oriel group.

The arrangement can be described as follows:

  • WHA, a UK member of the Oriel group, supplied claims handling services to Viscount, a Gibraltar based member of the group. Provided (1) the garages made supplies of labour and parts to WHA (and not, as previously, to the insured) and invoiced WHA for those supplies, (2) WHA then invoiced Viscount for claims handling services, and (3) the invoice covered the amounts invoiced by the garages, WHA would be entitled to recover credits on the amounts charged by the garage (as the recipient of the repair services), and would not have to charge VAT on its onward supply of claims handling services to Viscount (because Viscount was a non-resident).

The history of the proceedings and the issues in dispute on appeal

The matter has a very long history, with a decision of the Tribunal in 2002, some 11 years prior to the decision of the Supreme Court. During this period there were two decisions of the Court of Appeal ((2004 STC 1081) and ((2007) STC 1695).

The appeal before the Supreme Court involved a number of issues, but the judgment only dealt with the following issue (on the basis that it found against the taxpayer, so the other issues fell away). That issue was described as follows:

“Is there a supply of repair services for the purposes of WHA’s business by the garages to WHA, as well as or instead of a supply of services to the insured, on which WHA may claim deduction of input tax?”

On this issue, the Tribunal found that the garages made supplies of repairs and parts to the insured, not to WHA. The High Court found that the garages made a supply to the insured, but also to WHA, being the discharge of its obligations to Viscount. The Court of Appeal agreed.

The Supreme Court unanimously found that there was no supply of repair services to WHA. Rather, the payments by WHA were third party consideration for the supply of repair services to the insured.

Discussion of the principles

The Court noted its recent observation (in Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited [2013] UKSC 15 – my analysis of that decision can be accessed here) that:

“…decisions about the application of the VAT system are highly dependent upon the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another. It is therefore necessary to begin by considering carefully the facts of the present case.

The Court also made the following observation with regards to the scope of the enquiry (emphasis added):

“As was also noted in the Aimia case at para 38, the case-law of the Court of Justice indicates that, when determining the relevant supply in which a taxable person engages, regard must be had to all the circumstances in which the transaction in question takes place. Furthermore, as Lord Walker explained in Aimia at paras 114-115, in cases where a scheme operates through a construct of contractual relationships, as in the present case, it is necessary to look at the matter as a whole in order to determine the economic reality. Accordingly, although the transaction of particular importance is that between the garage and WHA, it has to be understood in the wider context of the arrangements between the insured, NIG, Crystal, Viscount and WHA and the garage.”

The underlined words are  interesting, from an Australian perspective. In Qantas, the Full Federal Court based its decision on the finding that “the relevant supply” was the supply of air travel (ie, the flight). On appeal, the High Court rejected that argument and looked to whether, having regards to the terms of the Conditions of Carriage (ie, the contract between Qantas and the passenger). Further, the Commissioner’s written submissions to the High Court argued that there was no concept of “relevant supply” in the GST Act.

The arrangements

Importantly, the Court observed that the contractual position was not conclusive of the taxable supplies being made as between the various participants in the arrangements. However, it was seen as the most useful starting point. Having regard to those arrangements, the Court found that the agreements were consistent in envisaging the role of WHA as encompassing the negotiation, investigation, adjustment, settlement and payment of claims. However, there was no indication that WHA’s role included undertaking responsibility for the carrying out of repairs.

With regards to the arrangement between WHA and the garages, the Court noted that WHA issued a “claims procedure” leaflet which required repairers to take certain steps (including that WHA pay the garage). However, the evidence was that in a number of cases this procedure was not followed and the insured paid the garage and WHA reimbursed the insured. While there appears to have been an agreement between WHA and the garages that WHA agreed to pay for the work in so far as it was covered by the policy, there was no finding made that the garage undertook to WHA to carry out repairs properly or at all, or that any steps were taken by WHA to check whether repairs had been carried out properly or at all. In this context, the Court observed that the High Court and the Court of Appeal had proceeded on the mistaken premise that Viscount had contracted with WHA to carry out the works required to be effected under the policies.

As between the insured and the garage, there was an agreement under which the insured authorised the garage to carry out the necessary investigatory work and agreed to pay for all work carried out by the garage in so far as it was not covered by the policy. Also, the insured authorised the garage to carry out the repairs.

The decision

The Court noted that under the contract of insurance, NIG undertook to the insured that it would meet the cost of repair – NIG did not undertake to repair the vehicle. In this context, if NIG were to perform its contact by paying the repair bill, it would be an example of third party consideration for a supply – meaning consideration for a supply which the person providing the consideration does not himself receive, but which he pays for, in this example, to discharge an obligation owed to the recipient of the supply.

The interposition of reinsurers did not change this position, nor did the imposition of WHA. In economic reality, when WHA pays for the repairs it merely discharges NIG’s obligation to the insured to pay for the repaid. As noted by the Court:

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

The Court observed that this conclusion was supported by a number of considerations:

  • The deduction of input tax is meant to relieve the trader entirely of the burden of VAT paid in the course of all its economic activities. In this appeal, WHA did not bear the burden of VAT paid to the garage. This was because WHA paid the money out of a float provided by Viscount, and its profit and loss was unaffected by the VAT.
  • WHA added no value in respect of its supply of “footing the bill” – the final consumer of the services supplied by the garage was the insured – and the effect of dismissing the appeal as that VAT is borne on that supply.
  • The conclusion was consistent with the guidance given in Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408 where Lord Hope asked “Did he obtain anything – anything at all – used or to be used for the purposes of his business in return for that payment?”. That question was to be understood as being concerned with a realistic appreciation of the transactions in question – so understood, it was plain that WHA did not obtain anything in return for the payment to the garage which was used for the purpose of its business. WHA’s business was the making of the payment.

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