In its judgment, the court said that input tax deduction is intended to relieve a trader of VAT payable in the course of his economic activities though WHA’s profit and loss is not affected by VAT because of the business structure it implemented.
It added that input tax deduction should have the consequence that VAT is only borne on supply to the final consumer and dismissing WHA’s appeal meant VAT was borne on the garages’ supply to the insured motorist.
“The court agrees that the garages were repairing cars for motorists, not for WHA, which simply assisted with arrangements and paid the bills,” said Lord Reed, who delivered the judgment.
“The insurer could not recover VAT on bills [paid to the garages] if it paid them directly and that does not change with the bills having been paid on its behalf by WHA,” Lord Reed added.
Oriel’s VAT scheme
The dispute centred on a scheme, known as Project C, designed to minimise the overall VAT liability of the Oriel group (to which WHA belongs), which provided motor breakdown insurance.
The supply of insurance is VAT exempt. Insurers therefore do not charge VAT on premiums; do not account to HM Revenue & Customs (HMRC) for VAT; and bear the VAT on business costs that incur VAT, since they cannot deduct this from any VAT they have received.
When a motor breakdown insurance company compensates a customer against the cost of car repairs, the company cannot deduct VAT from the garage’s invoice.
Oriel felt this put it at a competitive disadvantage to non-VAT exempt businesses since such businesses could deduct this VAT as input tax.
Project C sought to enable Oriel companies to recover the VAT on repair costs.
The scheme consisted of two strands. The first was based on a legislative interpretation that UK insurance claims handlers could recover input tax incurred for the purpose of supplying services to a non-EU recipient.
WHA, a UK member of Oriel group, began supplying claims-handling services to Viscount Reinsurance Company (Viscount), another group member based outside the EU in Gibraltar.
Viscount was responsible for reinsuring 85% of the risk associated with motor breakdown insurance policies issued by NIG, an insurer providing a UK front for Oriel’s offshore business.
WHA was to be regarded as recipient of a supply of repair services from garages, on which VAT would be charged. WHA would not have to charge output tax on its supply of claims-handling services to Viscount because it was outside the EU. This would allow WHA to recover input VAT from HMRC.
The second strand of Project C was implemented in case HMRC deemed that VAT should be chargeable on WHA’s supply of claims-handling services to Viscount.
Based on another legislative interpretation by the taxpayer, which deemed Viscount could recover VAT paid to WHA as long as Viscount made supplies to a non-EU recipient, Crystal – a Gibraltar-based member of Oriel – was installed to reinsure 100% of the risk under NIG’s policies, retroceding 85% of that risk to Viscount.
This strand relied on WHA being regarded as the recipient of a supply of repair services from the garages.
HMRC argument
HMRC refused to repay VAT to WHA or Viscount. It argued that the garages did not make a taxable supply of services to WHA, which would invalidate both strands of Project C.
In addition, HMRC said in any case, Project C was so artificial that it fell foul of the EU’s abuse of rights doctrine.
WHA and Viscount’s appeal to the Supreme Court argued that WHA does receive a taxable supply from the garages and Project C is not a breach of the abuse of rights doctrine.
Judgment
The Supreme Court ruled that there is no supply of repair services by the garages to WHA.
“As the court held that the garage made its supply to the insured, this was sufficient to dispose of the case in favour of HMRC,” said Michael Conlon QC, head of indirect tax at Hogan Lovells.
“It is a pity, therefore, that the court did not need also to consider the other points, namely the scope of the abuse principle and whether the UK's transposition of the Thirteenth Directive Refunds mechanism was ultra vires EU law,” Conlon added.
Referring to its judgment in Aimia Coalition in March, the court stated that where a scheme operates through a construct of contractual relationships it is necessary to look at the matter as a whole to determine its economic reality.
The court therefore assessed the transaction between WHA and the garages in the context of the entire arrangement including the insured motorist, NIG, Crystal, Viscount, WHA and the garage.
“There is no indication that WHA’s role included undertaking responsibility for the carrying out of repairs. The nature of the relationship between the garages and WHA does not suggest the former provides a service to the latter,” the judgment said.
“The economic reality is that the payments made by WHA to the garages merely discharge the obligation which NIG undertook to the insured to pay for the repair of a vehicle up to the value permitted by the policy. Interposition of Viscount and Crystal in the chain of contracts linking WHA to NIG does not alter the position that WHA simply acts as the paymaster of the costs falling within the cover provided by the policies.”
Conlon said with respect to the "person supplied" point, he was greatly encouraged to see that the Supreme Court drew heavily on its reasoning in the Aimia Coalition case and the need in VAT cases to analyse the contractual framework having regard to economic reality and the principle of fiscal neutrality.
“We are waiting to hear whether the Supreme Court will allow HMRC's application for a further reference to the ECJ in Aimia. Let us hope, in light of the line taken in WHA, they will reject this and decide a further reference is unnecessary,” said Conlon.
