Homeserve Membership Limited v The Commissioners for Her Majesty's Revenue and Customs
Homeserve, an insurance intermediary, arranged "assistance insurance," such as plumbing and drainage cover, for homeowners. The insurance provided cover against domestic repairs and an emergency response service that promised access to a hotline and an approved engineer attending on site within two hours.
Under its agreement with the insurer, Homeserve arranged and administered the insurance policies and dealt with the payment of premiums, renewals and complaints. The insurer provided the cover and was responsible for contracting with a separate claims handling company.
All the marketing materials and insurance documents were careful to inform the homeowner that he would have one contract with Homeserve ("to arrange and administer your policy") and a separate contract with the insurer.
The cost to the homeowner was given as a single sum, say £59.99, of which £14 was described as an administration fee and the rest as premium. Homeserve would keep the £14 and not account for it to the insurer. The services it provided to the insurer would be paid for out of the premium.
The issue was whether the £14 administration fee was subject to insurance premium tax (IPT).
Under the Finance Act 1994 (as amended by the Finance Act 1997), IPT is charged on the receipt of premium by an insurer in connection with a taxable insurance contract.
A premium is defined as "any payment received under the contract by the insurer" and includes any payment "wholly or partly referable to… costs of administration" (s. 72(1)).
Section 72(1A) provides: ''Where an amount is charged to the insured by any person in connection with a taxable insurance contract, any payment in respect of that amount is to be regarded as a payment received under that contract by the insurer unless … the amount is charged under a separate contract and is identified in writing to the insured as a separate amount so charged.''
IPT will therefore not be chargeable if four conditions are met: (1) there is a contract between the insured and the third party (in this case Homeserve); (2) the amount is charged under that contract; (3) the contract is a separate contract from the taxable insurance contract; and (4), the amount is identified in writing to the insured as a separate amount charged under the separate contract.
The issue in this case was whether there was a contract between Homeserve and the homeowner and, if so, whether that contract was "separate" from the insurance contract.
HMRC argued that, in reality, a homeowner signing up to the service entered into only one contract - the insurance contract – for which he paid £59.99. There was no separate contract with Homeserve. The £14 was a payment received under the contract of insurance and so was taxable to IPT.
The tribunal held IPT was payable. The arrangements gave rise to a contract between Homeserve and the homeowner, but this was not separate from the insurance contract for the purposes of IPT.
The tribunal concluded that the phrase "separate contract" in the Act had been specifically chosen to emphasise that the contract had to be independent or separable from the taxable insurance contract.
In this case, however, both contracts related to the same cover and were offered as a package. One could not be created without the other and the price quoted to homeowners was a single amount. There was also a considerable overlap between the services Homeserve provided to the homeowner and those it provided to the insurer in administering the insurance contract.
Homeserve appealed. The finding that there was a contract between Homeserve and the homeowner was not challenged. The sole issue was whether that contract was a separate contract for IPT purposes.
The appeal succeeded. IPT was held not to be payable on the £14 administration fee.
The judge concluded that the tribunal had been mistaken in giving a special meaning to the phrase "separate contract". The term meant no more and no less than a contract which was distinct from (in the sense that it was not the same as) the contract of insurance.
In addition, the tribunal had been wrong to consider it a requirement that a separate contract had to have a life independent of the contract of insurance.
In his view, it was irrelevant that the price was quoted to the homeowner as a single amount, albeit made up of two parts, or that there was an overlap between the services Homeserve provided to the homeowner and to the insurer. Nor did the judge think it relevant that the contract was dependent on the creation and subsistence of the insurance contract.
Far from stipulating that the separate contract should have an existence independent of the insurance contract, the legislation envisages that the two will be linked. Section 72(1A) refers to the charge made under the separate contract as being made "in connection with" a taxable insurance contract.
Since there was a contract between Homeserve and the homeowner that was not the same as the insurance contract and Homeserve had informed the homeowner in writing that the £14 was charged under this separate contract, IPT was not payable.
The judgment made it very clear that a special meaning could not be applied to the term "separate contract" in the IPT legislation. HMRC announced it would not be appealing the decision but that action would be taken to close the loophole.
In his Pre- Budget report of 9th December 2009, Chancellor Alistair Darling announced measures to prevent premium splitting. With immediate effect, fees charges under a separate contract in connection with personal lines insurance would fall within the scope of IPT.
In the Budget itself, however, this was amended. The provision has been narrowed to apply only to fees in relation to "commoditised" insurance. IPT will apply to fees charged to private individuals under contracts separate to the insurance contract where certain criteria are met.
These include that the amount charged for any services under the contract or the terms on which they are provided are not open for negotiation, and that the premium for the insurance is fixed without any comprehensive assessment of the individual's circumstances.
The amended provision, (which can be found at section 51 of the Finance Act 2010) came into effect on 24th March 2010 and will apply to payments made on or after that date.