Consumer insurance contracts law: Recent Irish legislation diverges from UK position
Out-Law Guide | 28 May 2009 | 4:12 pm | 7 min. read
HMRC v InsuranceWide.com Services Ltd; Trader Media Group Ltd
InsuranceWide operated a website that initially simply passed details of prospective insureds to a panel of insurers. Over the years, however, the site developed so that customers were automatically matched with groups of insurers and provided with quotes, from which they could choose their policy.
InsuranceWide was paid commission if an insurance contract resulted. Its terms and conditions with customers, however, said it was not an insurance agent or broker and did not warrant, represent or endorse the suitability of any insurance product.
Trader Media operated the Auto Trader website, which included an area that enabled customers to obtain quotes for car insurance from a panel of insurers. This "insurance centre" was run by an independent insurance intermediary under the trading name Compare the Market.
After answering a series of questions set by Compare the Market, customers were able to arrange cover by clicking on one of the quotes that appeared in a comparison table. Trader Media received a commission by the insurer if an insurance contract was concluded.
In each case the issue was whether the services provided were exempt from VAT because InsuranceWide and Trader Media were acting as an insurance broker or agent in supplying the services of an insurance intermediary.
Under the Sixth VAT Directive, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are exempt from VAT. But no definition is given of broker or agent, or of related services.
In the UK, the VAT Act 1994 provides that the services of an insurance intermediary are exempt if they are related to an insurance transaction and are provided by the broker or agent in the course of his acting in an intermediary capacity between an insurer and a person seeking insurance.
The services of an insurance intermediary are further defined in the notes to the Act as the bringing together of insurers and prospective insureds, carrying out work preparatory to the conclusion of insurance contracts, assisting in the administration and performance of such contracts and the collection of premiums. Specifically excluded from the exemption, however, is the supply of advertising or promotional services.
Outside the realm of VAT legislation, the roles of insurance broker and insurance agents are defined in the Insurance Directive.
Insurance agents are "empowered to act in the name and on behalf of" one or more insurer in "introducing, proposing and carrying out work preparatory to" the conclusion of contracts, or assisting in the administration and performance of such contracts.
Brokers, on the other hand, "bring together" parties with a view to the insurance of risks, carry out preparatory work and, where appropriate assist in the administration and performance of contracts.
The Insurance Directive was superseded in 2002 by the Insurance Mediation Directive (IMD). The IMD does not refer to brokers or agents at all. Instead it adopts the more general term "insurance intermediary", defined as a person carrying out insurance mediation.
Under the IMD, insurance mediation comprises "introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts".
The VAT tribunal concluded that InsuranceWide was merely an introducer and not an insurance agent, so the exemption did not apply. But a different VAT tribunal found that the services provided by Trader Media qualified for the exemption.
HMRC appealed, as did InsuranceWide. Both appeals raised the same point of law - could the mere act of introduction attract the VAT exemption?
The High Court judge held the exemption applied in both cases.
Construing the Sixth VAT Directive and the UK VAT legislation, he found the terms "broker", "agent" and "intermediary" to be interchangeable. Whether a person was exempt from VAT would depend on what that person was actually doing and not how he may describe himself or be described.
Under the UK legislation, one of the functions of an insurance intermediary is the bringing together of insurer and prospective insured. Another is carrying out work preparatory to the insurance contract, which would include negotiating contract terms.
For the purposes of the exemption, the judge concluded that the rules recognise two separate types of individuals: introducers and negotiators. An introducer does not also have to be a negotiator to qualify. Nor does an introducer necessarily have to have a direct relationship with both parties, as long as he is part of a chain of introduction between customer and insurer.
HMRC appealed, arguing that InsuranceWide and Trader Media merely provided a "click-through" facility to a broker, agent or insurer. Introduction, on its own, was not enough. In the absence of any legal relationship with either the insured or the insurer and in the absence of any involvement in the negotiation of the contract or its preparation, the collection of premiums or the handling of claims, neither InsuranceWide not Trader Media could show it was an insurance broker or agent.
InsuranceWide is no longer trading and was not represented at the appeal. Trader Media, however, relied on the Dutch case of J.C.M. Beheer BV to argue that the legal relationship with the insured or the insurer did not have to be a direct one for the VAT exemption to apply.
The European Court of Justice in Beheer held that it was sufficient if an insurance broker or agent had an indirect relationship though the intermediary of another, taxable person who is himself in a direct contractual relationship with one of the parties to the insurance.
The Court of Appeal agreed with Trader Media and dismissed HMRC’s appeal.
Lord Justice Etherton, giving the leading judgment, said the Beheer case marked "an important shift in the jurisprudence of the ECJ".
Earlier cases indicated that, for the VAT exemption to apply, it was vital that the insurance broker or agent had a direct relationship with the insurer and insured, or at least with the insured.
But the Beheer case showed that a direct legal relationship with either party is not required. “It is sufficient that the insurance agent or insurance broker is carrying out a vital intermediary role in a chain of intermediaries”.
In the case of InsuranceWide and Trader Media, the Court of Appeal was satisfied that the services provided were much more that a click-through facility. For the exemption to apply, it was enough that they were providing services characteristic of an insurance broker or agent which were vital to the process of introducing prospective insureds to insurers, even if they were only part of a chain.
It was also immaterial, or at least inconclusive, whether they were authorised by the Financial Services Authority to carry out insurance mediation activities.
“What matters is what InsuranceWide and Trader Media actually did, and whether that satisfied the requirements of the insurance intermediary exemption in the light of principles to be derived from the EU legislation and cases”.
In the circumstances, the court did not consider a referral to the European Court was necessary or desirable. Exemptions are highly fact-dependent but, in its view, the principles of law to be applied were clear:
This decision paves a clearer path through the tricky insurance intermediary exemption. It provides comfort that introducers who play a relatively passive role in the insurance process may benefit from the exemption, provided that they are bringing together insurers and those seeking insurance.
The judgment is also useful in that it does not try to define (or distinguish) an insurance broker and insurance agent, but rather concentrates on what the person actually does rather than how it or its services are labelled. It also highlights the significance of the Beheer decision, which for the first time applied the concept of “fiscal neutrality” in the context of the VAT exemption.
Although contentious areas of the insurance intermediary exemption still remain (such as the scope of "related services"), this decision is nonetheless very welcome and should clarify the position in relation to introducer arrangements.
UPDATE: HMRC decided not to appeal this decision and, on 3rd August 2010, published Business Brief 31/10, setting out the conditions that must be satisfied for insurance introductory services to be exempt from VAT.
Consumer insurance contracts law: Recent Irish legislation diverges from UK position