Royal Bank of Scotland Group PLC v The Commissioners for Her Majesty's Revenue and Customs
In January 2002, Prudential sold its UK general insurance business to Winterthur, granting Winterthur an exclusive licence to use the Prudential brand and access to details of Prudential's policyholders for a 15-year term.
Under the arrangement, Prudential redirected enquiries about general insurance cover to Winterthur and Winterthur was also able to renew polices held by existing policyholders. But it had to obtain Prudential's approval for any new insurance products that would bear the Prudential brand.
Winterthur paid commission to Prudential calculated by reference to each Prudential branded general insurance policy sold. The amount varied according to the type of policy, the means by which the customer was introduced and whether it was a renewal or a new insurance.
By a series of novations in 2002/3, Winterthur's rights and obligations under the contracts with Prudential were transferred to RBS.
The issue was whether Prudential was providing the services of an insurance agent to RBS, so that commissions paid by RBS (most of which arose on renewals) would be VAT-exempt.
RBS argued that the commissions fell within the exemption because Prudential was providing the services of an insurance intermediary in relation to insurance transactions.
HMRC, however, said that Prudential's services were effectively marketing services. It allowed RBS to use its brand and had passed over its customer data, following which RBS was able to sell and renew policies without any further input from Prudential.
Under the Sixth VAT Directive, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents are exempt from VAT.
The European Court of Justice, interpreting the terms broker and agent in the 2005 Arthur Andersen case, considered the definition given in Insurance Directive 77/92 (superseded in 2002 by the Insurance Mediation Directive).
That Directive differentiated between the two roles. 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.
In Arthur Andersen, the European Court held that the primary requirement for an insurance broker or an insurance agent is the bringing together (or the introducing) of the party seeking insurance and the insurer. Whether or not an insurance agent has power to create legal relations between insurer and the insured is not the determining factor.
The Insurance Mediation Directive, however, 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.
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".
UK legislation uses all three terms – broker, agent and insurance intermediary. The VAT Act 1994 provides that the provision by an insurance broker or agent of the services of an insurance intermediary is exempt if the services relate to an insurance transaction and are provided in the course of his acting in an intermediary capacity.
The Act defines the services of an insurance intermediary 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.
The Tribunal held that Prudential's services were not exempt from VAT because Prudential was not bringing together or introducing the parties.
The commission was payable for the use of Prudential's customer data. Any introduction between the insurer (who was then Prudential) and the insured had taken place in the past.
As part of the sale of its insurance business, Prudential had given Winterthur information about existing insureds and this had been transferred to RBS. But whether a new insurance contract was concluded thereafter was solely a matter between RBS and the insured.
The Tribunal followed the European Court in considering the roles of insurance broker and agent in light of the definitions given in the old Insurance Directive, now repealed and replaced by the Insurance Mediation Directive. But even if it had relied on the IMD's definition of insurance mediation, the Tribunal was satisfied it would have reached the same conclusion.
This decision confirms that the broker or agent must bring the parties to the insurance contract together if the VAT exemption is to apply.
This bringing together need not be done directly. The recent Dutch case of J.C.M. Beheer BV demonstrated that an insurance sub-agent with only an indirect contractual relationship with an insurer can still benefit from the exemption.
The decision is also interesting because the Tribunal disagreed with the approach taken in the Trader Media case, in which another UK VAT Tribunal preferred the Insurance Mediation Directive's "more functional" definition of insurance intermediary when considering the more passive role played by contemporary agents and brokers, such as online sellers, estate agents and travel agents.
This Tribunal thought that a directive that deliberately avoided using the terms broker and agent was not of much help in interpreting those terms in the VAT Directive or domestic law.
It also noted that the RBS situation was unusual and expressed some sympathy with the contention that Prudential was closer to the insurance contract than a normal insurance broker. But it could not stretch the meaning of insurance broker to cover it.
Arrangements involving the provision of customer databases or information to insurers are, however, fairly common and may need to be reviewed in the light of RBS and other cases in this area.