The Governor and Company of the Bank of Ireland v The Commissioners for Her Majesty's Revenue and Customs
The Bank of Ireland had an arrangement with the Post Office to sell motor insurance to Post Office customers.
To do this, it entered into a separate contract with an intermediary, Junction, to whom it referred Post Office customers in return for a sales-based commission. Junction acted for a panel of insurers, including Norwich Union, who competed with each other to quote for the business.
There was no dispute that the services provided by the bank to Junction under this contract were insurance intermediary services exempt from VAT under the VAT Act 1994.
Sales proved disappointing, however, so the bank decided to "skew" the panel by appointing Norwich Union as primary insurer. On 31st March 2006, it entered into a contract with Norwich Union under which, in return for a commission, the bank promised to procure that Junction would give Norwich Union the opportunity to undercut the lowest of the quotes offered by other panel members.
The existing agreement between the bank and Junction was amended on the same date to reflect the setting up of the skewed panel.
The new arrangement proved successful, in that not only Norwich Union but also the other panel members wrote more business for Post Office customers.
Under the Sixth VAT Directive, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are exempt from VAT.
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.
The services of an insurance intermediary are further defined in the VAT 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.
The issue was whether the arrangement between the bank and Norwich Union was exempt from VAT or whether it fell outside the proper scope of the intermediary exemption.
HMRC said the agreement was not for the supply of intermediary services. It merely gave Norwich Union preferred status on the panel in return for payment. That was a different sort of supply and did not qualify for the VAT exemption.
The bank argued that it was providing exactly the same service as under the previous arrangement. The Norwich Union contract simply altered the way in which insurance intermediation services were already being provided under the bank's contract with Junction.
The Tribunal held that commissions paid by Norwich Union to the bank were VAT exempt.
The relationships between the various parties were fundamentally changed by the Norwich Union contract. Insurers on the panel were no longer competing for business on the same terms. But the bank was still bringing about the writing of contracts of insurance, albeit indirectly and with Norwich Union being given an advantage.
The Tribunal concluded that it was not possible to regard the supplies made under the Norwich Union contract in isolation from the original contract between the bank and Junction. There was sufficient nexus between the bank and the ultimate customer, via Junction, to satisfy the requirement for an exemption.
If it was wrong to find that the Norwich Union contract was part and parcel of the same principal supply of insurance intermediation services, the Tribunal considered it was ancillary to that principal service and so was also exempt.
In 2005, the European Court of Justice in the Arthur Andersen case held that, for the purposes of the VAT exemption, an insurance agent must be instrumental in bringing the parties together. HMRC postponed applying the decision in the UK until the European Commission has completed its ongoing review of VAT and financial services.
Nevertheless, as this case shows, HMRC is clearly not suspending analysis of VAT exemption issues while the European review is underway and it continues to review closely referral or intermediary arrangements which are outside the "norm". Care still needs to be taken on VAT in this area.
The way in which the Tribunal looked at the contractual provisions to support its approach also demonstrates the continued importance of making sure the contract reflects the intended VAT outcome.