WHA Ltd & Anor v Customs & Excise

This is an appeal brought by the Commissioners of Customs and Excise (“the Commissioners”) from a decision of Lloyd J (reported at [2003] STC 648). He allowed an appeal by WHA Limited (“WHA”) and Viscount Reinsurance Company Limited (“Viscount”) from a decision of the VAT and Duties Tribunal (Chairman Stephen Oliver QC). The appeal requires the resolution of three issues which arise under European and domestic legislation relating to Value Added Tax (“VAT”). All references to sections hereafter are to sections of the Value Added Tax Act 1994 (“the 1994 Act”).

The appeal concerns the effectiveness of a scheme which is designed to minimise overall liability to VAT in the context of motor breakdown insurance (“MBI”). In brief, the scheme is intended to work as follows. MBI policies are issued to members of the public by an English company, National Insurance & Guarantee Corporation plc (“NIG”) through the agency of another English company, Warranty Holdings Limited (“Warranty”). NIG reinsures its liabilities under these policies with a Gibraltar based company called Crystal Reinsurance Co Limited (“Crystal”) which in turn retrocedes 85% of the reinsurance to another Gibraltar based company, Viscount. Viscount contracts with an English company, WHA, to instruct garages to carry out any works required to be effected under the policies, and to pay for those works. (All the companies, with the exception of NIG, are in the same group of companies.)

On each occasion that such work is carried out by a garage (“the garage”) on WHA’s instructions, the garage renders an invoice to WHA. It is common ground that VAT is payable on this invoice. The effectiveness of the scheme primarily depends on WHA being able to treat this VAT as input tax. WHA renders an invoice to Viscount, which WHA contends is exempt from VAT. If that contention is correct, WHA is able to claim repayment from the Commissioners of the input tax. Alternatively, if WHA is wrong and VAT is chargeable on its invoice to Viscount, then Viscount contends that it is entitled to recover the VAT it has to pay in respect of the invoice from WHA.

The Commissioners challenge the effectiveness of the scheme on the grounds that none of its three central planks is sound. The Tribunal agreed with the Commissioners on all three issues, and dealt only very briefly or not at all with further arguments raised by the Commissioners. These “further arguments” were based on the alleged artificiality of the scheme, including a contention based on abuse of rights (or abus de droit). On appeal, Lloyd J disagreed with the Tribunal on the first two issues, and held that (i) WHA could treat the VAT payable on the garage bills as input tax, and (ii) that WHA made “exempt” supplies to Viscount. Accordingly, Lloyd J did not go on to consider the third issue, which could only arise if he had found the other way on the second issue. The third issue is (iii) on the assumption that WHA made taxable supplies to Viscount and so had to charge output tax, whether Viscount could recover the input tax it had to pay to WHA.

The MBI policy (“the policy”) offered by NIG is addressed to motor vehicle owners and states that it offers them “parts and labour protection”. Under the heading “Contract of Insurance” there is this:

The policy also states that:

The policy contains instructions as to how to make a claim, and it includes the following:

While the owner has the right to choose the garage which carries out the repairs, he is warned in the policy that, if he does not choose a selected garage as identified to him by WHA, he will risk having to pay any sum in excess of that which an approved garage would have charged.

The policy also entitles the owner to reimbursement by NIG in respect of hotel costs and travelling costs incurred as a result of a breakdown, at least in certain defined circumstances.

By an agreement dated 27^th April 1998 (“the reinsurance agreement”), Crystal effectively agreed with NIG to reinsure the whole of NIG’s liabilities under all of the policies. By clause 3.1 of the reinsurance agreement, it was stated to be “a condition precedent to any liability [of Crystal] under this agreement” that:

Clause 5.2 of the reinsurance agreement required Crystal to

The financial terms of the reinsurance agreement required NIG to pay over all the premiums it received in respect of the policies to Crystal, and entitled NIG to a fee of £75,000 per month for, in effect, acting as what the Tribunal called “a front for Crystal”.

On 28^th April 1998, Crystal and Viscount entered into a deed of retrocession (“the retrocession agreement”). This required Viscount to manage the handling of claims under NIG policies, and entitled Viscount to appoint someone to control the claims handling. In return for the payment of 85% of the premiums on the policies, less commission, Viscount agreed a provision which substantially mirrored that contained in clause 5.2 of the reinsurance agreement. By clause 4 of the retrocession agreement, Viscount agreed to be responsible for the payment for the work to be done to any insured vehicle, but Crystal agreed to reimburse Viscount 15% of the cost.

On 3^rd March 1998, Viscount and WHA entered into an agreement (“the claims handling agreement”). By clause 3.1, Viscount appointed WHA:

In clause 6.1 of the claims handling agreement, WHA agreed to:

Clause 3.2 required WHA to seek “prior authority from Viscount” in relation to any payment under a policy which exceeded £3,500.

By clause 7.1(ii) of the claims handling agreement, WHA agreed that, prior to a part being fitted to a vehicle pursuant to work done under a policy, title in the part would pass to WHA, and then from WHA to Viscount.

Clause 9 of the claims handling agreement dealt with consideration. In return for the performance of WHA’s obligations thereunder, it was to receive payment from Viscount, such payment being divided into two elements. The first element of the payment, which was set out in clause 9(a), is the cost of settling each claim. The second element, which was referred to in clause 9(b), is the sum of £17.60 in respect of each claim settled and paid by WHA pursuant to the claims handling agreement, subject to a maximum of 125,000 claims in any year. This latter element is subject to three provisos, two of which are intended to protect WHA so far as volume of business is concerned, and the third of which is to encourage WHA to keep the value of each claim down.

Although there was no reference to this in the claims handling agreement, the evidence before the Tribunal established that Viscount provided WHA with a “float” of around £2.5m from which to pay garages in respect of work done to vehicles pursuant to the policies. This float was topped up by Viscount, on average about once a week. This topping-up normally involved a payment by Viscount of approximately £500,000. The evidence also established that Crystal’s monthly receipts under the reinsurance agreement were between £2m and £2.5m. It was further established on the evidence that there were around 10,000 claims a month under the policies, and that the average amount paid to WHA per claim was in the region of £194 (inclusive of the £17.60 but excluding any VAT element).

The evidence showed that there were many garages authorised by WHA, and with whom WHA had agreed labour rates and parts discounts. WHA had issued a claims procedure leaflet (“the leaflet”) to these garages; it included the following instructions:

The provisions in the various agreements relating to title to the parts fitted to a motor vehicle by the garage carrying out work pursuant to a policy give rise to obvious difficulties. First, there may be cases where the cost of the work exceeds the amount of the cover so that the policy covers only part of the cost. Secondly, in many, indeed it would appear most, cases, the terms and conditions of the garage ensure that it retains title to parts until they are paid for. In those circumstances, it is scarcely surprising that the Tribunal concluded that the evidence “did not convince us that the title trail sought to be set up by the contractual arrangements could work in practice”.

The Tribunal also formed the view that there could be a problem in establishing the genuineness of the scheme because, on the evidence, in a fair number of cases, contrary to what was envisaged by the policy, the policy holder, ie the owner rather than WHA, agreed with the garage what work would be carried out and paid for it, and thereafter WHA reimbursed the policy holder. It is argued on behalf of WHA and Viscount (“the respondents”) that the Tribunal plainly erred in this connection, because it considerably exaggerated the proportion of occasions upon which this happened. We heard very little argument on that aspect, and, while it is right to say that I think that there is force in the respondents’ contention in this connection, I do not think that it is necessary to decide it.

There was a substantial amount of evidence before the Tribunal which related to the circumstances in which the scheme was set up, and the way in which it worked. Much of that evidence may well be relevant in relation to the further arguments raised by the Commissioners which are not to be considered at this stage. Although some of that evidence was relevant to arguments raised in relation to the three issues which are now before us, those arguments play no relevant further part in these proceedings. Accordingly, it is unnecessary to refer to those further facts.

The first issue which requires to be decided is whether a garage carrying out works to a motor vehicle pursuant to a policy on WHA’s instructions makes a taxable supply of services to WHA. In this connection, the garage will be registered for VAT, and will accordingly include VAT in its invoice to WHA. However, in order for the scheme to succeed, the invoice would have to be in respect of a taxable supply of services to WHA. The Tribunal accepted the Commissioners’ argument that there was no such taxable supply; but Lloyd J disagreed. If the Tribunal was right on this issue, the Commissioners’ appeal would succeed, at least so far as WHA is concerned, because WHA would have no input tax which it could seek to reclaim. If WHA is correct on this issue, then it would be necessary to consider the second issue.

The second issue is whether, as WHA contends, the service it provides to Viscount in relation to paying the garage for the works is exempt. In this connection, WHA renders Viscount an invoice in relation to each claim it settles, and such an invoice is for the aggregate of £17.60 and the amount of the garage invoice which WHA will have paid in respect of that claim. Subject to two points, it is common ground that the £17.60 component of such an invoice would be exempt for VAT purposes. The second issue turns on whether the balance of the invoice is also exempt for VAT purposes. If it is exempt, then, because WHA is thereby making exempt supplies to an entity outside the Community, it would be entitled to a refund of input tax from the Commissioners. If the balance of the invoice is not exempt then WHA has to charge VAT to Viscount.

If WHA succeeds on the first issue but fails on the second issue, then that gives rise to the third issue, namely whether it is open to Viscount to recover the input tax it has paid, namely the VAT which, on this hypothesis, it will have been charged on the invoice rendered to it by WHA. (It is right to mention that this third issue could also arise if WHA fails on the first issue, but only if it fails on the grounds that the garage invoice should, in practice, be treated as having been paid by WHA on behalf of Viscount.)

If WHA succeeds on the first and second issues, as it did before Lloyd J then, subject to the further arguments, WHA will have won: it will be entitled to recover the input tax paid on the garage invoice. If WHA succeeds on the first issue, but fails on the second issue, then the Commissioners will be successful in this appeal provided they succeed on the third issue. However, if the Commissioners fail on the third issue, then their appeal will, in practice, have failed because (subject to the further arguments raised by the Commissioners) although WHA will have to charge output tax on the garage invoices, having failed on the second issue, Viscount, a member of the same group of companies, will be able to recover its input tax (which will amount to precisely the same figure) from the Commissioners.

When considering these three issues, Mr Roderick Cordara QC, who appears for the respondents, contends that one must treat the chain of contracts, that is between (i) the insured and NIG, (ii) NIG and Crystal, (iii) Crystal and Viscount, (iv) Viscount and WHA, and (v) WHA and the garage, as valid and effective. In effect, he contends, one must take them at face value. One cannot, for instance, conclude that the proper analysis is that the garage is in reality providing a service to NIG, even though the garage, when carrying out the work to a vehicle, will have seen the policy and will be well aware that the work is being carried out to satisfy NIG’s obligation to the policy holder.

I do not understand that contention to be challenged by Mr Jonathan Peacock QC, who appears for the Commissioners, save through the medium of the further arguments which are not before us. Mr Cordara’s contention in this connection was accepted (perhaps sub silentio) by the Tribunal and by Lloyd J. In my view it is correct. Subject at least to the issues raised by the further arguments, when assessing the impact of the VAT legislation on a particular transaction or series of transactions, one must look at the way the parties have actually structured, and indeed, expressed, their transaction or transactions. This appears to have been the approach approved by Lord Hoffmann in Customs & Excise Commissioners -v- Robert Gordon’s College [1995] STC 1093 at 1099f, applying the reasoning of the European Court of Justice (“ECJ”) in BLP Group -v- Customs & Excise Commissioners [1995] STC 424 at 430. However, it is important to bear in mind that the proper analysis of the effect of that transaction or those transactions for VAT purposes may not be the same as that characterised, or apparently characterised, by the parties in the documents giving effect to their transaction or transactions. In this connection, I would refer to the guidance given by Laws J in Customs & Excise Commissioners -v- Reed Personnel Services Limited [1995] STC 588 at 591F-H and 595 B-G, part of the latter passage having been cited with evident approval by Lord Slynn of Hadley in Eastbourne Town Radio Cars Association -v- Customs & Excise Commissioners [2001] 1 WLR 794 at 799A-E (paragraph 14).

For the purpose of deciding this issue, it is necessary to refer to only two provisions of the 1994 Act. Section 24(1) provides, so far as relevant, as follows:

Section 5(2) provides, so far as relevant:

In deciding whether a provision constitutes a supply of services within the terms of the 1994 Act, it seems to me that three essential features of sections of the 1994 Act must be borne in mind. The first two features were identified by Lord Millett in Customs & Excise Commissioners -v- Redrow Group Limited [1999] 1 WLR 408 at 418E-F:

The third feature which one derives from the statutory provisions is that there can only be a supply of services to a person giving rise to input tax if the services are actually used or to be used for the purpose of his business.

The question in the present case, therefore, is whether, by carrying out work to a vehicle pursuant to a policy, a garage is supplying services to WHA, as WHA contend. In this connection, the Commissioners’ argument is that the services are supplied to the policyholder because the works are carried out by the garage to his vehicle, and any parts involved in the works are installed by the garage into his vehicle.

When considering this issue, Lloyd J observed that

The essential features which are said to justify the conclusion that the garage makes a supply of services to WHA are as follows. First, the invoice is in respect of work carried out by the garage pursuant to an instruction by WHA. Secondly, the only contractual relationship, pursuant to which the work the subject of the invoice is carried out, exists under an agreement between WHA and the garage. Thirdly, the only person who is liable to pay the garage in respect of that work is WHA. Fourthly, WHA gets into the contractual relationship with the garage in the course of its business. Fifthly, by ensuring the garage carries out the work, WHA fulfils its obligation to Viscount under the claims handling agreement, and also becomes entitled to earn its £17.60 in respect of the claim resulting in the works.

In these circumstances, it appears to me that, unless there is some reason for reaching a contrary conclusion, there is indeed a “supply of services” by the garage to WHA when the garage carries out repair work to a vehicle under a policy. Given the very wide definition of “services” in s5(2)(b), it is hard to resist the conclusion that, if something is supplied to WHA, it can be described as “services”: WHA receives a benefit from the carrying out of the repairs (namely satisfaction of an obligation to Viscount and the ability to earn the £17.60) and it is work which WHA will have authorised to be done. The fact that there is another beneficiary of the work, who may even fairly be said to be the primary beneficiary, namely the owner of the vehicle, should not, at least of itself, prevent the arrangement operating as a supply of “services” to WHA.

It further appears to me that the services in question are “supplied” to WHA. Again, the fact that they are also provided to the vehicle owner does not, to my mind, prevent them from being treated as “supplied” to WHA. The fact that WHA authorises and pays for the work, and, indeed, is rendered the invoice for the work, serves to underline this conclusion. Of course, if any of these steps could be regarded as sham or bogus, different considerations might well apply. But, at least unless it is necessary to resort to the further arguments, which impinge on the scheme as a whole, no such contention has been raised in the present case.

As to the third requirement, once it is accepted that the work done by the garage constitutes the “supply of services” to WHA, I do not see how it could be suggested that the services so supplied are not “used … for the purpose of [WHA’s] business”. Indeed, I do not understand Mr Peacock to contend otherwise.

Casting one’s eyes more widely, I can see no reason for calling that conclusion into question. The suggestion that the vehicle owner, rather than WHA, is the person to whom the services should be treated as supplied has an initial attraction. However, such a conclusion suffers from the unattractive feature that the owner does not pay for the work, and receives no invoice in respect of it, and that, accordingly, even if the circumstances would otherwise justify someone recovering the input tax, there could be nobody entitled to recover the input tax, at least on the face of it. The owner could not recover input tax because he had not paid it, and neither could WHA, because although it had paid the VAT, it could not be treated as input tax because there would have been no supply of services to WHA. While I readily accept that there can be circumstances where such a dichotomy can arise, and while I accept that there may be regulations which avoid such dichotomies at least in certain circumstances, it appears to me that the court should certainly not lean in favour of analysis which results in such a dichotomy. Even assuming that Mr Peacock is correct in his contention that there cannot have been a “supply of services” both to the owner and to WHA, it appears to me that the proper analysis in the present case is that the services were “supplied” to WHA, albeit that they were also provided to the owner.

I believe that this conclusion is supported by authority, and in particular by the decision of the House of Lords in Redrow to which I have referred. In that case, Redrow, a residential developer, instructed agents to value and sell houses owned by prospective purchasers of new houses erected by Redrow. Under the arrangement, Redrow would pay all the agents’ fees if the prospective purchaser bought a Redrow home, whereas, if the prospective purchaser did not buy a Redrow home, he would be responsible for the agent’s fees. The House of Lord unanimously held that, in those circumstances, Redrow was entitled to treat the VAT payable in respect of the fees of any agent for which it was responsible, as input tax.

The Tribunal had reached the same conclusion, expressing the view that the agents’ services “were supplied both to Redrow and to the prospective purchasers”; Lord Hope of Craighead said that “[t]he primary facts seem to me to support the conclusions which it reached on this issue”: see at 412C-D. He continued at 412E:

Lord Hope went on to make some general observations which, like Lloyd J (see at paragraph 29 at 660F-H), I consider are worth repeating:

At 418F-H, in a passage also quoted by Lloyd J, Lord Millett took essentially the same view, saying:

In my judgment, these two passages, from the only two reasoned speeches in the unanimous decision of the House of Lords in Redrow, present the Commissioners’ contention on the first issue with serious problems. Lord Hope’s confirmation of the Tribunal’s view that there could be a supply of services to the prospective purchaser and to Redrow render it very difficult for the Commissioners’ case to get to first base. Even if the Commissioners are right in saying that there is in the present case a supply of services to the vehicle owner, that would not, it would appear, prevent there also being a supply of services to WHA.

To use Lord Hope’s words, it is enough for WHA’s case on the first issue that “something”, namely the repair work, was “done for” WHA, in the sense that it was authorised and paid for by WHA and WHA benefited from the work. Lord Millett’s approach may be said to be slightly different, although I believe that the difference is one of language or emphasis, rather than of concept or principle. His approach would appear to involve, in the present case, asking oneself who paid for the works, on the basis that any person who did not pay for the works, such as the insured, “has no claim to deduction”. Once one identifies the payer, namely WHA, one simply asks whether he received “anything at all” for the carrying out of the work by the garage. Given that it satisfied WHA’s obligation to Viscount, and it enabled WHA to earn its £17.60, the answer to that question must, to my mind, be in the affirmative.

The respondents’ case on the first issue receives further support, in my view, from the decision and reasoning of the House of Lords in the later case of Customs & Excise Commissioners -v- Plantiflor Limited [2002] 1 WLR 287. In that case, the taxpayer supplied horticultural goods by mail order, and its charges included a sum in respect of postage. The taxpayer stated to customers that it would advance the postal charge to Parcelforce on behalf of the customer. The House of Lords held that, on analysis, there were three supplies, namely:

“the supply by Parcelforce to Plantiflor of the service of delivering its customers’ goods” which, but for the fact that Parcelforce’s services were exempt, would be “a taxable supply”;

“the supply by Parcelforce to the customer of the service of delivering his goods to him”, which because it involved the customer incurring no liability to Parcelforce, was not a taxable supply; and

“the supply by Plantiflor to the customer of an arrangement service for which Plantiflor charged £1.63 per parcel”: see per Lord Millett at paragraph 67 at 2302E-H.

Earlier, consistently with what Lord Hope had observed in Redrow, Lord Millett said at paragraph 50, at 2299E:

As Mr Cordara points out, Plantiflor can be said to involve the converse of the present case. In that case, the single act of the delivery of the horticultural products to the customer could be said to involve supplies by two different people, namely arranging for the parcels to be delivered, which was effected by Plantiflor, and the actual delivery, which was effected by Parcelforce. Even ignoring the fact that the actual delivery was an exempt service, only one of those services, that supplied by Plantiflor, was taxable, because it was only that service which was supplied for a consideration. The present case can be said to be the converse in the sense that there are two recipients of the single set of services provided by the garage, namely WHA and the insured, but only one of them gives rise to a liability for VAT, and therefore to a right in principle to recover input tax, namely that to WHA, because it is only WHA who pays for the service. (It could be added that Plantiflor also involved a similar arrangement to that in the present case, in that Parcelforce’s delivery involved a service both to the taxpayer and to the customer.)

Mr Peacock, however, contends that there are two important distinctions between the present case and Redrow. The first distinction, which was relied on heavily by the Tribunal in reaching its conclusion that there was no supply of services to WHA, is based on the proposition that WHA had no ultimate right to select, and very little control over, the garage, when compared with Redrow’s right to select, and degree of control over, the estate agents in Redrow. The second point of distinction relied on by Mr Peacock is that, on analysis, there is no positive obligation on the garage to carry out any works to a vehicle, once the works are authorised by WHA. Mr Peacock, thirdly, argues that the mere fact that WHA receives the invoice in respect of the works carried out by the garage cannot of itself justify WHA treating the VAT payable thereon as input tax. He fourthly relies on a recent decision of the ECJ. Finally, he relies on the reference to third party consideration in Article 11A1(a) of the Sixth Directive.

I do not consider that those arguments justify the conclusion that there was no supply of services in the present case by the garage to WHA.

It is true that, in the final paragraph I have quoted from the speech of Lord Millett, he referred to the degree of control over the agents enjoyed by Redrow, and that it can be contrasted with the relative lack of control over the garage by WHA. However, the extent to which Redrow had a right to select the agents and control their activities does not seem to me to have been a factor which played much, if any, part in the reasoning of Lord Hope. So far as Lord Millett’s speech is concerned, I consider that the final paragraph quoted above was included merely to emphasise the extent to which it could not be said that Redrow was receiving a merely adventitious benefit from the agents’ activities. Quite apart from this, it is clear that WHA has a degree of involvement, and indeed a real degree of control, over the activities of the garage. WHA authorises the work and is liable for its cost, save to the extent that the policy dictates; further, the garage is obliged to comply with WHA’s requirements in the leaflet, at least if it was a garage selected by WHA, as presumably is the position in the great majority of cases.

Standing back, it appears to me unlikely in the extreme that the entitlement of a person in the position of Redrow or WHA to claim input tax could depend upon the precise degree of control which it exercises over the person who renders the invoice. Although it is plainly dangerous to generalise, it seems to me that to justify a claim for input tax in principle, it would normally be sufficient for the person presented with the relevant invoice to establish that he had authorised and paid for the work the subject of the invoice, and that he received a genuine benefit in the course of his business from the carrying out of the work.

That also deals with Mr Peacock’s third point, namely that the mere fact that the invoice is addressed to WHA cannot determine the matter. That must be right; indeed it is supported by a decision of the ECJ in Genius Holdings BV -v- Staatssecretaris van Financiën [1991] STC 239. However, that was a case where the invoice was plainly addressed to a person who was not responsible for paying it, and it is of no assistance here, where the invoice was properly addressed to the person who had authorised the work and agreed to pay for it, namely WHA.

The question of whether or not the contract between WHA and the garage obliged the garage to carry out the work was not investigated by the Tribunal, because, I think, it was not a point raised before it. Assuming, in the Commissioners’ favour, that the proper analysis of the agreement between WHA and the garage was that WHA would pay the garage for any work covered by the policy which the garage actually carried out, so that there was no actual obligation upon the garage to WHA to carry out the work, I do not think that that would assist the Commissioners. That contention would appear to lead to the conclusion that, in a normal bipartite agreement between a vehicle owner and a garage (without the involvement of any third party, whether insurer or otherwise) the owner could not seek to recover input tax if it could be shown that the work was carried out by the garage in circumstances where the owner merely agreed to pay the garage if the garage chose to carry out the work. It seems to me to be the logical effect of this argument, because, if WHA cannot treat the VAT payable on a garage invoice as “a supply of services” on the ground that its contract with the garage did not oblige the garage to carry out the work, there is no reason why that should be limited to a case where the contract is between an insurer and a garage.

Even if it were so limited, it would seem to be a surprising result, and one which I would not be prepared to accept unless compelled to do so as a matter of principle, statutory provision, or precedent. I can see no reason in principle why the argument should be correct. The normal rule, which is well established, is that liability to pay VAT in the first place arises on the furnishing of an invoice, and such an invoice is normally sent off when the work has been done. That would accordingly suggest that the question of whether there has been a supply of services must be determined by reference to the date when the VAT in respect of which the claim for input tax becomes payable. By that time, the question whether the contract pursuant to which the work has been done was bilateral or unilateral would appear to be of no relevance whatever.

I believe that this view can be said to receive a little indirect support from the reasoning of the House of Lords in Nell Gwynn House Maintenance Fund Trustees -v- Customs & Excise Commissioners [1999] STC 70 at 88f-h, per Lord Slynn. The fact that the monies in that case were trust monies rather than beneficially owned by the taxpayer did not assist the taxpayer because, when the monies were used to pay for the services, “they ceased to be trust monies”. As Lord Slynn explained “[t]hat is the time of supply for the purposes of the 1994 Act”.

In any event, as Mr Cordara points out, the subtle distinction in the domestic common law as to bilateral contracts and unilateral contracts would not be expected to govern a determination of whether or not a particular contract leads to a supply of services to a particular person: in this connection see Case C-291/92 Finanzamt Uelen -v- Armbrecht [1995] STC 997 at paragraph 13 at 1019.

Quite apart from this, it appears to me that there is considerable force in Mr Cordara’s point that the decision in Redrow would not have been any different if the point had been available, or had been taken, that the contract between Redrow and the agents was unilateral. So far as the agent’s invoice included a sum, presumably by way of commission, for selling a house, it seems to me quite possible that the contract under which this commission was earned would have been a unilateral contract. In the absence of a specific term to the contrary, an estate agent, except where he is appointed as sole agent, is not under an obligation to do anything: he is merely entitled to his commission in the event of a sale, satisfying the condition giving rise to his commission, being completed: see Luxor (Eastbourne) Limited -v- Cooper [1941] AC 108. Even if, which I accept is quite likely, the agents in Redrow were sole agents, or were under a specific obligation to seek to sell the properties concerned, I find it very difficult to see any basis upon which it could realistically be said that the House of Lords would have reached a different conclusion if the agents had been employed on the more normal basis. There is certainly nothing in the reasoning which begins to suggest that a different conclusion would have been arrived at.

Mr Peacock also relies on the recent decision of the ECJ in Case C-185/01 Auto Lease Holland BV -v- Bundesamt für Finanzen [2003] ECR 1-1317. In that case, Auto Lease, a vehicle leasing company, offered its lessees the option of entering into a fuel management agreement which permitted the lessee to fill up his vehicle in the name and at the expense of Auto Lease through the medium of a fuel credit card issued by a credit card company, DKV. The financial arrangement involved the lessee paying a monthly sum to Auto Lease, based on his likely consumption of petrol, with a balancing sum being paid at the end of the year. The contention, rejected by the ECJ, was that Auto Lease was entitled to reclaim input tax in respect of the VAT paid on the petrol. In effect, it was contended that the fuel was supplied by the oil companies to the lessor, even if there was almost immediately thereafter a transfer in the fuel by Auto Lease to the lessee. At paragraphs 35 and 36, the ECJ said this:

I do not consider that that decision assists the Commissioners in the present case. First, Auto Lease was concerned with a supply of goods, and not a supply of services. There is a clear and important distinction in the definition of the two expressions in the 1994 Act (mirroring the Sixth Directive in this respect) as is graphically illustrated by the observations I have quoted from the speech of Lord Millett in Redrow. Secondly, there is an important conceptual distinction between goods and services, particularly in the context of a statutory provision which refers to their “supply”.

Thirdly, it is probably inappropriate to rely upon the essentially domestic point that the supply of goods will normally involve transfer of title to a particular person, whereas a supply of services need not. However, there is the more general point that it is much easier to envisage a particular service which is supplied, perhaps in a different way, to more than one person or group of persons, whereas there will normally only be one person, or one group of persons, to whom a particular supply of goods will be directed. This point is illustrated by what the ECJ said in Auto Lease at paragraph 32:

Furthermore, it is clear from what the ECJ said in paragraph 35 of Auto Lease, quoted above, that considerable weight was given to the fact that it was the lessee, rather than Auto Lease, who ultimately paid for the fuel. Although that might be invoked in the present case to suggest that one should look behind WHA, for instance to Viscount (or even to Crystal or NIG), as the person who ultimately pays for the repairs, it seems to me that, if one concentrates on the competing recipients of the supply in the present case as being WHA and the vehicle owner, the fact that it is WHA, rather than the owner, who pays for the works, is a strongly relevant factor for favouring WHA as the recipient of the relevant supply. Indeed, in the present case, the point can be said to be more strongly in favour of WHA being the recipient of the supply than it was in favour of the lessee being the recipient in Auto Lease: WHA has the direct liability to pay the garage, and indeed directly pays the garage, whereas the lessee in Auto Lease paid for the petrol through the two intermediaries of DKV and Auto Lease.

In these circumstances, it appears to me that, at best from the Commissioners’ point of view, Auto Lease takes their case no further, although it is fair to say that there are aspects of that decision of the ECJ which can be said to support the respondents’ argument.

Finally, in this connection, I must deal with Mr Peacock’s reliance on Article 11 of the Sixth Directive. Article 11 is concerned with “the taxable amount”, and subparagraph A1(a) provides:

The argument advanced is that, if WHA succeeds on this first issue, then it renders the reference to third parties in that Article effectively redundant. I am not impressed with that point. First, if it resolved the issue in favour of the Commissioners in the present case, it would also have resolved Redrow in the Commissioners’ favour. Perhaps a more general way of putting the same point is that this argument proves too much, in that it would rule out any claim for input tax where the service benefiting, and paid for by, the person claiming input tax could be said to have been provided to a third party. Secondly, as is clear from its title, Article 11 is concerned with the “taxable amount”, and not with the identity of the person who is supplied. Thirdly, although I accept that the effect of decisions such as Redrow may be to cut down the circumstances in which Article 11A1(a) would apply to third party consideration, I do not accept that it would rule out the possibility of it ever having any application. Even if that was the effect, I find it very difficult to accept that such an indirect argument could justify arriving at a wholly different conclusion from that which is indicated by the factors I have so far been considering.

Accordingly, I have reached the conclusion, in agreement with Lloyd J, that, by carrying out works of repair to a vehicle under a policy, pursuant to the authority of WHA, who then pays for the repairs, the garage makes a supply of services to WHA, as a result of which WHA is, in principle, entitled to claim input tax in respect of the VAT it pays on the garage’s invoice submitted in respect of the cost of the repairs.

Article 13 of the Sixth Directive sets out certain exemptions from VAT, which include the following:

This exemption has been implemented in the United Kingdom through the medium of Group 2 of Part II of Schedule 9 to the 1994 Act (“Schedule 9”). In common with other groups in that Schedule, there are a number of “Items” and subsequent “Notes” to this Group. Item 1 is “the provision of insurance or reinsurance in the course of insurance business” by certain specified persons. The directly relevant Item for present purposes is in these terms:

Note (A1) defines “insurance business” as “business which consists of effecting and carrying out contracts of insurance”. It is also necessary to quote Note (1), which is in these terms:

In light of the arguments which have been addressed to us, I must also refer to Notes (9) and (10), which are in these terms:

The respondents’ case, which was accepted by Lloyd J, is that all the activities carried out by WHA in relation to a claim under a policy, namely, receiving, discussing, considering, and investigating a notification of claim, determining its validity, receiving, considering and approving the garage’s report, receiving, considering, approving and paying the garage’s invoice and liaising with Viscount, all constitute a single global supply of services to Viscount, which is a supply of services falling within the ambit of Item 4 of Group 2 of Schedule 9 (“Item 4”). If that is right, then it would follow, as Lloyd J said, that the invoice rendered to Viscount by WHA in respect of each claim, including the amount paid by WHA to the garage for carrying out the actual repairs under the policy, would be exempt from VAT.

The basis for the Commissioners’ attack on this conclusion, subject to one additional point which Mr Peacock seeks to raise, is substantially the same as the basis for the Tribunal’s conclusion that the actual cost to WHA of footing the garage bill was a separate service from the other activities it carried out in relation to the claim, and that, while a supply of services to Viscount, it would not fall within the ambit of Item 4, and is therefore not exempt for VAT purposes.

Before turning to consider that argument, it is right to mention the additional point which Mr Peacock seeks to raise. He wishes to argue that none of the services provided to Viscount by WHA is capable of falling within Item 4, because WHA is not within the expression “an insurance broker or insurance agent”. That was not a point taken before the Tribunal, or indeed before Lloyd J. As I understand it, it was prompted, and understandably so, by the decision of the ECJ given on 20^th November 2003 in Taksatorringen -v- Skatterministeriat (Case C-8/01). Having heard Mr Peacock develop the submissions he would seek to make based on that decision, and Mr Cordara’s objections, we decided that this was not a line of argument which the Commissioners should be permitted to run. Inevitably, we reached that conclusion with regret, because, at least in the absence of any good reason to the contrary, justice requires a party to be permitted to run any reasonable argument which it may wish, even if it is raised at a very late stage. In the present case, however, if the Commissioners had relied on this line of argument before the Tribunal, it is as certain as anything can be that the respondents would have adduced substantially more evidence than they did as to the extent to which WHA communicated with, and even advised, vehicle owners making claims under their policies, with a view to assisting the contention, which had been effectively accepted by the Commissioners, that WHA was, and its activities were, at least to a significant extent, within the ambit of Item 4.

The possibility of permitting WHA to produce a schedule of further facts, which the Commissioners would have to accept for the purpose of running this argument, was canvassed. However, we took the view that this was a likely recipe for dispute and unfairness, particularly in light of the fact that the possibility was only raised during the currency of the appeal itself. In the event, therefore, the second issue has to be considered by us on the same basis as it was decided by Lloyd J and the Tribunal, namely on the assumption that WHA’s functions were generally capable of falling within the ambit of Item 4.

The Commissioners’ primary contention on this second issue is that the activities of WHA in connection with any claim under a policy fall within the ambit of Item 4 with the exception of the actual footing of the cost of the works carried out by the garage under the policy. In other words, the Commissioners primarily contend that, for the purposes of the VAT analysis:

one should divide the services supplied to Viscount by WHA in connection with any claim under a policy into two components, namely (a) the footing of the bill for the works carried out pursuant to a claim and (b) the handling of all other aspects of a claim; and

that the former component does not fall within Item 4, and is therefore not exempt for VAT purposes, whereas the latter falls within Item 4 and is exempt.

WHA’s case, which was accepted by Lloyd J, is that it is illegitimate to divide up the service supplied by WHA to Viscount in this way, and that there is a single supply of services in relation to each claim dealt with by WHA, and that that supply falls within Item 4.

WHA and the Commissioners each have an alternative case. The Commissioners argue that, if, as WHA contends, there is a single supply of services in relation to each claim, then, in light of the financial significance of the cost of footing the garage bill, it is that which is the main component of the service provided, and in those circumstances, no part of WHA’s invoice to Viscount in respect of a claim is within Item 4. WHA’s alternative argument is that, if, as the Commissioners contend, the actual footing of the cost of the works by WHA constitutes a separate service which falls outside Item 4, then it is nonetheless an exempt supply pursuant to provisions not so far referred to, namely Article 13B(d)(iii) of the Sixth Directive, brought into law in this country by Item 1 of Group 5 of Part II of Schedule 9 to the 1994 Act.

The first question to consider is whether it is right to regard WHA as supplying two services to Viscount in relation to a claim, namely the actual payment to the garage for the works, and the performance of all the other services. On this point, Lord Slynn of Hadley, giving the only reasoned speech, said this in Card Protection Plan Limited -v- Customs & Excise Commissioners (No 2) [2002] 1 AC 202 at paragraph 22 at 213F-G:

On that basis, Lord Slynn went on to say at paragraph 25, 213B-C:

In the following paragraph of his speech, Lord Slynn went on to explain why, in those circumstances, he was of the view that the other services provided by CPP to clients, which would not of themselves constitute insurance, were “ancillary or incidental to the main objective of the scheme” (213D), and in the next paragraph, why the “dominant purpose … is thus plainly one of insurance” (at 213E). Accordingly, in paragraph 28 at p213E-F he expressed the view that while there were “services which are not independently to be categorised as insurance, they are in my view ancillary and in some cases minor features of the plan” which were elements which were not “economically dissociable” from the remainder of the benefits.

Earlier in his speech, Lord Slynn had quoted from the decision of the ECJ (reported at [1999] STC 270) which the House of Lords were applying. In paragraph 18, at 211E-H, Lord Slynn quoted from paragraphs 29 and 30 of the decision of the ECJ, including the following:

The guidance given by the ECJ and the House of Lords is clear, but it is not always entirely easy to apply. That is inevitable. While in many cases the answer may be relatively clear, there will always be cases in which it is difficult to decide whether two factors are to be treated as separate, or one is to be treated as ancillary to the other, and, indeed, if the latter is correct, which factor is ancillary to which. The present case is one in which, in my view, it is not entirely easy to arrive at a clear conclusion, as indeed is evident from the fact that Lloyd J and the experienced Tribunal differed in their conclusions.

I am of the opinion that there are, in the present case, two separate supplies by WHA to Viscount in relation to the disposal of each claim, namely (a) the footing of the bill for the works and (b) the other services, which have been conveniently referred to as “claims handling services”.

First, the two types of service are very different in character. Verifying a claim on behalf of an insurer, and organising the satisfaction of a claim on behalf of an insurer appear to me to be distinct in quality from actually paying off or satisfying the claim, or, to be more accurate in the present case, footing the bill for the satisfaction of the claim. The former types of activity can be said to be classic actions of an agent, namely a claims handler, whereas as the latter is the performance of the fundamental obligation of the principal, namely the insurer. The former activities are administrative and organisational acts, whereas the latter is the performance of the underlying transaction. Of course, there is no intrinsic reason why the agent, the claims handler, should not pay the cost of meeting the claim, as the very facts of this case show, but that does not, in my view, in any way detract from the difference in the quality of the activities involved.

There is force in Mr Peacock’s analysis that, by paying the garage invoice, WHA is supplying the benefit of the garage’s labour and materials to Viscount, a different service from the claims handling duties of WHA. It is plainly not necessary for a claims handler, providing all the other services WHA supplies to Viscount, to take on, let alone to satisfy, primary liability for the cost of the works carried out to satisfy the insurer’s obligation under an insurance policy. Indeed, I strongly suspect it is an unusual extra service for a claims handler to provide.

I am also attracted by the argument that as between Viscount and WHA, the claims handling services were provided by WHA as principal, whereas the payment of the garage involved WHA acting as Viscount’s undisclosed agent. Reliance on such domestic law analysis may well be dangerous when considering the proper analysis for VAT. However, it helps explain, in domestic legal conceptual terms, the difference between the two types of service provided by WHA to Viscount.

The distinction between the two types of service is further underscored by the way in which WHA’s services are paid for. So far as the claims handling contract is concerned, there is, as the Tribunal pointed out, a clear difference between the payment for the claims handling service, namely under clause 9(b), and the footing of the bill, under clause 9(a).

The judge was unimpressed with this argument, saying in paragraph 55 at 667B-C:

As to the analysis in the last sentence in the passage just quoted, I think two points can be made. First, the fact that the contractual arrangement between Viscount and WHA can be characterised as “cost plus” does not call into question the conclusion that “cost” and the “plus” may be properly regarded as paid for different supplies of services, if one can fairly attribute the “cost” to one supply and the “plus” to another. Secondly, it could be a very dangerous analysis from the point of view of WHA for present purposes, because it would seem to suggest that, if there is a single supply of services, the dominant supply is the “cost” element, with the “plus” element being ancillary.

I do not merely rely on how the claims handling contract is financially structured on paper. It is also relevant to consider the factual position. The claims handling service involves WHA receiving £17.60 per claim (subject to adjustment in accordance with the terms of the contract). However, the cost of footing the garage bill is not received by WHA from Viscount: it is paid out by WHA from a float supplied by Viscount. It may well be that the float should be treated in proprietary terms as the property of Viscount, even though it appears to be held in an account in the name of WHA, but that is not a point which should be decided. We have not been taken to all the relevant evidence, and, in any event, it is the sort of domestic law point which would merely serve to confuse the issue which has to be decided in the present case. I mention the point simply to emphasise the difference in the way in which the two services are paid for.

I accept Mr Cordara’s submission that the fact that the consideration payable by Viscount to WHA for dealing with each claim consists of two components cannot conclusively indicate that there are two supplies of services. As he says, there are a number of cases which make it clear that the fact that there is a single payment does not prevent there being more than one supply of services: indeed, if it were otherwise, there could have been no serious dispute in Card Protection. However, as a general point, it seems to me to be a significantly stronger indicator that there is more than one supply of services if the consideration is divided into two legally and commercially separate components, than it is a reliable indicator that there is only one supply of services if there is a single payment. This is particularly so where, as I think in the present case, it would have been very difficult to arrange matters so as to have a single component per claim. Even if, instead of the £17.60, the claims handling component had been based on the amount of the claim, there could still be said to be two components, namely the “cost” and the “plus”, albeit that the “plus” may have been a percentage of the “cost”.

Mr Cordara makes the point that, by authorising a garage to carry out repair work under a policy, WHA were taking on the liability to pay for the work in any event, and that, as such authorising was part of the claims handling, this strongly supports the case for saying that WHA’s payment for the works is part and parcel of its claims handling functions. I do not consider that that point assists WHA’s case on the second issue, although it is attractive. WHA could instruct garages to render their invoices to Viscount. There is no inherent requirement for WHA to render itself liable for the garage bill simply because it authorises the work in question. It could easily authorise the work on terms which made it clear that it was not thereby rendered responsible for the cost by so stating in the leaflet.

Quite apart from this it appears to me that, when deciding whether there is more than one supply of services by WHA to Viscount, one should concentrate on the relationship between WHA and Viscount, and not on the relationship between WHA and third parties, such as the garage. The point is well illustrated by the judge’s rejection of Mr Peacock’s argument:

While it can be said that the garage might well regard the authorising of work and paying for the work as part and parcel of the same transaction, particularly in light of the terms of leaflet supplied by WHA, it by no means follows that the same analysis is appropriate as between WHA and Viscount, any more than it follows that because WHA’s payment to the garage is fully taxable, Viscount’s reimbursement of WHA cannot be exempt.

A number of detailed arguments and analyses were put forward with a view to either supporting or calling into question this conclusion, and I intend no disrespect by not considering those arguments further, but I believe that any more detailed consideration of the issue of whether there is one supply or two would involve the sort of approach deprecated by Lord Slynn at paragraph 22 of Card Protection. In summary terms, I consider that the footing of the garage bill is not ancillary to the claims handling any more than the claims handling is ancillary to the footing of the bill. Although the two services have a number of features in common, they are conceptually, commercially and contractually distinct.

The next question it is therefore necessary to consider is whether the footing of the garage bill is a supply of services by WHA to Viscount which, as WHA contends, falls within the ambit of Item 4. While that matter is to some extent one of impression, as with many issues of construction, it seems to me that the actual payment of the claim or the cost of meeting the claim does not fall naturally within the ambit of the language of Item 4. One does not naturally think of an insurance broker or insurance agent as being the person who pays out the cost of meeting the claim, and that is, if anything, all the more true if one fastens on the words “the services of an insurance intermediary”. When one turns to Note (1), it seems clear that the type of work falling within paragraphs (a), (b) and (d) involves introductory, administrative or organisational activities, and, albeit perhaps to a pretty limited extent, that may well colour one’s reading of paragraph (c), upon which WHA’s argument rightly concentrates. However, the expression in that paragraph, “the handling of claims” does not, in my view, naturally extend to the payment out of, or footing the cost of satisfying, such claims, particularly when related back to the immediately preceding words “the provision of assistance in the administration and performance of such contracts” and the governing words in the Note “services of an insurance intermediary”.

WHA contends that its case derives assistance from Note (9), a contention which was accepted by the judge at paragraphs 51 and 52, at 66A-E. In that connection, Mr Cordara fastens on the words, “to settle the amount to be paid on the claim” at the end of Note (9)(c). In my view, the inclusion of those words at the end of Note (9)(c) does not take matters any further, because, to put it at its lowest, they may not mean actual payment of the claim. They are perfectly capable of meaning agreeing the amount to be payable on the claim. Indeed, I think that that is the natural meaning of those words, given that, as a matter of syntax, it appears to me that they are governed by the words, appearing earlier in Note (9)(c), “written authority”. There would seem to be no good reason why the payment out of a claim should be within Note (9)(c) only if it is within the written authorisation of the agent. One would have thought that if payment as such was intended to be included, then all that would matter is whether the payment was actually made by the agent, and not whether it was made under written authority. On the other hand, if the settlement envisaged involves merely agreeing the amount to be paid, then it is not hard to understand why such a type of settlement by an agent should only fall within Note (9)(c) if it is within his written authority. Accordingly, I do not consider that Note (9) assists WHA’s case.

On the other hand, I consider that Note (10) provides some support for the Commissioners’ case. It indicates that a sum paid in order to satisfy an insurance claim, particularly if it is in substitution for the satisfaction of the claim, is not to be treated as exempt. Mr Cordara contends that this Note takes matters no further, because it is merely concerned with ensuring that the person who supplies the fundamental work or services to satisfy the claim, in this case the garage, cannot contend that those services are exempt because they are ultimately supplied to satisfy an insurance claim. In this case, therefore, he contends that Note (10) merely ensures that there could be no question of a garage contending that its repair services were exempt. I find that unconvincing, because Note (10) is concerned with excluding certain services from the ambit of Item 4, and that Item is concerned purely with the provision of services “by an insurance broker or insurance agent of any of the services of an insurance intermediary”. There could therefore be no question of Note (10) applying to an entity such as a garage in the present case.

In my view, the somewhat gnomic Note (10) at least provides indirect support for the Commissioners’ case on the second issue on this appeal, and it could even be determinative of the issue. It seems to me well arguable that the agreement between WHA and Viscount whereby WHA is to pay the garage for carrying out any work under a policy is an “arrangement … made in connection with … a contract [of insurance or reinsurance]” and is a service “supplied [by WHA] … for the purpose … of satisfying any claim under that contract”. Mr Cordara argues that this is not correct, principally on the basis that Note (10) is concerned with payment to the insured. I am not convinced that that is right: I cannot see why it should not extend to payment made for the benefit of the insured (in this case Crystal).

Even if that involves giving too wide an ambit to Note (10), as it may do, then, as I have indicated, the terms in which the Note is phrased nonetheless appear to me to assist the Commissioners’ case. The purpose of the Note appears to be to ensure that the cost to an insurance agent of actually satisfying a claim should not be treated as exempt from VAT.

My view that Item 4 does not extend to the cost of paying out the claim or the direct cost of satisfying the claim could be said to involve giving the words of Item 4 a limited, rather than a broad, meaning. In that connection, I draw a little support from the principle that, when construing an exemption in VAT legislation, any exemption is to be construed strictly - see for example per the ECJ in SDC -v- Skatterministeriat [1997] STC 932 at paragraph 65, at 953d. Of course, as pointed out by Chadwick LJ in Expert Witness Institute -v- Customs & Excise Commissioners [2002] STC 42 at paragraph 17, at 50J - 51A: “the court is not required to reject a claim which does come within a fair interpretation of the word of the exemption”. Nonetheless, the fact that exemptions are to be construed narrowly appears to me rather to reinforce the conclusion which I have reached.

Quite apart from the domestic legislation, Mr Cordara points out that the fact that a particular payment is not exempted by the provisions of the 1994 Act is not necessarily the end of the matter, because the exemption derives from the Sixth Directive, which has direct effect. However, I do not think that the relatively terse words of Article 13B(a) of the Sixth Directive assist WHA in the present case. That is so especially in the light of the fact that Article 13B requires member states to exempt transactions within its ambit “under conditions which should have the purpose of” ensuring the “correct and straightforward application of the exemptions” and “preventing any possible evasion, avoidance or abuse”. These words indicate that a not insignificant measure of discretion is accorded to a member state when giving effect to the exemption set out in Article 13B. It is right to record that very little argument has been advanced as to the effect of that Article so far as this, the second, issue is concerned.

Finally, on this second issue, I turn to Mr Cordara’s contention that if, as I have concluded, the footing of the bill for the cost of the repairs is to be treated as a separate supply of services as between WHA and Viscount, and does not fall within Item 4 of Group 2, it nonetheless falls within a different exemption, namely Item 1 of Group 5. In the Sixth Directive this latter exemption is to be found in Article 13B(d)(3) which is expressed in the following terms:

In Group 5 of Schedule 9, the legislature has given effect to that exemption in these terms, so far as Item 1 is concerned:

I do not consider that Item 5 can take matters further, because Note (5) to Group 5 is in these terms:

However, it seems to me that there is more force in Mr Cordara’s contention that, in paying the garage bill for carrying out the works, in circumstances where it has a right to recover the cost, or even to pay out the bill, from the float provided by Viscount, WHA’s activities fall within Item 1 of Group 5. In this connection, I think one must be careful about accepting too readily Mr Peacock’s attractive submission that WHA does much more than simply pay the garage bill, because it is of the essence of the Commissioners’ case in relation to the second issue that one must distinguish between the footing of the bill on the one hand, and the provision of claims handling services on the other hand.

Nonetheless, the fact that one distinguishes between the two types of activity does not mean that, when considering the nature of one type of activity, one can disregard its context. The payment of the garage for work carried out under a policy still involves WHA effectively delivering to Viscount the benefit of the parts supplied and work done by the garage, thereby enabling Viscount to fulfil its contractual obligation to Crystal under the retrocession agreement. Further, it is a payment made by WHA on its own account in consequence of a direct bipartite contract between it and the garage.

Furthermore, as was emphasised by the ECJ in SDC at paragraph 63, and by Laws LJ in Customs & Excise Commissioners -v- FDR Ltd [2000] STC 672 at paragraph 35, 686H, the Group 5 exemption, like all other exemptions, has to be “read … strictly”. Earlier, in the same paragraph, at 686E-F, Laws LJ said this:

In the present case, the scheme involves Viscount and WHA agreeing that WHA will have the primary liability to the garage for paying invoices for work done pursuant to claims previously approved by WHA, thereby enabling Viscount to satisfy its duties to Crystal and that Viscount will reimburse WHA the cost of paying such invoices. In my judgment, the fact that WHA is entitled to recover the cost of paying such invoices in full from Viscount, and indeed is provided by Viscount with a float from which it is to pay such invoices, does not result in the supply of the relevant service falling within the ambit of Group 5. Bearing in mind the nature of the scheme, the nature of the benefit conferred on Viscount by WHA, the fact that the primary, indeed the only, liability to the garage to pay its bill for the works lies with WHA, the fact that the Group 5 exemption must be given a relatively strict interpretation, and, indeed, an interpretation in light of the guidance given by Laws LJ, I consider that Group 5 does not assist WHA in the present case.

Standing back, the conclusion that, in footing the garage bills, WHA is not providing an exempt service to Viscount appears to me to be consistent with the structure of the VAT system. It would mean that the otherwise irrecoverable VAT (ie, in this case that payable to the garage) could be rendered recoverable as input tax where there is an insurer outside the Community simply by the insurer creating a captive agent within the Community which would have the obligation to pay the garage invoice. I appreciate that surprising results in VAT law can sometimes obtain as a result of interposing an intermediary between two contracting parties. However, the fact that my conclusion produces a sensible outcome on the second issue once one looks at the matter more widely, is in my view, supportive of the conclusion.

In these circumstances, I have reached a different conclusion from Lloyd J on the second issue, and am of the view that, insofar as the activity of WHA involves paying the garage, the benefit thereby conferred on Viscount by WHA is not an exempt supply as between WHA and Viscount. Accordingly, in my judgment, WHA’s claim against the Commissioners cannot succeed, because it is obliged to charge Viscount output tax. It is therefore necessary to turn to the third issue, which involves considering whether Viscount is entitled to recover the input tax it has to pay to WHA.

On behalf of Viscount, Mr Cordara contends that it is entitled to recover the input tax payable in respect of the invoices submitted to it by WHA in light of both the provisions of the Sixth Directive, which, as mentioned, has direct effect, and of domestic legislation. It is, I think, more appropriate to start by considering the terms of the Sixth Directive, because of the strong presumption that the domestic legislation is consistent with the requirements of the Sixth Directive. However, it is fair to say that the mere fact that there may be differences does not mean that there are inconsistencies, but if there are inconsistencies, which result in a domestic loophole available to the taxpayer, then he may well be entitled to rely on it. (I express myself in somewhat qualified terms, because in this case the taxpayer concerned is Viscount, which is based outside the Community, and it is therefore arguable that it may not be entitled to invoke the doctrine of direct effect.)

In connection with the third issue, Mr Cordara rightly points out that when considering the Community Directives and the domestic legislation, it is very important to bear in mind where the place of the supply occurs. Article 9 of the Sixth Directive contains the rules which govern this question. Those rules are to be observed, even if they lead to a result which is of questionable economic logic or which is surprising in terms of common sense - see ARO Lease BV -v- Inspecteur de Belastingdienst Grote Ondernemingen Amsterdam [1997] STC 1272 especially at paragraphs 23 - 26 at 1285f-h.

Article 9 is headed “Supply of Services”. The normal rule is contained in Article 9.1, and it is:

Article 9.2 then sets out exceptions, and the centrally relevant provision for present purposes is Article 9.2(e). This provides as follows:

Articles 9.3 permits the United Kingdom to move away from Article 9.2(e) “to avoid double taxation, non-taxation, or the distortion of competition”. However, the United Kingdom has not exercised this right in relation to insurance, although it has done so in respect of certain other services - see Article 16 and 17 of the Value Added Tax (Place of Supply of Services) Order 1992, SI 1992/3121.

With that introduction, I turn first, to the case based on the European legislation. Article 13 of the Sixth Directive is concerned with “Exemptions within the Territory of the Country”, and certain specific exemptions are set out in Part A. As I have mentioned, Part B is headed “Other Exemptions” and sets out eight categories, introduced by the words:

Article 17 of the Sixth Directive is in the Part concerned with “Deductions” and is headed “Origin and Scope of the Right to Deduct”. Article 17.2 provides that:

Article 17.3 is in these terms:

In light of the wide definition of the term “taxable person” in Article 4.1 of the Sixth Directive, it is clear that, notwithstanding that they are established outside the Community, both Viscount and Crystal are “taxable persons”. Accordingly, Viscount’s case, insofar as it is based on EC legislation, is that it is entitled to a “refund” by virtue of the provisions of Article 17.3(a) and/or (c).

When considering Article 17.3, it is, I think, important to bear in mind the closing phrase of the governing provision, whose effect is to limit the right to a deduction or refund in relation to VAT paid on services “insofar as the … services are used for the purposes” described in the three subparagraphs. The services on which Viscount have to pay tax are the services of WHA footing the garage bill for carrying out the works under a policy. Those services are “used” by Viscount “for the purposes of” meeting its liabilities to Crystal under the retrocession agreement.

As mentioned, it is common ground that, as between Viscount and Crystal, the activities which Viscount is obliged to carry out, or to arrange to have carried out, are treated as services supplied in Gibraltar, because the activities are insurance services, and such services are treated as supplied in the place where the customer, namely Crystal, is established: see Article 9.2(e) of the Sixth Directive. In those circumstances, it appears to me that Mr Peacock is right in his submission that it is not open to Viscount to rely on Article 17.3(c) of the Sixth Directive, to justify its claim to a refund of input tax, because the services in respect of which it will have paid the tax will not have been used for the purpose of a transaction “exempted under Article 13B(a)”. That is because, in my view, there can be no question of a service provided by one entity outside the EC, namely Viscount, to another entity outside the EC, namely Crystal, being exempted under Article 13B(a), especially when neither entity is registered for VAT. It is true that there is no reference in terms in Article 13B to its applying only to transactions within the Community. However, it is inherent in the concept of liability to VAT that it is not concerned with transactions effected outside the Community between two entities both of whom are situated outside the Community and neither of whom is registered for VAT. That is also clear from the terms of the Sixth Directive because it is concerned with transactions within each “territory”, in other words, within each Member State. Thus, Article 13 itself is headed “Exemptions within the territory of the country” and the whole tenor of Article 3, concerned with “Territorial Application” makes the point clear.

It seems to me that this view is also supported by Council Directive 86/560/EEC of 17^th November 1986 (“the 13^th Directive”). Article 2.1 of that Directive provides, so far as relevant, as follows:

The absence of any reference there to Article 17(3)(c) of the Sixth Directive is, I think, not insignificant. Mr Peacock, realistically to my mind, does not seek to rely upon the 13^th Directive for any purpose other than emphasising that the exclusion of Article 17(3)(c) from the ambit of the 13^th Directive is consistent with the Commissioners’ case, and not with that of Viscount, on the third issue.

So far as Article 17.3(a) of the Sixth Directive is concerned, it could only be relied on by Viscount if the services it supplies to Crystal “would be eligible for deduction of tax” if they had “occurred” in the United Kingdom. Again, in light of Article 9.2(e), the supply of insurance services occurs where the insured carries on business. Therefore, Article 17.3(a) can only be relied on by Viscount if it would be able to claim a refund of the input tax it has paid to WHA if its insured, namely Crystal, carried on business in the United Kingdom. It is clear that no such refund would be permitted in such circumstances in light of the limited extent of Article 17.2. There is no right thereunder to a refund of input tax paid by a provider of exempt services in the United Kingdom.

I turn now to the second aspect of this issue, which involves the domestic legislation. Section 24 is concerned with identifying “input tax and output tax”, and I have set out the relevant part of s24(1) above. Section 25 is entitled “Payment by reference to accounting periods and credit for input tax against output tax”, and it entitles a person “to credit for so much input tax as is allowable under s26”. Section 25(7) empowers the Treasury to specify “supplies acquisitions and importations” by order, in respect of which “VAT charged on them is to be excluded from any credit under this section”.

Section 26 is headed “Input tax allowable under section 25”. Section 26(1) entitles a “taxable person” to credit for “so much of the input tax … as is allowable by or under regulations as being attributable to supplies within subsection (2)”. A “taxable person” is a person who is, or is required to be, registered for VAT - see s3(1). Section 26(2) is in the following terms:

The current Order made under s26(2)(c) is the Value Added Tax (Input Tax) (Specified Supplies) Order 1999, SI 1999/3121 (“the 1999 Order”). Article 2 of this Order states that the services described in Articles 3 and 4 of the Order are specified “for the purpose of s26(2)(c) of the” 1994 Act.

Article 3 of the 1999 Order provides:

I turn to the Value Added Tax Regulations 1995, SI 1995/2518. All references to Regulations hereafter are to those Regulations. Regulation 185 defines “claimant” as:

It also defines a “trader” as a person carrying on a business who is “established in a third country”, ie in a country outside the Community, “and who is not a taxable person in the United Kingdom”.

Regulation 186 provides that:

Regulation 188 precludes a trader from relying on Regulation 186 in respect of any period in which he was “established in … the Community” or he “made supplies in the United Kingdom”, with certain immaterial exceptions.

I should also refer to Regulation 190(1) which states:

The case advanced on behalf of Viscount on the domestic legislation in relation to the third issue involves two simple steps. The first is the contention that, had Viscount been based in the United Kingdom, it would have been entitled to recover its input tax payable in respect of any WHA invoice by reason of its making a supply of reinsurance to an overseas customer, namely Crystal in light of s26(2)(c) and Article 3 of the 1999 Order. The second step is to contend that Regulation 186 entitles it to recover the input tax because it is to be treated, for this purpose, as being a taxable person within the United Kingdom, rather than outside.

When considering this argument, it is necessary first to consider the extent to which Regulation 186 is cut down by Regulation 190, because Mr Peacock contends that this latter Regulation excludes Viscount’s claim in the present case. The language of Regulation 190(1)(a) - “excluded from credit” - reflects the language of s25(7). However, although therefore I see its force, I do not accept Mr Cordara’s argument that the reference in the Regulation should be limited to s25(7). In my view it is also applicable to s25(2): its language - “so much as is allowable” - suggests that if a claimed credit is not “allowable”, it is “excluded”. Further, if Regulation 190(1)(a) had been intended to be limited to cases under s25(7), one would have expected the reference in that Regulation to be to that subsection, rather than to s25 as a whole. In addition, it is agreed on both sides that the purpose of the 1995 Regulations is to maintain a level playing field for traders within and without the Community (although the extent of the playing field is in dispute). That also tends to support the notion that the right of a person outside the Community to claim credit for input tax under the Regulation should be no better than that of a person within the Community. This conclusion is also supported by the fact that one would expect the domestic legislation to reflect the terms of the Sixth Directive.

Accordingly, s26(2), which is brought into the ambit of Regulation 190(1)(a) though the medium of s25(2), applies. This means that Viscount can only claim a repayment of the VAT payable to WHA if it can bring the services it provides to Crystal within one or more of the three paragraph of s26(2), as adjusted in accordance with the provisions of Regulation 186.

Viscount cannot satisfy s26(2)(a), as so adjusted, because the only services it supplies are reinsurance services to Crystal. Such services are exempt, not taxable. Accordingly, Viscount could make no “taxable supplies” to Crystal which could satisfy s26(2)(a). This means that s26(2)(a) is in this connection consistent with Article 17.2 of the Sixth Directive.

Viscount cannot satisfy s26(2)(b) as adjusted by Regulation 186 because, if supplied in the United Kingdom, the reinsurance services it provides to Crystal would be exempt not taxable. Although not directly in point at this juncture, it should be observed that such reinsurance services would only be provided to Crystal in the United Kingdom if Crystal was in the United Kingdom - see Article 9.2(e) of the Sixth Directive. In this connection, therefore, s26(2)(b) reflects Article 17.3(c) of the Sixth Directive.

The critical question which has to be considered is whether Viscount can rely on s26(2)(c) as adjusted by Regulation 186. There is obvious force in the simple argument that it can do so, because Article 3 of the 1999 Order applies. In this connection, the reinsurance provided by Viscount is a service which is “supplied to a person who belongs outside the Member States”, namely Crystal, and which “would have been exempt if made in the United Kingdom by virtue of [an] Item in Group 2 … of Schedule 9 to [the 1994 Act]”, namely Item 4. On behalf of the Commissioners, however, it is contended that s26(2)(c) cannot be satisfied by Viscount, because it is not a person in the United Kingdom making supplies to a customer outside the United Kingdom. That submission is made, at least in part, on the basis that s26(2)(c) is intended to implement Article 17.3(c) of the Sixth Directive, effectively in the same way as ss26(2)(a) and (b) respectively reflect Articles 17.2 and 17.3(a).

The Tribunal accepted that argument, and I am anxious to do so because rejecting it would mean concluding that the United Kingdom has gone further in permitting persons based outside the Community to reclaim VAT than is envisaged by Article 17 of the Sixth Directive. However, I cannot discern any proper basis for concluding that the combination of Article 3 of the 1999 Order, s26(2)(c), and Regulation 190(1)(a) justifies such a result.

Article 3(a) of the 1999 Order is of no assistance to the Commissioners, in my view. It clearly applies, given that it is concerned with services supplied outside the United Kingdom, referring as it does to services which “would have been exempt if made in the United Kingdom”, but it says nothing about the person making the supplies. Section 26(2)(c) also refers to “supplies outside the United Kingdom” (as well as “exempt supplies”). More importantly, for present purposes, by limiting its application to a “taxable person”, s26(2)(c) appears to require the person making the supplies to be based, or at least registered for VAT, in the United Kingdom. However, Regulation 186 effectively requires one to assume that the foreign-based, non-taxable “trader” claiming repayment, ie Viscount for present purposes, is a “taxable person in the United Kingdom” when considering its claim for repayment of VAT.

Crucially, I also consider that Regulation 190(1)(a) does not assist the Commissioners’ case. In this connection, the Commissioners say that it disqualifies Viscount from relying on Regulation 186, because Viscount cannot bring itself within s26(2)(c) at all, as it is not based in the United Kingdom. However, save by referring to a “taxable person”, s26 has no requirement that a person has to be trading in the United Kingdom in order to claim repayment of VAT. If the Commissioners’ case is correct, what the legislature gives with one hand, through Regulation 186, it takes away with the other, through Regulation 190(1).

Regulation 186 entitles a “trader”, ie a person based outside the Community and who is not a taxable person, to recover VAT on certain supplies made to him if the VAT would be input tax “were he a taxable person in the United Kingdom”. In other words, it requires one to inquire whether the VAT paid by a person outside the United Kingdom would be input tax on the counter-factual assumption that he is a taxable person. Accordingly, I do not consider that it can be said that, in a case where Regulation 186 is being invoked in connection with s26(2)(c), a trader outside the Community will fall foul of Regulation 190(1)(a), on the ground that s26(2)(c), can only apply to a taxable person, let alone only to a person based in the United Kingdom. It is true that Regulation 186 is expressly stated to be “subject to the other provisions of this Part”, and therefore is subject to Regulation 190(1)(a), but that is not a powerful enough expression to drive one to the conclusion for which Mr Peacock contends.

Indeed, I think there is considerable force in Mr Cordara’s submission that, if the Commissioners’ argument on this point is correct, then it is very hard to conceive of circumstances in which Regulation 186 could ever be invoked by a trader based outside the Community - the only type of person who can invoke it. If such a trader could never rely on s26(2)(c) because it only applies to persons based in the United Kingdom, then it would seem that precisely the same point would follow in relation to s26(2) (a) and (b). The point is further reinforced by Regulation 188 which prevents a trader, who was established in the United Kingdom during the period in question, from relying on Regulation 186. He has to be based outside the United Kingdom to be a “trader” who can rely on the Regulation; yet, if the Commissioners are right, he is excluded from relying on the Regulation unless he is inside the United Kingdom. In my judgment that simply cannot be right.

One point which should perhaps be mentioned is whether Regulation 186 can be relied on at all by Viscount, because it only applies where VAT has been paid in respect of “supplies … made in the United Kingdom”. At first sight, as the supplies concerned are insurance-related, it might be thought that Viscount could not bring itself within the Regulation, because Article 9.2(e) of the Sixth Directive would result in the services concerned, ie those provided by WHA to Viscount, being treated as supplied in Gibraltar, Viscount’s place of establishment. However, the reason that argument cannot be right (and, no doubt, the reason the argument was not raised by Mr Peacock, so far as I am aware) is essentially the same as the reason why, in relation to the second issue, the services concerned are not “insurance or reinsurance transactions” falling within Article 13B(a) of the Sixth Directive. As a matter of logic, they cannot therefore be “insurance transactions, including reinsurance” within Article 9.2(e) of the same Directive. Article 9.1 therefore applies and, as WHA is an English company carrying on business in the United Kingdom, the place of supply is indeed “in the United Kingdom”.

Mr Cordara says that the Tribunal agreed with the Commissioners on the basis that Crystal, as well as Viscount, should be treated as notionally transposed into the United Kingdom under the provisions of Regulation 186, in order to see whether s26(2)(c) would apply. I am not convinced that that is right. However, if that was the Tribunal’s reasoning, I disagree with it. It does not appear that there is any justification for making any counter-factual assumption beyond that which is explicit in the 1995 Regulations, save that I would accept that, in some circumstances, an express counter-factual assumption might, as a matter of logical, or even commercial, necessity, carry with it an implied counter-factual assumption. For instance, consideration of s26(2)(b) in the context of Viscount’s claim under Regulation 186 involves assuming Crystal is based in the United Kingdom; otherwise, the supplies in this case could not be “made in the United Kingdom”, given Article 9.2(e) of the Sixth Directive. However, I can see no reason why the required assumption of Viscount being based in the United Kingdom under Regulation 186 should carry with it the implicit assumption that Crystal is similarly so based generally.

Although it does not, of course, have any statutory force, it appears to me that the guidance given in a Notice issued by the Commissioners for the assistance of the public supports the case of Viscount, rather than that of the Commissioners, on the third issue. The Notice in question is Notice 701/36 issued in May 2002 in which HM Customs & Excise give detailed and helpful guidance to the public in relation to “Insurance”.

Part 12 of the Notice is concerned with “Insurance related services supplied outside the UK”, and it includes in paragraph 12.3.2 a passage headed “Entitlement to recover input tax”. This paragraph contains a table which explains the VAT treatment in various circumstances. The “VAT treatment where place of supply” is “outside EC” in relation to “other insurance related services when the insured party belongs outside the EC” is said to be “outside the scope with input tax recovery”. It appears to me that that pithy description encapsulates the Commissioners’ case on the European legislation and Viscount’s case on the domestic legislation. The fact that such supplies are “outside the scope” calls into question the proposition that the reinsurance Viscount provides to Crystal is “exempt” for the purposes of Article 17.3(c) of the Sixth Directive, which is the proposition which Viscount relies on so far as the European legislation is concerned. On the other hand, the fact that a person in Viscount’s position is described as benefiting from the right to “input tax recovery” appears to me to be inconsistent with the Commissioners’ case on the domestic legislation, on which Part 12 of the Notice appears to be primarily based: see, for instance, the 1999 Order is referred to in paragraph 12.3.1.

Both parties rely on policy considerations to justify their respective arguments. In this connection, as I have mentioned, they both also contend that the purpose of Regulations 186 - 190 is to ensure a level playing field.

For the Commissioners, Mr Peacock contends that the purpose of the Regulations and of Article 17.3 of the Sixth Directive is to ensue that insurers within the Community providing insurance services to customers outside the Community are not placed at a competitive disadvantage as against insurers outside the Community providing similar services. This, he says, is achieved by giving to insurers in the Community the right to recover input tax, while making exempt supplies to customers outside the Community. Otherwise insurers within the Community would suffer irrecoverable VAT whereas their competitor insurers outside the Community would suffer no irrecoverable VAT. So far this is common ground.

If Viscount’s case were correct, however, it would mean that insurers based outside the Community would also be entitled to recover VAT in respect of supplies by them of insurance services to persons also based outside the Community. That, says Mr Peacock, would be an odd state of affairs, because one would expect the European and domestic legislation to be designed to encourage the provision of insurance services by persons based in the Community to persons based outside the Community, and not the provision of such services by persons outside the Community to other persons outside the Community.

Mr Cordara contends that, on the contrary, the result of the interpretation for which Viscount contends is more consistent with the policy of encouraging trading within the Community. At first sight, a provision which enables persons trading outside the Community to recover VAT payable on transactions which they enter into inside the Community would seem to have little purpose from the point of view of the Community’s interests. However, there are two answers to that. First, there is the general point that, even if it were somewhat altruistic, it is only fair to ensure that a person who does business in the Community, and has to pay VAT in connection therewith, should have the same rights, so far as possible, with regard to recovering the VAT as a result of subsequent transactions, whether inside or outside the Community, as a person carrying on a similar business inside the Community. Secondly, the interests of the Community are in fact better served by the construction favoured by Viscount in the present case. If suppliers of insurance outside the Community are given wider, rather than narrower, rights to claim a refund of input tax incurred within the Community, this serves to increase the competitiveness of the Community in its export trade. If such persons are able to recover any VAT payable they will be less likely to be deterred from obtaining supplies in the Community as opposed to other countries, such as the United States and Japan, where they do not have to pay VAT at all.

While it would be inappropriate and unsafe to base the resolution of the dispute relating to the third issue on such policy considerations, it does appear to me that the policy arguments advanced on behalf of Viscount are rather stronger than those put forward on behalf of the Commissioners.

Accordingly, I consider that Viscount’s case on the third issue is to be preferred, in light of the domestic legislation. It therefore follows that Viscount is entitled to seek a refund of the VAT which, in light of my conclusion on the second issue, it has to pay WHA.

In these circumstances, I am of the view that:

in agreement with Lloyd J, and disagreeing with the Tribunal, there is a supply of services by the garage to WHA, who therefore pay input tax which is, at least in principle, recoverable;

in disagreement with Lloyd J, and agreeing with the Tribunal, WHA make a taxable supply of services to Viscount and so have to charge output tax;

in disagreement with the Tribunal, Viscount is entitled to recover, by way of input tax, the VAT which it has to pay to WHA.

I believe that it follows that the Commissioners succeed in their appeal against WHA, but, subject to their further arguments, the Commissioners are obliged to pay Viscount the tax it is required to pay WHA. I would invite proposals from counsel as to how to proceed with the Commissioners further arguments.

I agree.

I also agree.