Revenue and Customs v Zurich Insurance Company

These are as follows:

Customs & Excise made assessments to VAT upon ZIC under the reverse charge provisions of VATA s.8 (of which more later) for the five quarterly periods ending between 31 December 1999 and 31 December 2000. Nothing at this stage turns on the detailed figures, which remain to be agreed or determined when questions of principle have been finally decided. However, the amount involved is substantial. The net amount of VAT claimed by the assessments under appeal was a little over £2m. If the assessments are upheld in principle the final figure may change, but it will probably remain in the region of £2m.

In 1999 and 2000 a new software system was installed in the United Kingdom operations of ZIC. For that purpose ZIC, acting by its head office in Switzerland (referred to in this judgment as ZIC(HO)), engaged the consultancy services of PwC AG, which subcontracted performance of the services to PwC(UK). All or substantially all the services were physically provided by personnel of PwC(UK) in the United Kingdom, and were provided at business premises of ZIC in the United Kingdom. (ZIC in respect of its United Kingdom operations carried on at its United Kingdom branch premises is generally referred to in this judgment as ZIC(UK). I should spell out that ZIC(HO) and ZIC(UK) are not separate legal entities. They are merely different parts of the business structure within one legal person, namely ZIC.)

PwC AG invoiced ZIC(HO) for its consultancy charges. Those invoices did not include any charge to VAT under United Kingdom law or under the law of any other member state of the European Union. (Originally it was thought that there would be a VAT charge in Switzerland, not a member state, at 7.5%, but I understand that in the event no Swiss VAT was payable, and that a payment originally paid was repaid.) The result was that consultancy services contracted for by ZIC(HO) in Switzerland but performed for ZIC in the United Kingdom and provided physically at premises of ZIC(UK) were received without the addition of any charge for VAT. Suppose that the contractual price, before VAT, for the services was 100. Apart from the issue raised in this case, the cost of the services to ZIC would have been only 100. If, however, ZIC(UK) had obtained the same or similar consultancy services from a United Kingdom-based supplier (for example PwC(UK)), it would have been invoiced for them at their basic contractual price of 100, plus 17.5% for VAT, making a total of 117.5. The supplier of the services would have been liable to account to Customs & Excise for the 17.5 (‘output tax’). Since most of the supplies which ZIC(UK) makes in the course of its business are exempt supplies (being supplies of insurance, exempt by reason of VATA Schedule 9 Group 2), ZIC(UK) would have been able to recover from Customs & Excise only a small proportion of the 17.5 (the ‘input tax’) which it paid as part of the invoiced price charged to it by the supplier. If I assume (arbitrarily, and for purposes of illustration only) that it could have recovered 10% of its input tax, it would have recovered 1.75. The net cost of the services to it would have been 100 plus 17.5 minus 1.75, which comes to 115.75.

In those circumstances Customs & Excise contended that the reverse charge provisions of s.8 meant that ZIC(UK) was liable to pay VAT of 17.5 to them (that is to Customs & Excise), and was entitled to recover 1.75 from them. Customs & Excise assessed ZIC to VAT on that basis.

ZIC appealed to the Tribunal. By a decision released on 30 June 2005 the Tribunal (Dr Avery Jones and Mr Shaw) allowed the appeal in principle, leaving detailed figures to be agreed or, if they could not be agreed, determined later. HMRC (as Customs & Excise have now become) have appealed to the High Court, and the appeal has come before me. For the reasons which I will explain, I respectfully disagree with the decision of the Tribunal, and I will allow the appeal.

ZIC is a Swiss company with its headquarters in Zurich. It was established in 1873, and is now at the head of a major insurance group with operations in many countries throughout the world. It has subsidiaries and branches in many countries, including a large operation in the United Kingdom. For the most part this case is concerned with the United Kingdom branch (referred to as ZIC(UK) in this judgment) rather than with United Kingdom subsidiaries, but there is one respect in which subsidiaries are relevant. I will come to that just before the end of this judgment. The term ‘branch’ is conventional, but it should not be thought to imply that ZIC(UK) operates at only one location in this country. I believe that there are seven substantial offices. The United Kingdom operations are conducted on a considerable scale, especially after a merger in 1998 with the businesses of several other insurance companies, two of which were of substantial size. In 2000 ZIC(UK) received premiums of almost £2bn. After the merger the group had about 21,000 employees in the United Kingdom. (I do not know how they divided between employees of ZIC(UK) and employees of United Kingdom subsidiary companies.) Within ZIC’s world structure the United Kingdom is part of the ‘UKISA’ region. UKISA is the United Kingdom, Ireland, and South Africa. This case is only concerned with the United Kingdom part of UKISA.

In the 1990s ZIC(HO) commenced and continued the development in Switzerland of a template, which it called Z-Core, for the computer-based systems to be used throughout ZIC’s worldwide group for high level management information and recording. Z-Core, if I have understood correctly, is not so much a software system itself as a description of what the functions and capabilities of all the software systems used in the numerous branches and subsidiaries of ZIC throughout the world should be like. A major purpose of it was and is that at world headquarters level the overall management of the group should have access to information, configured on a consistent basis, about the business activities and results of all the branches and subsidiaries around the world. The plan was that, once Z-Core had been planned and designed in sufficient detail, it would (even though the process of development of it continued) be ‘rolled out’ in all the separate ‘BUs’ (business units) around the world. The design of Z-Core has been a head office function intended to create a pattern applicable to all the activities of the worldwide group, but the installation in the separate business units of software systems designed and configured to operate within the parameters of the Z-Core function was to be a series of different operations.

In the United Kingdom the introduction of the Z-Core template involved the installation of new financial software known as SAP (from the name of the German company which designed the software). The Tribunal states:

“SAP is a set of software tools used by many international businesses to keep business records, prepare accounts, monitor budgets, control costs and handle many other business process needs. ... The output from SAP provided management reporting, regulatory reporting (such as insurance company regulation, direct tax and VAT) in sterling and based on UK GAAP [Generally Accepted Accounting Principles] for ZIC(UK), local reporting based on IAS [International Accounting Standards], and also information required by ZIC(HO) for Group reporting in other currencies and based on IAS with an addition for insurance company reporting known as NewZAP. Consolidation worldwide was performed by the output from SAP being passed through another system, Cormis.”

This case is not about the VAT consequences of expenditure incurred in connection with the development and design of Z-Core. It is only about the United Kingdom VAT consequences of expenditure on the services of consultants who were engaged to assist upon the installation of SAP into the activities of ZIC(UK). That was a major and expensive operation. ZIC could not have done it using only its own internal resources. It needed outside consultants, and it incurred large consultancy fees.

For the first phase of the installation of SAP in the United Kingdom (covered by ‘Work Order 1’), the consultant engaged was PwC(UK). The contract relating the Work Order 1 was made, not by ZIC itself, but by the group’s United Kingdom service company .No disputed VAT issue arises in connection with PwC(UK)’s fees for that first phase. The detail of what was done does not appear in the Tribunal’s decision or in the documents which I have seen. I infer, however, that PwC(UK) invoiced ZIC (either ZIC(HO) or ZIC(UK) or the service company – I do not know which) for a fee plus 17.5% for United Kingdom VAT, and that ZIC(UK) (or the group representative member if that was not ZIC(UK)) recovered from Customs & Excise only the small proportion of the 17.5% which it was able to recover by reason of nearly all of the supplies made by companies within the United Kingdom VAT group being exempt supplies (see paragraph 4 above).

For later phases of the installation of SAP into the operations of ZIC(UK) (the phases covered by subsequent Work Orders) the contractual pattern for the engagement of consultants changed. ZIC(HO) contracted with PwC AG for consultancy services to be provided to ZIC in the United Kingdom; PwC AG sub-contracted the work to PwC(UK). Thereafter (as I have already said in paragraph 3 above) the consulting work was actually done in the United Kingdom by personnel of PwC(UK). PwC AG invoiced ZIC(HO) in Switzerland. The invoices did not include any charge for United Kingdom VAT. The original intention was that ZIC would meet the costs out of its head office funds, but later it was decided that the funds of ZIC’s United Kingdom branch should make transfers to head office of amounts equal to PwC AG’s charges. These transfers were internal transfers between different holdings of money of a single legal person, and in themselves had no VAT consequences.

At the risk of labouring excessively the point made in paragraph 10 above about the difference between the development of Z-Core (a matter relevant to ZIC’s business worldwide) and the consequential installation of SAP into the activities of ZIC(UK) (a matter relevant, or primarily relevant, to ZIC’s business in the United Kingdom), I wish to quote a number of passages from the Tribunal’s decision (in addition to the passage quoted in paragraph 9 above, which is also relevant to the same matter) and from documents which the Tribunal had before it. I also quote passages to show that the central role which SAP was to perform was a role within the United Kingdom business of ZIC(UK). I do these things because the Tribunal made a finding that the work on installation of the SAP system was carried out for the benefit both of ZIC(UK) and of ZIC(HO), and in my view ZIC attempts to place on that finding a greater burden than it can bear.

In all VAT contexts the legislative provisions are likely to be found in two different places: in the domestic legislation (consisting of the VATA, other Finance Acts, and United Kingdom statutory instruments), and in the EC Sixth Directive. Practitioners and the courts are now well familiar with this feature of the VAT system, and normally it requires little or no exposition or discussion. It received none in the decision of the Tribunal in this case. In my view, however, the interaction of the domestic law and of the Sixth Directive is not entirely straightforward in this case, and I wish to say something about it.

VAT is imposed in Member States of the European Union, one of which is the United Kingdom, because the Sixth Directive imposes an obligation on the Member States to impose it. Further, the Member States have to impose it within the parameters provided by the Directive. Article 1 of the Directive provides as follows:

“Member States shall modify their value added tax systems in accordance with the following Articles.”

The Directive lays down a framework of charging provisions and relieving provisions. There is an important difference between the two types of provisions so far as concerns their impact on the domestic law of the United Kingdom.

The provisions of the Directive which are important for the purposes of this appeal are some of the sub-articles of articles 2, 9 and 21.

There are several points to be made about the provisions of the Sixth Directive which I have quoted above. There are also important decisions of the ECJ about the application of article 9. I will return to those matters later, but for the present it is convenient to set out the relevant provisions of the United Kingdom statute.

Although the domestic VAT legislation is by no means confined to the VATA, all the provisions which are material to this case are contained in that Act.

Where services are supplied in a Member State there is, or should be if the Member State has correctly implemented the Directive, a VAT liability upon the consideration for them: article 2.1(a). For present purposes I can equate the Member State with the United Kingdom, since no other Member State is involved in this case. The rules which determine whether, for purposes of the Directive, the services are supplied in the United Kingdom or not are contained in article 9, which I say more about in the next following paragraph. If the services are supplied in the United Kingdom the general rule laid down in the Directive is that the person liable to pay the VAT is the supplier: article 21.1(a). However, there is an exception for some kinds of services, one of which is consultancy services, if the services are (i) supplied to a ‘taxable person’ (a person who independently carries out an economic activity: article 4.1), and (ii) carried out by a person not established in the United Kingdom. In that case the VAT is payable by the taxable person to whom the services are supplied: article 21.1(b). The charge is still, as I see it, conceptually a charge upon the supply of services by the supplier (not upon the receipt of services by the recipient), but it falls to be paid by the recipient.

Article 9 is quite a complex article. In cases concerned with suppliers of services who do have business establishments there is a general rule in article 9.1, but an important exception in article 9.2. Within both the general rule for cases covered by article 9.1 and the rule in 9.2 for the exceptional cases there are, or may be, two alternatives, without the text of the Directive offering much in the way of guidance as to which alternative should apply in any individual case. I have quoted the relevant wordings of the two sub-articles in paragraph 16(ii) above.

The United Kingdom statutory rules which affect this case are all contained in the VATA. They ought to implement the principles set out in the Sixth Directive (see paragraph 15 above), but they are in some respects differently worded from the Directive, and they do not operate in exactly the same way. VAT is charged on the supply of goods and services in the United Kingdom (s.1(1)(a)). That provision corresponds to article 2.1 of the Directive. But the place of supply rules are differently constructed, at least for supplies of services. Whereas in the case of the Directive the place of supply of services may be where the supplier is located or where the recipient is located, depending on whether article 9.1 or 9.2 applies, under s.7(10) of the VATA (reproduced in paragraph 18(ii) above) all supplies of services are treated as made where the supplier ‘belongs’. That place is determined by reference to s.9(2) (see paragraph 18(iii) above), and depends on the location of his or its (the supplier’s) business establishment or establishments. There is no rule in the VATA like article 9.2(e) of the Sixth Directive, under which supplies of certain services are taken to be made in the country where the recipient is established or has a fixed establishment.

Nor is there a rule which precisely tracks article 21.1(b) in requiring the recipient of services from an overseas supplier to pay the VAT which is chargeable on the making of the supply. However, the Act seeks to get to essentially the same result by the different route of the reverse charge provisions in s.8 (quoted in paragraph 18(iv) above). Where services of the kinds to which the section applies (and they include consultancy services) are supplied by a person who belongs in a country outside the United Kingdom to a recipient who belongs in the United Kingdom, the section imposes a liability to VAT on the recipient. Whereas the scheme of the directive is that the overseas supplier of the services has a liability to VAT but the United Kingdom recipient is required to pay the supplier’s VAT, the scheme of s.8 is that the United Kingdom recipient of the services has the liability, and is liable to pay its own VAT. Conceptually the two approaches are different, but they work out in essentially the same way. Further, as long as the result of the domestic legislation is in accordance with what would be the result of the provisions in the Directive, it does not matter that the domestic legislation gets to that result by a different route. That is the effect of the third paragraph of article 249 of the EC Treaty:

“A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.”

It is worth noting that the reverse charge only really matters in a case where the United Kingdom-based recipient of services to which s.8 applies (for example consultancy services supplied by a non-United Kingdom supplier) itself makes supplies that are largely exempt, and so is able to recover only a small proportion of input tax suffered by it. If the recipient makes fully taxable supplies (or zero-rated supplies) and therefore can recover all its input tax, the reverse charge applies but is of no practical importance. The recipient is liable to pay output tax on the notional supply to itself which it is deemed by subsection (1) to have made (‘as if the recipient had himself supplied the services in the United Kingdom in the course or furtherance of his business’), but is immediately entitled to an equal and opposite credit for input tax (‘so much as … entitles a taxable person to credit for input tax’). Since, however, the United Kingdom branch of ZIC makes predominantly exempt supplies of insurance, a liability to pay VAT under the reverse charge would not be effectively neutralised by a matching credit for input tax. That is at root what this case is about.

I turn to the cases on article 9. It is sufficient at this point to refer to three of them.

Normally at this point in my judgment I would have expected to summarise the decision of the Tribunal before setting out my own analysis of the legal position. However, in this case it is sensible for me not to come to the decision of the Tribunal until I have set out how I consider that the United Kingdom legislation would have operated apart from the Directive. The reason is that the Tribunal says nothing about the domestic statute, but addresses only the position under the Directive. In my view the position under the domestic statute does need to be explained. It is, I believe, most helpful to do that now, and to defer summarising the Tribunal’s decision until immediately before the part of my judgment when I consider the matters which it addressed.

Amplifying on why I consider that the position under the VATA has to be dealt with as part of my decision, I refer to paragraph 15 above, in which I make the point that the Sixth Directive does not itself impose VAT liabilities in Member States: it directs Member States to impose liabilities in accordance with the principles of the Directive, but taxable persons are liable to pay VAT in Member States, like the United Kingdom, because the domestic statute requires them to do so. In this case a necessary step to upholding the assessment is to demonstrate that, if the VATA stood alone unaffected by the Directive, ZIC would be liable for the VAT assessed upon it. If ZIC would not be liable to pay the VAT assessed under the VATA considered by itself, ZIC is not liable whatever the Directive might provide.

In my opinion, under the VATA by itself, ZIC would be liable. The assessments for the five periods under appeal were made under the reverse charge regime contained in ss.8 and 9 of the Act: that is clearly explained in the Decision Letter dated 30 September 2002 in which the assessing officer of Customs & Excise explained the reasons for the assessments which she had decided should be made. The provisions are set out in paragraph 18(iii) and (iv) above, to which reference should be made in connection with the following subparagraphs.

Before I move on I should say something about how the matter stands when regard is had both to the VATA and to the Sixth Directive. For the reasons which I have set out in paragraph 15(ii) above, I believe the position to be as follows. If in accordance with the principles in the Sixth Directive ZIC would be liable to pay to the United Kingdom VAT of the same amount as it is liable to pay under the VATA, it remains so liable. (The point made at the end of paragraph 22 above about article 249 of the EC Treaty is relevant here.) If, however, under the Directive ZIC would not be liable to pay United Kingdom VAT at all (or would be liable to pay only a smaller amount), the Directive overrides the United Kingdom liability, which ceases to be payable (or is reduced to the lower amount which would be payable under the Directive).

Under the Directive United Kingdom VAT would be payable on the basis of a supply of services by PwC AG if, on the proper application of the place of supply rule in article 9.2(e), the services fall to be regarded as supplied in the United Kingdom. Further, ZIC would be liable to make the payment, by reason of article 21.1(b). However, under the Directive United Kingdom VAT would not be payable if article 9.2(e) had the effect of treating PwC AG’s services as having been supplied in Switzerland. In that situation the Directive would remove the liability which would otherwise have arisen under ss.8 and 9 of the VATA. So in my opinion that is the reason why the place of supply rules in the Directive are critical in this case. If they mean that PwC AG’s supply was made to ZIC in the United Kingdom they do not remove the liability to United Kingdom VAT which arises under ss.8 and 9. If they mean that the supply was made in Switzerland, they do.

The Tribunal, in its decision, goes almost straightaway into what it understands the case to depend on, without explaining why the case depends on it. The first sentence of the decision is: ‘This is an appeal by Zurich Insurance Companyagainst an assessment to VAT dated 6 November2002 for £2,085,153 in respect of periods 12/1999 to 12/2000.’ The assessment was in fact made under the reverse charge provision in VATA s.8(1), but the Tribunal does not say so. Indeed, at no point does the Tribunal refer to any specific provision of the United Kingdom legislation. In paragraph 2 of the decision the Tribunal states what it considers the issue in the appeal to be: whether the place of supply of consultancy services by PwC AG to ZIC was Switzerland or the United Kingdom. It does not spell out why that is the issue. However, I hope that I have explained that matter in earlier paragraphs of this judgment, culminating in paragraph 29 above. After paragraphs describing the facts the Tribunal sets out article 9 of the Sixth Directive, followed by this:

“The relevant part is article 9(2)(e). We have included article 9(1) since this is relevant to the cases we consider. The issue is whether PwC AG’s services, which it is common ground are consultancy services, were supplied at the place where the customer [the Appellant Company] has established [its] business [Zurich (HO) in Switzerland], or the place where it has a fixed establishment to which the service is supplied [Zurich (UK) in the UK]. It is common ground that we should decide the case on the basis of the Directive alone without regard to the VAT Act 1994.” (The square brackets and the words in them are not interpolations by me. They appear in that form in the decision.)

The Tribunal summarises the contentions of the parties, and reviews the authorities, principally Berkholz and DFDS. There is also a brief reference to RAL. The Advocate-General in RAL had commended ‘an analysis that is especially responsive to the factual economic and commercial reality of the case’. The Tribunal picked up that phrase, and said that, since ZIC(UK) undoubtedly had a fixed establishment with many thousands of employees there, it would apply ‘the same approach based on economic reality, rather than apply a hierarchy.’ (A ‘hierarchy’ would entail determining the place where a service is supplied simply by reference to where the supplier, in an article 9.1 case, or the recipient, in an article 9.2(e) case, is ‘established’, in preference to where the supplier or the recipient has a fixed establishment.) In this case article 9.2(e) applied, and it gave two possible places for where the customer (ZIC) received the supply of consultancy services from PwC AG: Switzerland where it (ZIC) was established or the United Kingdom where it had a fixed establishment. The Tribunal said that it must ‘choose between the two possibilities on the basis of rationality, economic reality and distortion of competition’. After discussion, which I will summarise in the next few paragraphs, the choice that it made between those two possibilities was that the supply was made to ZIC in Switzerland, not in the United Kingdom.

As regards economic reality the Tribunal considered the place of contracting, the location which bore the cost, what was actually done, and the establishment for the benefit of which the work was done. It considered that the place of contracting was Switzerland, either on the basis that there was an earlier ‘framework’ agreement between ZIC(HO) and PwC AG for PwC AG to provide consultancy services generally to ZIC, or (more relevantly in my view) because the individual Work Orders, pursuant to which the services that are the subject matter of the VAT assessments were actually provided, though negotiated by personnel of ZIC(UK), had to be accepted by ZIC(HO) before they became contractually binding. The location which bore the cost was originally intended to be ZIC(HO), but later became ZIC(UK). What was done was done in the United Kingdom, not in Switzerland. The work was done for the benefit both of ZIC(UK) and ZIC(HO). The Tribunal considered that, of those factors, the most important one was the place of contracting. So its tentative conclusion was that the supply was made to ZIC(HO), not to ZIC(UK), but it said that it was then going to test the conclusion for ‘rationality and distortion of competition’. The Tribunal set out to do that in paragraph 24 of its decision. It made observations about rationality which I find difficult to understand. It appears to me to have said nothing about distortion of competition.

The Tribunal then indicated that it did not accept an argument which Mr Pleming had advanced based on the ‘cost components’ concept (which I will explain later). Nor did it consider that arguments based on the corporation tax treatment of the costs were relevant.

Accordingly, it concluded that the supply of consultancy services by PwC AG was made to ZIC(HO), and that ZIC(UK) was not a ‘fixed establishment to which the service is supplied’ (words taken from article 9.2(e)). The Tribunal concluded that Switzerland, not the United Kingdom, was the place of supply.

I preface the discussion that follows by saying this. (1) If under article 9.2(e) PwC AG’s services are taken to have been supplied to ZIC in Switzerland, the decision of the Tribunal is correct, and HMRC’s appeal fails. (2) If under article 9.2(e) PwC AG’s services are taken to have been supplied to ZIC in the United Kingdom, the decision of the Tribunal is wrong, and HMRC’s appeal succeeds.

I begin my discussion of the question by repeating a paraphrase of article 9.2(e) as it falls to be applied in this case, interpolating as I do so references to the specific facts which are relevant:

“The place where consultancy services [viz. the consultancy services of PwC AG] are supplied when performed for customers established outside the Community [for ZIC, which is established in Switzerland] … shall be the place where the customer [ZIC] has established [its] business [Switzerland] or has a fixed establishment to which the service is supplied.”

Before I evaluate the analysis of the Tribunal I will state the essential element of how I would approach article 9.2(e) in the context of this case. The subparagraph gives two possibilities: (1) the place where ZIC has established its business, or (2) the place where ZIC has a fixed establishment to which the service is supplied. The first question is: which of those two possibilities should be adopted? It is first necessary to ask whether possibility (2) exists on the facts. That is, does ZIC have a fixed establishment elsewhere than where it (ZIC) is established, and was the supply of services made to that fixed establishment? If ZIC does not have a fixed establishment elsewhere or, although it does, the supply of services was not made to it at that establishment, the place of supply will be possibility (1): the place where ZIC has established its business, namely Switzerland. There would be no other possibility. The case would be analogous to Berkholz, in which the taxable person was established in Germany and did not have a fixed establishment anywhere else (the gaming machines on the ferries not being a fixed establishment). If, however, ZIC has a fixed establishment elsewhere than in Switzerland (which it obviously does), and if the services are supplied to that establishment (which is the critical disputed issue), then in my view the place of supply will be where the establishment is located.

There is a slight variant, which seems to correspond to the Tribunal’s finding in this case. Assume (realistically) that ZIC has a fixed establishment in its home jurisdiction (Switzerland), and also has a fixed establishment in the United Kingdom. It is necessary to ask: to which of the two establishments were the services of PwC AG supplied? If they were supplied to the Swiss establishment, the place of supply would be Switzerland. That could be on the theoretical basis that the case falls back to the first of the two possibilities (‘where the customer has established its business’). Or it could be on the basis that the second possibility applies (‘where the customer has a fixed establishment to which the service is supplied’), but the second possibility requires a decision as to which was the establishment to which PwC AG’s services were supplied, and the decision goes in favour of the Swiss establishment. That seems to me to be the way that the Tribunal viewed the matter. Its decision was that as a matter of economic reality the services of PwC AG were supplied to ZIC at its head office, not to ZIC at its fixed establishment or establishments in the United Kingdom.

I agree with the Tribunal’s approach up to a point: I agree that it was appropriate to ask whether PwC AG’s services were supplied to ZIC at its head office, or to ZIC at its United Kingdom establishment. However, I cannot agree with the answer which the Tribunal gave to the question. In my view, on the facts of this case, the only tenable answer to the question is that the services were supplied to ZIC at its United Kingdom establishments. I respectfully disagree with the Tribunal that the most important consideration was the place at which the contract for the services to be supplied was made. VAT is not charged on the supply of the service of making a contract for services. It is charged on the supply of the services which have been contracted to be supplied.

When a Work Order was signed ZIC thereby contracted with PwC AG for PwC AG to provide consultancy services to ZIC’s United Kingdom establishment. I can accept that PwC AG and ZIC made that contract in Switzerland. I can also accept that it was the sort of contract as respects which the head office in Switzerland would, for commercial reasons, want to be involved in the final decision to enter into it, rather than leaving that decision to the United Kingdom establishment alone. But PwC AG did not provide or supply the consultancy services to ZIC at ZIC’s head office by making a contract to provide or supply them. It provided or supplied the services by performing its contract after it had made it. And it performed the contract wholly, or virtually wholly, in the United Kingdom. It performed it through a sub-contractor, PwC(UK), and PwC(UK) fulfilled PwC AG’s contractual obligations entirely in the United Kingdom. PwC(UK) sent its specialist personnel to ZIC’s offices, and it was there that the services which ZIC had contracted for were supplied by (or on behalf of) PwC AG and received by ZIC. In this connection the facts found by the Tribunal are in paragraph 5(19) of the decision:

“(19)

The implementation of SAP by Zurich (UK) was carried out partly by Zurich (UK) staff (60% of the staff, although originally it had been expected to be 75%) and partly by PwC(UK) (40% of the staff) working as a team in Zurich (UK) premises. At the height there were 165 staff working on the project in the UK.”

I accept that, when PwC AG performed the contract by means of what the staff of its subcontractor, PwC(UK), did at ZIC(UK)’s premises in the United Kingdom, there was a sense in which it (PwC AG) provided a service to ZIC(HO) as well as providing a service to ZIC(UK): it provided to ZIC(HO) the service of doing what it had contracted with ZIC(HO) that it would do. The Tribunal, in paragraph 23 of its decision, draws an analogy with the circumstances in Customs & Excise Commissioners v Redrow Group plc [1999] STC 161, in which a first party contracted with a second party that the second party would, in consideration of payment from the first party, provide a service to a third party. There was a supply of services to the first party, which was entitled to input tax credit for the VAT content of what it had paid to the second party. The analogy is apt in some ways, but it does not change my view. It remains the case that what the head office of ZIC wanted was to get the SAP system installed into the operations of ZIC’s establishment in the United Kingdom. It was in order to secure that result that ZIC engaged PwC AG to provide its consultancy services. That result is what ZIC got, and in my view the actual provision of the services to ZIC in the United Kingdom far outweighs in importance the feature that the contract which PwC AG thereby performed in the United Kingdom had been made with ZIC(HO) in Switzerland. In reality the fixed establishment of ZIC ‘to which the service [was] supplied’ (echoing the words of article 9.2(e)) was its establishment in the United Kingdom, and not its head office in Switzerland.

What I have said in the last few paragraphs is, to my mind, the point of transcending importance in this case, and the foremost reason why in my view the decision of the Tribunal cannot stand. But there are other considerations which, in my opinion, all lead to the same conclusion. I mention them in the following paragraphs.

In paragraph 22 of the decision the Tribunal says that in its view the work was done for the benefit of both establishments: the head office establishment as well as the United Kingdom establishment. That is true in the sense that any head office of a business with branches located away from the head office will want its branches to be adequately equipped and organised, and will also want to have efficient access to information about the business which is going on in the branches. But that does not, in my opinion, change the position. The critical point is that, so far as the Work Orders relevant to this case are concerned, PwC AG was engaged to consult on the installation of the new SAP system in the premises and operations of ZIC(UK), not in the premises and operations of ZIC(HO). Of course ZIC(HO) would have wanted to be sure that the system was a good one and that it was efficiently installed. Also ZIC(HO) had a particular concern that the SAP system installed in the United Kingdom should be compatible with ZIC’s Z-Core template. But the operation was still one for the installation of a new system in the United Kingdom establishments, not in the head office establishment in Switzerland.

In paragraph 24 of the decision the Tribunal says, in relation to its tentative conclusion that PwC AG’s supply of services was made to ZIC(HO), that it will ‘test it for rationality and distortion of competition’. As regards rationality, the word ‘rational’ is used in most of the ECJ cases which have been concerned with the place of supply of services. The court consistently links rationality in this context with the avoidance of conflicts of jurisdiction, of double taxation, and of non-taxation. I have already quoted, but I will repeat, passages to that effect in the judgments of the court.

“Article 9 is designed to secure the rational delimitation of the respective areas covered by national value added tax rules … The object of those provisions is to avoid, first, conflicts of jurisdiction, which may result in double taxation, and secondly, non-taxation …”(Berholz, paragraph 14

“… regard is to be had to another establishment from which the services are supplied only if the reference to the place where the supplier has established his business does not lead to a rational result for tax purposes …” (ibid. paragraph 17)

“However … that treatment would not lead to a rational result for tax purposes …” (DFDS paragraph 22)

“Finally, application of such a rule leads to a rational solution from the point of view of taxation since the services concerned are subject to the VAT regime of the Member State in the territory of which the recipients of the services are established.” (RAL paragraph 33)”

I assume that in paragraph 24 of its decision the Tribunal is seeking to demonstrate that it would be rational to treat the services in this case as having been supplied in Switzerland rather than in the United Kingdom. However, I have to say that I cannot see how the paragraph demonstrates any such thing. In part it focuses on an example which appears in the opinion of the Advocate-General in DFDS. It is not apparent to me what that has to do with the arguments about rationality.

Towards the end of the same paragraph, paragraph 24, the Tribunal says of this case that ‘on the approach in DFDS the supply was made to ZIC(HO)’. That seems to me to be a highly questionable assertion, and in any event I cannot see what it has to do with what, according to the beginning of the paragraph, was going to be an exercise of testing for rationality the conclusion that PwC AG’s services were supplied to ZIC at its head office. It is a mere assertion that the conclusion is correct, rather than any sort of testing of it. At the end of the paragraph the Tribunal writes: ‘The reason why there is no tax in the United Kingdom is that there is no tax on the transfer of the services between a head office and a branch …’ I refrain from debating the validity of that proposition, but I do ask: What has it to do with rationality? Perhaps the suggestion is that, although it is irrational that there should be no charge to United Kingdom VAT in this case, the irrationality lies in the absence of a charge on quasi-supplies by one part of a company to another part of the same company. If that is the suggestion, I do not agree with it.

At the beginning of paragraph 24 the Tribunal wrote that it would also test its tentative conclusion for distortion of competition. However, as I read the paragraph it says nothing at all about distortion of competition.

In my judgment the factors which the ECJ has had in mind in its frequent references in this context to a rational approach or a rational result are avoidance of double taxation, avoidance of non-taxation and avoidance or prevention of distortion of competition. The Court of Appeal in this country has recently emphasised the importance of those concepts:

“In my judgment the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition are general principles of the Sixth Directive.” (Arden LJ in HMRC v IDT Card Services Ireland [2006] EWCA Civ 29, at paragraph 95)

Double taxation would arise if there were overlapping claims for VAT in two or more Member States. It is not directly an issue in this case.

In relation to non-taxation the point is that, if services are ‘consumed’ in the Community they should be subject to a VAT charge. (As to the concept of services being ‘consumed’ see the observations of the Advocate General in the RAL case which I quote in paragraph 24(iii)(c) above.) In my judgment the services of PwC AG which this case is about were consumed in the Community (specifically in the United Kingdom) to a much greater extent than they were consumed outside the Community in Switzerland. There can be cases where non-taxation inevitably arises, and if so the non-taxation result must follow. For and example see Commission v French Republic, Case C-429/97, [2001] STC 156 at 172, paragraphs 51 and 52. However, this is not such a case.

As regards distortion of competition, ZIC’s United Kingdom establishment competes with other insurance enterprises doing business in this country, most of which are United Kingdom companies. If a competitor replaced the whole of its top level computerised system and used the services of a consultant to do so, it would expect to be charged VAT on the consultancy fees, and would be able to recover only a small proportion of the VAT. For ZIC(UK) to be able to replace its computerised system without a VAT charge is a manifest distortion of competition.

In my judgment the conclusion that PwC AG’s services were supplied to ZIC’s fixed establishment in the United Kingdom is not just the only tenable conclusion on the facts. It is also the conclusion which produces a rational result, which avoids non-taxation in a case where there ought to be taxation, and which avoids distortion of competition.

Before the Tribunal Mr Pleming advanced on behalf of HMRC a ‘cost components’ argument, deriving from words which appear in the 1^st VAT Directive. The Tribunal did not attach significance to the argument. I do not regard it as a major point in the case, but I think that there is some force in it. The basic concept is that, if a person carrying on a business buys in goods or services at a price which includes VAT (input tax, in the terminology used in our legislation), the cost of the goods or services is a cost component of his business; if he makes fully taxable supplies in the course of his business he can recover from HMRC the VAT input tax charged to him on his cost components; if he makes supplies which are mostly exempt supplies (like supplies of insurance) he can only recover a small part of the input VAT charged to him on his cost components. If ZIC had obtained the consultancy services from a United Kingdom supplier, which would have added VAT to its invoices, the invoices, including the VAT element in them, would have been cost components of ZIC’s business, and ZIC could only have recovered a small proportion of the input tax. But what if ZIC instead obtained the services from a non-United Kingdom supplier which did not add VAT to its invoices? Without more there would be an inequality of treatment, and in my view a main purpose of the reverse charge is to create equality of treatment. That purpose is fulfilled if the reverse charge applies in this case (which it does if the supply of PwC AG’s services was located in the United Kingdom under article 9.2(e)), but is not fulfilled if it does not.

I move to another point. Before the Tribunal HMRC sought to rely on things which had been said on behalf of ZIC(UK) to the Inspector of Taxes in relation to its corporation tax position. The Tribunal did not see any relevance in this, and referred in support of its view to the permanent establishment article of the Double Taxation Agreement between the United Kingdom and Switzerland. On this matter also I think that there was more in the point that HMRC made than the Tribunal recognised. Of course the statutory rules of corporation tax (which include relevant provisions of Double Taxation Agreements) are altogether different from the statutory rules of VAT. Arguments advanced by ZIC(UK) about the meaning of an article in the Double Taxation Agreement could not realistically be used against ZIC on an appeal about the meaning of provisions in the VATA or the Sixth Directive. But that does not mean that facts presented by ZIC(UK) to the Inspector of Taxes cannot be relevant to factual issues which affect ZIC’s VAT position.

In 2002 ZIC(UK)’s tax department was claiming corporation tax deductions for ZIC’s expenditure incurred in 2000 on installation of the SAP system. In a letter of 11 September 2002 the Inspector of Taxes asked:

“Did the implementation of the SAP system relate only to the UK business? If not how were the costs allocated between the branch and the home office?”

The immediate reply did not directly answer the Inspector’s first question, although I think that the implication was that the answer was yes. In any event, in a later letter of 21 May 2004 ZIC(UK)’s tax manager wrote to the Inspector:

“The whole of the £16.7m cost represented the costs incurred for the purposes of the Branch. None of this was recharged to Home Office.”

The outcome was that ZIC(UK) obtained (and, as it seems to me, rightly obtained) corporation tax reliefs for the costs of the project. Those costs included the consultancy fees payable to PwC AG. Against the background of that outcome and the letter which was written to the Inspector it is, to put it at its lowest, difficult for ZIC to maintain for VAT purposes that the consultancy services were provided, not to the United Kingdom establishment, but to the head office in Switzerland.

There are two other points which I wish to add. First, I have already said that for Work Order 1 the contract for consultancy services was with PwC(UK), not with PwC AG. ZIC (or its service company) received invoices from PwC(UK), and the invoices included 17.5% for United Kingdom VAT. I have little doubt that the invoices were paid and that ZIC (or the group representative member) claimed input tax credit for the small recoverable proportion of the 17.5% which qualified for credit. It did that on the basis that the services were received for the purposes of its business. When it came to later Work Orders (the ones relevant to this appeal) the contractual and invoicing structure was different, but the position on the ground, so to speak, was the same: the same people were doing the same sort of work in the same locations in pursuance of the same project (which was the installation of the SAP system into the operations of ZIC’s United Kingdom establishment). It would, in my view, be unreal to say that what PwC(UK)’s staff did constituted the supply of services to ZIC(UK) (and not to ZIC(HO)) in the first phase, yet it constituted the supply of services to ZIC(HO) (and not to ZIC(UK)) in the later phases. The services were still in reality the same services, and in practice the work was still done by staff of PwC(UK). Although the services were now provided by the staff of PwC(UK) on a different contractual basis, they were still in reality services for ZIC in its ZIC(UK) capacity. In my judgment they were still, in terms of article 9.2(e), supplied to ZIC’s fixed establishment in the United Kingdom.

Second, some of the work which the staff of PwC(UK) did was referable not to ZIC’s branch operations in the United Kingdom (that is to ZIC(UK)), but rather was referable to United Kingdom subsidiaries of ZIC. It was, however, all part of the same single project, and it was all covered by the invoices from PwC AG to ZIC: the invoices were not split between invoices for work relating to ZIC(UK)’s establishments and operations in the United Kingdom and work relating to ZIC subsidiaries’ establishments and operations in the United Kingdom. ZIC estimated that 21% of the work was attributable to subsidiaries, and ZIC(HO) made inter-company charges on its subsidiaries equal to 21% of the invoices which it received from PwC AG. ZIC paid United Kingdom VAT by reference to that 21%. That effectively acknowledged that part of the work done by PwC AG (through its sub-contracting team) was work for the operations of the United Kingdom subsidiaries of ZIC rather than work for ZIC(HO). I find it difficult to see how ZIC can logically contend that the rest of the work done by the same sub-contracting team as part of the same single project was work for ZIC(HO), and not work for the operations of ZIC(UK).

I fear that this judgment has been too long already. However, it has now come to an end. I have no other specific points to make. For the reasons which I have explained, I consider that on a proper application of the place of supply rule in the Sixth Directive article 9.2(e) PwC AG’s supplies were made to ZIC’s establishment in the United Kingdom. It follows that the result of applying the reverse charge provision in VATA s.8 is the same as the result required to be brought about by the Directive. Accordingly I allow this appeal in principle. Figures remain to be agreed.