WTGIL Limited v The Commissioners for HMRC

WTGIL Limited ( the “Appellant”) was formerly called Ingenie Limited (“Ingenie”). As that was its name at the time of the events relevant to this appeal, and it was referred to by that name in the decision under appeal, we shall refer to it below as Ingenie.

The appeal relates to the VAT treatment of certain supplies made by Ingenie Services Limited (“ISL”). Since ISL was a member of the VAT group of which Ingenie was the representative member, for VAT purposes those supplies were deemed to have been made by Ingenie, which is why it is the appellant in this case.

The supplies related to a telematics device installed in cars as part of an insurance policy underwritten by a third party. The device, sometimes known as a black box, captures and transmits information about the way the car is being driven. Ingenie made a claim to HMRC that the provision and fitting of the devices were taxable supplies made by ISL to policyholders, so that Ingenie could recover the input tax attributable to such supplies. HMRC denied that claim, and Ingenie appealed against that decision to the First-tier Tribunal (Tax Chamber) (the “FTT”). In a decision released on 1 June 2022 (the “Decision”), the FTT dismissed Ingenie’s appeal.

Ingenie appeals against the Decision.

References below in the form “FTT[x]” are to paragraphs of the Decision.

The FTT helpfully summarised the background to the appeal before it as follows, at FTT [3]-[5]:

The only witness before the FTT was Luke Proctor-Wilson, for Ingenie, who was an employee of Ingenie. The FTT found him to be a credible witness and accepted his evidence of fact: FTT[14].

In summary, the FTT made the following findings of fact material to this appeal, at FTT[17]-[34]:

We discuss below the contractual documentation relevant to the issues in the appeal. We have set out in Annex 1 to this decision the most relevant documents, being the 2015 Policy Booklet and the 2016 TOBA.

It was common ground that EU law remains applicable for the purposes of the appeal, since the supplies under appeal were made prior to withdrawal from the EU. Section 22 of the Retained EU Law (Revocation and Reform) Act 2023 also makes clear that various repeals contained in that Act do not apply to anything occurring before 31 December 2023.

It was also common ground that Council Directive 2006/112/EC (the “Principal VAT Directive” or “PVD”) applied for the periods under appeal. The relevant provisions of the PVD, which we set out below, were transposed into domestic law by the Value Added Tax Act 1994 (“VATA 1994”), and it was again common ground that VATA 1994 must be construed so as to conform with the PVD.

In the Decision, the FTT referred primarily to the position under the PVD, as did the parties in this appeal, and we have followed that approach in this decision. For completeness, we have set out the relevant provisions of VATA 1994 in Annex 2 to this decision.

The relevant provisions of the PVD are as follows.

Article 2(1) has the effect that a transaction other than for consideration cannot be a supply for VAT purposes in the absence of an applicable deeming provision:

A supply of goods is defined by Article 14 as follows:

Where a taxable person disposes of goods which are part of the assets of the business free of charge, that is treated as a supply of goods for consideration, but only if the VAT incurred in relation to the goods was wholly or partly deductible. That is the effect of Article 16:

Article 24(1) has the effect that a transaction that is not a supply of goods is a supply of services:

In relation to supplies of goods and deemed supplies of goods, Articles 73 and 74 provide as follows:

Under Article 135(1)(a), insurance transactions, including related services performed by insurance brokers and insurance agents, are exempt from VAT (and as a consequence VAT incurred on goods and services attributable to such transactions is not deductible):

Article 168 provides that VAT incurred by a taxable person on goods and services attributable to taxed transactions may be deducted from the VAT which the taxable person is liable to pay:

At FTT[6]-[11], the FTT helpfully summarised the grounds of appeal, the submissions of the parties, and the issues to be determined:

In summary, the FTT decided these issues as follows:

Ingenie’s grounds of appeal can be summarised as follows:

These grounds raise two issues. First, did ISL make a supply to policyholders for consideration for VAT purposes? Second, if not, did ISL make a deemed supply to policyholders for VAT purposes? Other questions may arise, such as the basis of calculation of recoverable input tax, depending on our conclusions on these two issues.

ISL’s primary case, before the FTT and in this appeal, was that ISL made a supply to policyholders for non-monetary consideration, that non-monetary consideration being the entry by policyholders into the insurance contract and agreement to the installation of the Device and consequential data collection.

ISL’s alternative contention, if its primary submission was not accepted, was that ISL made a supply to policyholders for monetary consideration, being the Device Amount paid by the insurer to ISL “out of the premium”. This analysis was said to be “even clearer” in relation to amounts payable on cancellation of an insurance policy in certain circumstances.

We will first consider ISL’s primary case.

Article 2 of the PVD treats as a supply for VAT purposes a “supply of goods for consideration” and a “supply of services for consideration”. Section 5 VATA 1994 defines a “supply” for VAT purposes as any form of supply, “but not anything done otherwise than for a consideration”.

Three issues arise. First, did ISL make a supply of goods or services to policyholders? Second, if so, what was the nature of the supply; in particular, was it, as HMRC contend, an exempt supply of insurance intermediary services? Third, if, as ISL contends, there was a taxable supply of services, was that supply for consideration? It is sensible to consider the issues in that order.

ISL installed the Device in the vehicles of policyholders, and collected and analysed data produced by the Device. The FTT considered whether this resulted in a supply of goods (the Device) and/or a supply of services (the installation of the Device and data services).

However, in the VAT world very little is straightforward, and a further issue arose. For VAT purposes, where a supply comprises multiple elements, it may, depending on the facts, be treated as single supply, broadly by reference to the “predominant element” of the supply (Footnote: ¹). Before the FTT, Ms McCarthy submitted there was a single taxable supply of goods by ISL, with the supply of the Device being the predominant element to which the other services were merely ancillary, and as a result there was a single supply of goods. HMRC’s position was also that ISL made a single supply, but that it was a supply of insurance intermediary services and was made to the insurers, and was exempt from VAT: FTT[70]. HMRC applied to amend their statement of case to argue that there the supplies of exempt intermediary services were made both to the insurers and to policyholders. The FTT stated that it did not have to decide whether to permit that amendment in light of its decision that there was no supply for consideration: FTT[70]-[72].

It does not appear from the Decision that the FTT resolved the question of whether there was a single supply, and, if so, its characterisation. It decided that:

In this appeal, Ms McCarthy maintained the position that there was a supply of goods (the Device), at least when the insurance contract lapsed or was cancelled, but said that we did not need to determine that question, or whether there was a single supply, because on the FTT’s findings there was in any event a supply of services by ISL to policyholders (assuming the supply was for consideration). HMRC agreed with the FTT’s conclusion that there was no supply of goods, but their position as to whether there was a supply of services was not clear to us. Mr Mantle’s skeleton argument described HMRC’s “overarching position” as being that ISL made “a single, indivisible supply” of services, being exempt insurance intermediary services, both to the insurer and policyholder. That position necessarily entails acceptance that there was a supply (of services). However, HMRC also argued that ISL made no supply at all, because any apparent supplies were “no more than the necessary pre-condition” to the supply by insurers of the insurance.

It is in our view necessary to decide whether ISL did make a supply, and what the supply comprised, before one can properly determine whether the supply was for a consideration.

We agree with the FTT that there was no supply of goods by ISL to policyholders when the Device was installed. Article 14(1) of the PVD provides that a supply of goods means “the transfer of the right to dispose of tangible property as owner”. Part One of the Policy Booklet states explicitly that “the ingenie device remains the property of ingenie and shall only become your property after your insurance has lapsed or been cancelled”. This makes it clear that the right to dispose of the Device as owner does not arise on installation, so there was no supply of goods at that stage (Footnote: ²).

As to whether there was a supply of goods on the lapse or cancellation of an insurance policy, the FTT stated as follows, at FTT[84]:

It is not clear whether in this passage the FTT was simply saying that at the point of installation there was no agreement to supply the Device on a future lapse or cancellation of the Policy, or whether it was saying that if a lapse or cancellation in fact occurred there would still be no supply of goods at that stage. The former conclusion is in our view correct, for the reasons given by the FTT. The latter conclusion is less straightforward. In reaching its conclusion (at FTT[108]) that there was no deemed supply by ISL on lapse or cancellation of the Policy, at FTT[107], the FTT stated that in its view “rather than disposing of the Device when the insurance ends, ISL merely abandons any claim to it because it no longer has any value or serves any purpose to ISL”. That suggests that the FTT reached the latter conclusion. However, we do not need to determine that issue in relation to this ground of appeal, because ISL’s primary claim relates to the first provision and fitting of a Device on commencement of a Policy. We agree with the FTT that at that stage there was no supply of goods or agreement to supply goods between ISL and a policyholder.

The FTT went on to state as follows, at FTT[86]:

We agree with the FTT that both the installation of the Device and the collection and analysis of the resultant data could constitute a supply of services by ISL if made for consideration. However, we were told by the parties that the VAT consequences of the data collection and analysis services were outside the scope of this appeal (Footnote: ³). Therefore, we have proceeded on the basis that any supply of services by ISL to policyholders was confined to the installation of the Device.

Mr Mantle raised the argument that some provisions of goods or services, which viewed separately from the rest of the overall transaction, and in theory capable of constituting supplies, are deprived of the character of a supply when viewed in context. That is because they are no more than the necessary pre-condition to the supply of a service. This submission relied on the decision of the High Court in MBNA Europe Bank Ltd v HMRC [2006] EWHC 2326 (Ch) (“MBNA”), an authority not cited to the FTT. Mr Mantle argued that, viewed in context and in an economically realistic manner, the installation of the Device was no more than the necessary pre-condition to the supply of insurance to the policyholder by the insurer.

It is unclear whether this analysis was put forward by HMRC in relation to any putative supply of services, as well as goods. In any event, we do not accept that the present facts are sufficiently similar to the unusual facts in MBNA to sustain HMRC’s argument. MBNA concerned a highly complex securitisation arrangement entered into by a bank, one element of which involved an assignment of receivables. Mr Mantle relied in particular on the following statement by Briggs J, at [102] of the decision:

We accept that, as matter of principle, a transaction which, at first blush and viewed in isolation, looks like a supply may not on closer examination be a supply. However, in considering whether there is a supply, MBNA does not detract from the proposition that the correct starting point is the relevant contracts. In ING Intermediate Holdings Ltd v HMRC [2017] EWCA Civ 2111 (“ING”), to which we were not referred, Arden LJ referred to MBNA as “the only case that counsel can produce where the court has considered whether there can be transactions ancillary to another transaction which falls outside VAT (because it is not a supply for VAT purposes) with the result that the ancillary transaction will, like the principal transaction, be treated as not involving a supply for those purposes, even if it would otherwise have been so treated”: [22] of the decision. The taxpayer in ING had sought to argue on the authority of MBNA that in determining the existence of a supply, it was always necessary to determine the “essential nature” of the transaction. In a passage headed “My conclusion: purposes of contract to be found in the terms and conditions”, Arden LJ reiterated the conventional approach, stating as follows, at [37]:

In this case, the FTT recorded, at FTT[95], that since it was common ground that the contractual terms in the Policy Booklet were not artificial or drafted to achieve a particular VAT result, there was no reason to believe that the contractual position did not reflect the economic and commercial reality of the transactions. In those circumstances, we consider that since the Policy Booklet did set out terms as to the installation of the Device, it follows, subject to the issues below, that there was a supply of services by ISL to policyholders in that respect.

HMRC said that its “overarching position” is that ISL “made only exempt supplies of services of an insurance intermediary, regardless of the direction of supply”. Mr Mantle’s skeleton argument set out the submission in terms that “ISL made a single, indivisible supply of insurance intermediary services to the Insurer in return for the commission pursuant to the [Covea Business Agreement], or to the policyholder pursuant to the TOBA, or to both”. Mr Mantle argued that whether one started with the contracts or looked at the commercial and economic reality of the transactions, ISL was acting exclusively as an insurance intermediary, arranging and administering the relevant insurance policies. That was the case regardless of whether the recipient of those services was either or both of the insurer or the policyholder.

According to HMRC, any services provided by ISL fell within the following categories in Schedule 9 Group 2 VATA 1994:

We do not accept HMRC’s characterisation of the services supplied by ISL. The question of whether ISL acts in the overall arrangements as an insurance intermediary is not the issue. What matters for the purposes of this appeal is the nature of the particular services provided by ISL to policyholders under Part 1 of the 2015 Policy Booklet.

When we asked Mr Mantle to particularise the precise basis on which particular ISL services to policyholders fell within Items 1 or 4, interpreted consistently with the Notes to those provisions, it was telling that he found that task difficult. We agree with Ms McCarthy that, while ISL supplies insurance intermediary services to the insurer under the arrangements, there is simply no support in the contractual documentation for concluding that ISL’s services to policyholders fall within Item 1 of Group 2 (insurance or reinsurance). As regards Item 4, in light of our statement above that we have proceeded on the basis that the supply by ISL to policyholders was a supply of services, comprising installation of the Device, HMRC’s argument requires a conclusion that such a service was provided by ISL acting as broker or agent in the course of acting in an intermediary capacity. While it is possible to regard the act of installing the Device as a “service of an insurance intermediary”, likely falling within Note 1(b), there is in our opinion no indication in Part 1 of the Policy Booklet, or the TOBA, or the arrangements viewed economically and realistically, that ISL was providing this service in the course of acting “in an intermediary capacity” as that requirement is explained by Note 2.

Mr Mantle also argued that ISL’s overall services fell within Note 1(a), because ISL was “bringing together” the policyholder and the insurer. However, while in a general sense ISL’s role may have facilitated the entry into of the insurance contract, it is unwarranted to categorise the service of installation of the Device in this way, and, as Ms McCarthy pointed out in reply, ISL is not remunerated by policyholders for any bringing together of the parties.

We conclude that the services provided by ISL to policyholders were not comprised exclusively of services falling within Group 2 of Schedule 9 VATA 1994.

So, ISL made a supply of services to policyholders, comprising the installation of the Device, which would be a taxable supply if made for consideration. We now turn to the most difficult question in this appeal.

To recap, ISL’s primary argument is that the supply made by ISL was for non-monetary consideration, and its alternative argument, if we reject that submission, is that it was made for monetary consideration. We address both arguments in that order, but it is helpful to begin by looking at the meaning of consideration in relation to a VAT supply.

To a lawyer versed in the English law of contract, the concept of consideration has a reasonably clear and recognised meaning, and is often referred to as an essential ingredient in the existence of a contract. Indeed, since the FTT in this case determined (at FTT[80]) that Part One of the Policy Booklet “created a legal relationship between ISL and the policyholders”, if that legal agreement was a contract, then (one might ask) surely it would follow necessarily that there was consideration, for all purposes?

However, at the risk of repetition, VAT is rarely straightforward. Sedley LJ memorably referred to “the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted” (Footnote: ⁴), although that perhaps suggests a level of enjoyment not always inherent in navigating the process.

It must be recognised at the outset that the determination of whether a supply is done for consideration does not fall to be made under domestic law. The meaning and scope of “consideration” in Article 2 of the PVD depends not on the laws of Member States but on established EU law. As Advocate General Vilaca stated in his opinion in Naturally Yours Cosmetics Limited v Commissioners of Customs & Excise (Case 230/87) (“Naturally Yours”) at [13], “ the term to be interpreted (“consideration”) appears in a provision of Community law which does not refer to the law of the Member States for determination of its meaning and scope, and therefore its interpretation cannot be left to the discretion of each Member State”. It is not particularly helpful to think of the EU law meaning as wider or narrower than (say) the UK contract law meaning; it is different.

Several of the leading CJEU authorities on the meaning of consideration were drawn together by Advocate General Lenz in his opinion in Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) (“Tolsma”). At paragraph 10 onwards he said this:

Setting aside issues not relevant to this appeal, the CJEU authorities establish that in order for there to be a supply for a consideration, at least the following elements must be satisfied:

We look now at how the FTT reached its decision, and Ms McCarthy’s arguments as to how it erred in law.

It is necessary in considering this ground of appeal to look at the FTT’s decision in some detail.

The FTT’s discussion of this issue began with a detailed and thorough analysis of the relevant documentation, being the Covea Business Agreement, the Third Party Administrator Agreement, the 2015 Policy Booklet and the TOBA: FTT[35]-[62]. Its conclusions and observations included the following:

The FTT’s analysis of whether there was a supply for consideration is contained in FTT[63]-[95]. At this stage, we are concerned with its decision regarding whether there was non-monetary consideration. The FTT referred to some of the principles summarised in Tolsma, and stated that the consideration for a supply of goods may be the provision of services provided there is a direct link between the supply of goods and the provision of services and if the value of those services can be expressed in monetary terms. It noted that the legal relationship required for there to be a supply need not be a legally enforceable contract where the parties have agreed that the agreement shall be binding in honour only.

The FTT summarised the conventional approach, which it then adopted, to determining who makes and receives a supply, namely starting with the contractual position and then considering whether that is consistent with the economic and commercial reality: see, in particular, Secret Hotels2 Ltd v HMRC [2014] UKSC 16 (“SH2”). It referred to Lord Neuberger’s statement at [32] of SH2:

The FTT began by considering the Covea Business Agreement. It rejected ISL’s contention that a policyholder would have needed or desired a separate contract with ISL relating to the Device, stating that a policyholder would have been indifferent on this point: FTT[76].

Having described ISL’s obligations to Covea under the Covea Business Agreement regarding the Device, the FTT concluded (at FTT[78]) that “the Commission [payable by Covea to ISL] was consideration for ISL performing its obligations, which included providing and installing the Devices in the policyholders’ car and using them to provide driving data to Covea”.

In relation to the TOBA, the FTT stated that there was “ no provision in the TOBA 2016 by which the policyholder agreed to do anything or allow something to be done in return for the provision and fitting of the first Device”. It concluded as follows, at FTT[79]:

Turning to the Policy Booklet, the FTT made this important statement, at FTT[80]:

Having explained its conclusion that ISL made no supply of goods to policyholders (as discussed in this decision above), the FTT stated that the activities of Device installation and data analysis “may constitute supplies of services but only if made in return for consideration”: FTT [86].

After concluding that there was no monetary consideration for a supply of services, the FTT addressed ISL’s primary argument that a policyholder provided non-monetary consideration, comprising entry into the insurance contract with the insurer and observing its terms and/or agreeing to allow ISL to install the Device and analyse the data. Its full conclusions were as follows, at FTT[91]-[95]:

Ms McCarthy said that the FTT had erred in its analysis of the relevant contracts. There was a contract between ISL and each policyholder, whereby ISL agreed to supply the Device and to provide Device installation and data handling services. The Policy Booklet contained two separate contracts, the first between the policyholder and ISL and the second between the policyholder and the insurer. Part One sets out ISL’s obligations to the policyholder, and contains terms about property rights in the Device and the allocation of risks between ISL and the policyholder. ISL’s express contractual duties toward the policyholder include arranging for installation of the Device, data collection and analysis, and the provision of information to the policyholder and the insurer. It was implicit that ISL could be liable to the policyholder in respect of faults or damage to the Device that are caused by ISL. The contract would also contain terms to be implied by the operation of consumer law. The consideration provided by the policyholder in return for the contractual undertakings given by ISL consisted of (1) the policyholder’s entry into the insurance contract with the insurer, and (2) the reciprocal agreements made by the policyholder with ISL to permit ISL to install the Device; to agree to the collection and analysis of data, and not to hold ISL liable for certain faults or defects in the Device.

We have found this to be a difficult issue, for two main reasons.

First, ISL’s case has a beguiling simplicity to it. It can be summarised in this way. If Part One of the Policy Booklet does give rise to a legal agreement between the parties, then as a matter of English contract law the policyholder must have provided consideration, and, as a matter of fact, policyholders did enter into both Parts of the Policy Booklet at the same time.

Second, the FTT’s reasoning in the critical passages, set out above, is somewhat elliptical. By that we mean that the precise reason which led it to conclude that the supply of services by ISL to policyholders was not for consideration is not explicitly spelt out.

We turn now to the relevant criteria which, according to established CJEU law, must be satisfied on the facts in this case in order for ISL to establish that it made a taxable supply to policyholders. They are:

We have dealt with the supply issue above. In agreement with the FTT, we have decided that there was no supply of goods by ISL but that there was a supply of services. Since the services of data collection and analysis are not the subject of the appeal in this case, we have proceeded on the basis that the services were the installation of the Device. So, criterion (1) was satisfied.

As regards the requirement for the supply to take place pursuant to a legal relationship, the FTT found (at FTT[80]) that Part One of the Policy Booklet gave rise to a legal relationship. We agree. Since CJEU law supports a wide meaning of this term (so that, in particular, the relationship does not need to be legally enforceable but can be binding in honour only) we note that the question of whether Part One gave rise to a contract under English law, as contrasted to a legal relationship, is not the relevant question. So, we have concluded that Part One of the Policy Booklet did give rise to a legal relationship in the relevant sense, meaning that criterion (2) was satisfied.

We return to criteria (3) and (4) below. At this stage, it is worth noting that the effect of those criteria is that not every contract in which consideration is found and a supply is made will necessarily result in a supply for consideration for VAT purposes.

We have not yet discussed criterion (5), which is that the consideration provided must be capable of being expressed in monetary terms. The FTT identified this requirement, at FTT[64] and [91], but stated (at FTT[96]) that it did not need to address this issue in view of its conclusion that there had been no supply for consideration.

For HMRC, Mr Mantle argued that the services allegedly provided by the policyholders, of entering into the insurance contract and agreeing to installation of the Device, failed to satisfy this criterion. He pointed out that ISL’s own primary case in relation to the extent to which the input tax on any supply to policyholders should be reduced by output tax was that the non-monetary consideration provided by policyholders had a nil value. In any event, argued Mr Mantle, the services clearly had no monetary value because the policyholder and ISL had attributed no subjective value to the alleged exchange of services. ISL had not even attempted in its submissions to ascribe any monetary value to the consideration.

This requirement is referred to in the passage from Tolsma set out above, and is discussed in the Coöperatieve Aardappelenbewaarplaats judgment (at [13]), in Naturally Yours at [16] and in Empire Stores. These authorities establish that it is sufficient that then value of the services is capable of being expressed in monetary terms. The fact that valuation might be difficult or capable of being made on a number of bases does not prevent the requirement from being satisfied, and the precise methodology for the valuation is an issue for the court or tribunal. If we had needed to decide the output tax position, we would have needed to determine ISL’s argument that the value of the consideration should be taken to be nil. However, since the supply we have assumed to take place was a supply of the service of installation of the Device, a benchmark such as the installation fee paid by ISL to the third party which performed that service would in our opinion render the consideration capable of expression in monetary terms. Nor do we accept that a subjective value for the alleged exchange of services would be impossible to establish. In ING (to which we refer above), Arden LJ stated (at [55] of the decision):

For these reasons, we have concluded that criterion (5) was satisfied.

Since the FTT concluded that there was not a supply by ISL to policyholders for consideration, this means that it must have done so on the basis that criteria (3) and/or (4) were not satisfied. The essential reason why the FTT reached its conclusion was that it did not consider that there was a “direct link” in all the circumstances. Although it would have been preferable if this had been spelt out explicitly in the Decision, reading the decision in its entirety it is implicit in the reasons given by the FTT for reaching this conclusion.

We have concluded that the FTT reached a decision on this issue which did not involve any error of law and which was available to it on the basis of its findings of fact. We have reached this conclusion both as matter of contractual construction and as a matter of economic and commercial reality.

It is helpful to begin by returning to the opinion of Advocate General Lenz in Tolsma set out above. In Coöperatieve Aardappelenbewaarplaats, the CJEU stated, at [12]:

In its decision in Tolsma, the CJEU referred to reciprocal performance as one element of a direct link, at [13]-[14]:

In this context, the concepts of direct link and reciprocal performance are addressed to the degree and nature of the connection between the supply and the consideration. It is helpful to consider the statements made by the Advocate General in Tolsma; at [10] of his Opinion he stresses the need for a “stipulated exchange of mutually dependent services” and the “stipulation of a price or consideration”, and (at [11]) the need for “an element of contractual exchange” in this sense.

In South African Tourist Board v HMRC [2014] UKUT 0280 (TCC) (“South African Tourist Board”), the Upper Tribunal had to decide whether a contract (the “Performance Contract”) satisfied these requirements. Having referred to the principles summarised in Tolsma, it expressed its conclusion in these terms (emphasis added to original), at [56]:

The facts in that case were very different to those in this appeal. However, we consider that the Upper Tribunal’s approach to the process of assessing whether the requirements were met was both correct and consistent with the approach of the Advocate General in Tolsma.

As summarised above, in reaching its decision, the FTT analysed and took into account all of the material contracts and all relevant circumstances. That was in our opinion the right approach. In Apple and Pear Development Council, for example, the CJEU considered and weighed (at [14]-[15]) a number of factors in determining the direct link issue. We agree with the observation of the Upper Tribunal in South African Tourist Board (at [40]) that “Apple and Pear demonstrates that in any particular case there will be likely to be a range of factors to consider and that no one factor is conclusive”.

The FTT was correct to distinguish (at FTT[80]) between the issue of whether there was a legal relationship between ISL and a policyholder and the issue of whether any supply was made in return for consideration pursuant to that relationship. We also consider it was correct at FTT[91] to accept that “entering into a contract and/or allowing something to be done can be sufficient consideration for VAT purposes”, so that “if the policyholder actually entered into the insurance contract and/or agreed to allow ISL to install a Device in return for the installed Device then that could be consideration”.

However, the critical issue was whether, on the facts found by the FTT, ISL had discharged the burden of proof which lay on it to establish that in fact the services given by a policyholder were given “in return for” the supply of installation services by ISL to a policyholder, as asserted by ISL. Put another way, was there a sufficiently direct link between any consideration given by a policyholder and the supply of services by ISL to the policyholder, and was there in fact a reciprocal bargain between the parties as asserted by ISL?

The FTT began by considering the contractual position: FTT[68]. There were two legal agreements between a policyholder and ISL, namely the TOBA and Part One of the Policy Booklet. The former is longer than the latter, but it contained no provision by which the policyholder agreed to do anything or allow something to be done in return for the provision and fitting of the first Device. ISL’s case therefore rested entirely on Part One of the Policy Booklet.

In relation to the wording contained in Part One, in considering ISL’s argument that a policyholder gave non-monetary consideration (by entering into the insurance contract and agreeing to Device installation and data analysis), the FTT stated that the difficulty with that case was that “the 2015 Policy Booklet does not contain any term under which the policyholder agreed to do anything or allow anything to be done in return for the provision of the first Device”: FTT[91]. The FTT also noted “the absence of clear wording” relating to any such agreement by a policyholder: FTT[92]. Ms McCarthy said that this was an error of law because under English contract law there is no legal requirement for consideration to be expressed in clear wording. However, that is an incomplete answer to the question which was before the FTT. The question is not only whether there was consideration under contract law sufficient to create a contract but whether there was a direct link between ISL’s installation of the Device and any services putatively supplied by a policyholder to ISL. In considering that question, it was highly relevant that there was no explicit wording to support ISL’s suggested analysis. As we have seen, in Tolsma the Advocate General referred to the need for “a stipulated exchange of mutually dependent services” and “the stipulation of a price or consideration”. The FTT did not, as Ms McCarthy suggested in her skeleton argument, reach its conclusion solely for this reason, but it was clearly entitled, and in our opinion correct, to regard as materially relevant the wording in the contract relied on by ISL and the absence of any wording in that contract stipulating or referring to the agreements which ISL argued were given by a policyholder.

The FTT considered two other arguments raised by ISL. The first was that Part One was inextricably linked to the insurance contract, and the Device was provided, fitted and required to be used as a condition of the insurance policy; in effect, there was a tripartite contract. The second was that it was clearly objectively intended that a policyholder should have direct contractual remedies against ISL in relation to the Device. In this appeal, it was said by ISL that the FTT erred in law in failing to be persuaded by these arguments.

In relation to the first argument, Ms McCarthy referred to “the tripartite agreement” and “the two contracts created by the Policy Booklet” and said this in her skeleton argument:

The FTT said (at FTT[92]) that “the fact that the policyholder enters into two contracts at the same time does not necessarily mean that one is consideration for something done under the other even where the two are inextricably linked”. We do not consider that the FTT made any error in this statement. There are, in our view, two problems with ISL’s argument on this point. First, a direct link in relation to consideration requires more than the existence of a link (even an inextricable link) between the two contracts. In the absence of any clear or express wording, the FTT had to assess the extent to which there was a mutuality and reciprocity of exchange. The issue in this respect was not whether there was, in Ms McCarthy’s words “mutuality or reciprocity between the two contracts”, but whether there was mutuality and reciprocity between the supply by ISL, which we remind ourselves was a service of installing the Device, and the consideration for that installation said to have been given by a policyholder “in exchange for” that supply. Second, it is inherent in the nature of reciprocity and mutuality of exchange of supply and consideration for that supply that a critical issue to be determined by the FTT in the absence of clear contractual wording was not only the purpose of ISL in entering into Part One of the Policy Booklet, but the purpose of a policyholder in doing so. The FTT was in our opinion correct to interrogate what ISL asserted to be the position of the policyholder in that respect, particularly given the absence of clear wording in the contract. Put simply, did a policyholder take out an insurance policy and agree to installation of the Device as the price for installation of the Device, or for something else and for some other reason? That question is not answered simply by pointing to the linkage between Part One and the insurance contract.

The FTT was not persuaded that in fact a policyholder took out the insurance and agreed to installation of the Device as the price for installation of the Device (or for any other supply of services by ISL to a policyholder). ISL argued before the FTT that the fact that the Device was fitted and used as a condition of the insurance policy showed why a policyholder needed to have a direct contract with ISL in relation to the Device. The FTT did not accept that, stating as follows, at FTT[76]:

Ms McCarthy argued that this finding was an error of law, because it was mere speculation and irrelevant in any event. We do not agree. The FTT was engaged in a legitimate enquiry as to the position of a policyholder under Part One, as we have explained, and was responding to an assertion made by ISL. The reason why the FTT did not accept the assertion was clear; a direct contact was unnecessary from the perspective of a policyholder in light of the obligations on the parties in the other contracts. That was an inference which the FTT was reasonably entitled to draw, having been invited to draw the opposite inference. We would add that in any event the issue in relation to the existence of a direct link was not reducible to whether a policyholder wanted or needed a contract with ISL; the question was whether a policyholder was paying for the installation of the Device by ISL by entering into Part One of the Policy Booklet.

At FTT[92], the FTT expanded on its reasons for rejecting this argument:

The FTT was in our opinion entitled to draw the conclusion that in entering into the insurance contract on terms that the Device must be fitted, the purpose of a policyholder was not to pay consideration to ISL for the installation but rather to comply with a requirement of the insurer. The FTT was not satisfied that there was a direct link between any policyholder obligations reflected in Part One of the Policy Booklet and installation of the Device by ISL. In the terminology used in Tolsma, there was no “contractual exchange” in the necessary sense for there to be consideration for a supply by ISL for VAT purposes.

The FTT was also not persuaded by the argument, renewed by Ms McCarthy, that objectively it must clearly have been intended that a policyholder should have directly enforceable rights against ISL in respect of defects in the Device and in other circumstances. We were given examples of situations in which, it was asserted, a policyholder would have no redress absent some contract with ISL. At FTT[92], the FTT described the position in such a situation as “untested and…unclear”. For our part, we consider that again this argument is looking at the wrong question, because, as the FTT correctly said at FTT[80], “the issue is …not whether there was a legal relationship but whether ISL made a supply of goods and services to the policyholders in return for consideration pursuant to that relationship”. Put simply, we have accepted that there was a legal relationship between ISL and a policyholder as a result of Part One of the Policy Booklet, but that does not resolve the question of whether, pursuant to that relationship, there was consideration given by a policyholder in exchange for a supply to a policyholder of installation services by ISL.

So, we have concluded that the FTT did not err in law in finding that, in the absence of clear wording in Part One of the Policy Booklet the TOBA or any other document, ISL had not established that a policyholder was paying ISL for a service of installing the Device by entering into the insurance contract and accepting that installation. Although the FTT did not have to consider the position as a matter of economic and commercial reality in accordance with the “second stage” approach in SH2, the FTT did consider the wider commercial arrangements, and all the contracts, and determined that its conclusion was consistent with those arrangements.

We agree with the FTT. In our opinion, the correctness of the FTT’s conclusion, and the lack of commercial substance to ISL’s analysis, becomes clearer the more one stands back and considers the contractual documentation as a whole, rather than just Part One of the Policy Booklet. The FTT identified one aspect of the transaction as a whole as the primary rationale for a policyholder, which was to obtain insurance, and do what was necessary to do so. Although not expressed in these terms by the FTT, we consider that ISL’s analysis for VAT purposes effectively involves an impermissible element of double counting. That is not only the case from the perspective of a policyholder. It is also because the supplies in relation to the Device which are said by ISL to be made to policyholders for consideration are in all material respects supplies which ISL already contracts to make to the insurer under the Covea Business Agreement. Moreover, in terms of the price to be received by ISL for those supplies, ISL earns its return by being paid its commission by the insurer out of the premiums received: see paragraphs 59 and 63 above summarising the FTT’s findings. That does not mean it was impossible for ISL also to make a separate supply to a separate person in relation to the same activities, and be paid twice (once in money and once in non-monetary consideration), but the wider picture does not lend support to ISL’s contractual construction, which asserts that, notwithstanding the absence of explicit wording, that was the effect of Part One of the Policy Booklet.

In conclusion, we consider that the FTT was justified in concluding that policyholders did not give non-monetary consideration in return for a supply of services by ISL and that its decision was reached essentially for the right reasons.

Since we have found that the FTT did not err in law in concluding that there was no supply by ISL to policyholders for non-monetary consideration, it is necessary to consider ISL’s alternative submission that there was a supply between those parties for monetary consideration.

Since ISL argues in this appeal that the FTT failed to consider all aspects of this submission, we begin by setting out the position as summarised in ISL’s skeleton argument before the FTT:

There is no reference in the Decision to the term “COV Event”, but it stands for a “change of vehicle event”, describing the position which occurs when a policyholder changes vehicle during the term of an insurance policy, and is required to pay an amount in respect of the installation and fitting of a Device in the new vehicle.

We have considered the monetary consideration argument firstly on installation of the Device and secondly in relation to the amount payable on a COV Event.

The alternative submission is that a policyholder gives monetary consideration for a supply by ISL, namely the Device Amount of £150. This is the amount payable on first fitting of a Device. There is also a fee of £165 payable if the insurance policy is cancelled within the first twelve months, and that is also said to be monetary consideration payable to ISL.

The FTT rejected this argument, at FTT[87]-[88], as follows:

Ms McCarthy described the Device Amount as a “fee paid by the Policyholder to ARL, and then duly retained by ISL pursuant to its contractual agreement with the insurers”. She said that policyholders were “aware of the fact that although there is no separate charge for the Device, its cost is included in the premium which the policyholder pays for their insurance”. Ms McCarthy also argued that since there was a contract between ISL and a policyholder, if there was no non-monetary consideration, then there must necessarily be monetary consideration. Further, she submitted, the FTT was wrong to look at Part Two of the Policy Booklet to find terms governing the policyholder’s relationship with ISL.

We do not accept Ms McCarthy’s arguments. The FTT made no error in reaching its conclusions on this issue, with which we agree.

In contrast to ISL’s primary argument, this alternative argument relies on a characterisation of the policyholders’ contractual obligations which is contradictory to the wording of the Policy Booklet. We have nothing to add to the description of those contractual obligations at FTT[87]. The FTT was fully entitled to consider the terms of the Policy Booklet in its entirety in addressing ISL’s argument that, because the source of the payment to ISL of the Device Amount was the premium, it should be regarded as consideration given by a policyholder to ISL. The contractual position was, as the FTT found, clear, and did not support that argument. That position was not altered by the mechanics of calculating and paying the net fee earned by ISL from the insurer. For VAT purposes, the insurer obtains the entire premium paid by a policyholder, but allows ARL to retain and pay to ISL an amount equal to the consideration due from the insurer to ISL in return for ISL’s supply of insurance intermediary services to the insurer. Ms McCarthy referred to various authorities regarding the value of supplies, including H. J. Glawe Spiel-und Unterhaltungsgerate Aufstellungsgesellschaft mbH & Co. KG v Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] EUECJ C-38/93 (5 May 1994), but they have no relevance to the factual situation in this case.

In any event, we have agreed with the FTT’s finding that there was no supply of the Device for VAT purposes, for consideration or otherwise, but only a supply of services. There is nothing in the contractual documentation to support the analysis that the £150 paid by the insurer to ISL was a payment by a policyholder not for the Device but for services from ISL.

Ms McCarthy’s argument that if there is no non-monetary consideration there must be monetary consideration is again based on the fallacious conflation of the alleged position under English contract law with the question of whether there was monetary consideration for VAT purposes, including the need for reciprocal performance and a direct link. The VAT criteria discussed above are clearly not met in relation to the Device Amount payment.

In relation to the payment due from a policyholder in the event of early cancellation of a policy, we agree with the FTT at FTT[88]. That analysis should be read together with the FTT’s statement regarding evidence given on behalf of ISL at FTT[33] (also referred to at FTT[56]), as follows:

ISL argued that “in particular” there was monetary consideration provided by a policyholder to ISL on a COV Event. At FTT[6], this ground of appeal was recorded as being that there was a taxable supply on “any subsequent provision and fitting of a Device, eg when the policyholder changes their car, in return for the amount charged, according to a sliding scale, to the policyholder under the insurance contract as a contribution to the cost of providing and fitting the new Device”. This is presumably a reference to the statement in the contract between the policyholder and the insurer in Part Two of the Policy Booklet (repeated in tabular form at the end of Part Two) that:

At first sight, the COV argument would seem to suffer from the same flaws as those regarding the argument in relation to the first fitting of a Device, namely that under the Policy Booklet the monetary obligations operate as between a policyholder and the insurer (not ISL) and that there was in any event no supply of a Device. However, the TOBA, a contract between a policyholder and ISL/ARL, also stated that in certain circumstances, ARL and/or ISL “may” charge fees to the policyholder, including the sliding scale charges on a COV.

Notwithstanding the terms of the TOBA, the FTT recorded that on ISL’s own case the TOBA were of no material assistance, and found as follows, at FTT[79]:

Ms McCarthy criticised the FTT for simply failing to address the argument that fees payable on a COV Event were monetary consideration paid by a policyholder to ISL. However, that criticism is misplaced. The FTT did address this argument. At FTT[92], the FTT concluded its rejection of ISL’s primary argument that there was non-monetary consideration, for the reasons we have discussed above, and then continued, at FTT[93]:

Once it is accepted that the COV Event charges set out in the TOBA cannot be taken at face value (a finding not challenged by ISL), we consider that the FTT was entitled to reach the conclusion it did at FTT[93]. Those charges are not consideration for VAT purposes for a supply by ISL, satisfying the criteria we discuss above, but for insurance.

In conclusion, we reject ISL’s alternative argument that a policyholder gave monetary consideration for a supply by ISL on first fitting, early cancellation of a policy or a COV Event.

Since we have concluded that ISL did not make a supply to policyholders, it is necessary to consider the alternative argument that ISL satisfied the conditions for a deemed supply for VAT purposes.

Article 16 PVD provides that a disposal of goods which are part of the assets of a business free of charge by a taxable person is treated as a supply of goods for consideration, “where the VAT on those goods or the component parts thereof was wholly or partly deductible”. Article 16 is implemented in the UK by paragraph 5 VATA 1994. Paragraph 5, so far as relevant to this appeal, is worded slightly differently, and, in particular, states in paragraph 5(5) that the treatment as a deemed supply under paragraph 5(1) applies only in a case where the person disposing of the goods is a person who (disregarding paragraph 5) has or will become entitled to an input tax deduction for the whole or part of any VAT on the goods.

Since we have concluded that there was no supply by ISL to policyholders for consideration, it follows that on this basis if there was a disposal by ISL to policyholders, it was free of charge.

The first point to note is that Article 16 applies only to disposals of goods, not to a provision of services. Ms McCarthy submitted that Article 16 could potentially apply because the provision and fitting of the Device was a single supply, with the Device being the principal element to which the fitting services were merely ancillary, and as a result there was a single supply of goods: FTT[98]. Mr McNab for HMRC submitted that any deemed supply could not take place when the Device was fitted, but only when title to the Device passed to the policyholder after the insurance lapsed or was cancelled: FTT[99]. We cannot discern in the Decision any explicit resolution by the FTT of the issue of whether the supply was a single supply of goods in the context of the deemed supply analysis. The FTT reached its decision on other grounds, discussed below. It appears to have accepted Mr McNab’s submission regarding the timing of any supply of the Device and proceeded on the basis either that it accepted Ms McCarthy’s submission as to a single supply of goods, or that it would analyse the other issues on the assumption that that submission was correct. For reasons which will become apparent, we have also proceeded on this basis.

Before the FTT, and in this appeal, the debate focussed on the requirement in Article 16 that input tax on the goods deemed to be disposed of must have been wholly or partly deductible. It was common ground that in fact ISL had treated the Devices as costs components of an exempt supply of insurance intermediary services, with the result that the input tax on them was wholly non-deductible. However, Ms McCarthy argued that where Article 16 otherwise applied to deem a supply to occur, then on the authority of Church of England Children’s Society v HMRC [2005] STC 1644 (“Children’s Society”) input tax would be deductible in respect of that deemed supply.

The FTT rejected that argument, concluding that Children’s Society was inconsistent with subsequent decisions of the CJEU, stating as follows, at FTT[104]:

We consider that the FTT was right to reach this conclusion, although we have reached the same conclusion by a more straightforward process of reasoning than that adopted by the FTT.

In terms of the wording of Article 16, the use of the past tense (“was wholly or partly deductible”) is consistent with a requirement that there has in fact been some input tax deduction in respect of the goods deemed to be supplied. In paragraph 5(5), the wording “has or will become entitled to” an input tax deduction is less clear, but the reference in parentheses to the entitlement being one which arises “disregarding this paragraph” (namely paragraph 5, including sub-paragraph (1)) strongly indicates that the requirement is that there must in fact have been an input tax deduction.

As with any provision of the PVD, Article 16 falls to be construed teleologically. In terms of the purpose of Article 16, its broad purpose is to ensure equal treatment between the input tax and output tax position where business goods are disposed of other than for consideration. So, if input tax has been wholly or partly deducted on goods, Article 16 ensures that output tax would arise on a deemed disposal as well as an actual disposal. If no input tax has been deducted, then no need to deem any disposal would arise. A construction of the wording imposing the relevant condition in Article 16 and paragraph 5(5) of Schedule 4 VATA by reference only to an actual deduction achieves this equal treatment. In the words of Advocate General Fennelly in his opinion in Kuwait Petroleum (GB) Ltd v Customs & Excise Commissioners (Case C-48/97) [1999] STC 488, at paragraph 26:

Ms McCarthy reaffirmed ISL’s reliance on Children’s Society in arguing that (in effect) input tax by reference to the deemed disposal would suffice to satisfy the wording. We do not consider that the decision supports that proposition.

Children’s Society was a decision of the High Court in which one of the issues related to a deemed supply in respect of newsletters distributed by the Society, which was registered for VAT, to certain donors (“committed givers”) and the amount of input tax that could be recovered on goods and services used in the production and distribution of the newsletter. The construction and effect of paragraph 5 of Schedule 4 VATA 1994 arose from a cross-appeal by HMRC against the decision of the VAT and Duties Tribunal. The issue was not whether paragraph 5(1) applied: it was common ground between the parties that paragraph 5(1) applied since the newsletter was provided otherwise than for consideration: [37] of the decision. The dispute was as to the extent to which input tax actually paid by the Society in respect of supplies to it which had gone into the production and distribution of the newsletter would be recoverable: [38] of the decision. Before it began to distribute the newsletters free to committed givers, the Society had treated the VAT it had in fact paid on supplies connected with its newsletters as residual input tax: [6] of the decision. Put simply, HMRC argued for a lesser proportion of the input tax paid to be deductible by virtue of the deemed supply.

It is essential to appreciate that this was the context in which Blackburne J reached the following conclusion, which was relied on by Ms McCarthy, at [59]:

Contrary to Ms McCarthy’s submission, this passage was not dealing with the situation in this appeal, where in fact ISL deducted no input tax in respect of any deemed supply of the Device, but with the question of how much of the input tax which had in fact been incurred could be deducted on the deemed supply. That is why the court referred to the original input tax being “restricted”. It also explains the court’s detailed discussion of Customs & Excise Commissioners v West Herts College [2001] STC 1245, another case which concerned the extent to which input tax actually incurred in relation to a deemed supply could be deducted.

A further reason why we do not accept that Children’s Society supports ISL’s analysis is that the court omitted to refer to critical wording in paragraph 5(5). At [40], the decision sets out paragraph 5 as follows:

As we have described, paragraph 5(5) in fact states “except in a case where that person… is a person who (disregarding this paragraph) has or will become entitled –” (emphasis added to original). The wording in parentheses strongly supports the construction of paragraph 5 which we have arrived at, because it makes clear that an entitlement to input tax which arises solely by virtue of paragraph 5(1) does not suffice. The fact that the court in Children’s Society did not include this wording in its description of paragraph 5 (Footnote: ⁵) may indicate that it was seen as irrelevant (because, as we have said, it was common ground that input tax had in fact been paid) or may have been an oversight. In either event, the decision is not authority for the proposition on which ISL rely in relation to the deemed supply argument.

The FTT distinguished Children’s Society on the basis of certain decisions of the CJEU which it considered had superseded it. The FTT also considered that no deemed supply arose for a different reason, namely that the Devices were not disposed of by ISL for purposes other than those of its business: FTT[106]-[107]. Since our conclusion that there was no deemed supply has been reached simply on the basis of the construction on Article 16 and paragraph 5 and an analysis of Children’s Society, we need not comment on those aspects of the FTT’s reasoning, and we do not do so.

ISL did not make a deemed supply for the purposes of Article 16 and paragraph 5 Schedule 4 VATA 1994 because there had been no input tax deduction in respect of any deemed supply. The appeal on this ground is dismissed.

The appeal is dismissed.