VAT and sales of warranty extensions

The CJEU has held that a retailer selling goods and acting as an intermediary in connection with a supply of warranty extensions in relation to those goods must apportion input VAT between the taxable and exempt supplies involved: Rádio Popular v Autoridade Tributária e Aduaneira (Case C 695/19). The Court rejected the argument that the services provided by the supplier amounted to incidental financial transactions.

Importantly, however, the decision also confirms that the services provided by the retailer in these circumstances do fall within the exemption for insurance related transactions.

Background

Rádio Popular (RP) was a retailer of household electrical appliances and other computer and telecommunications equipment. When making sales of these items, it also offered customers a warranty extension in return for payment of an additional charge. In doing so, it acted as an intermediary in the sale of insurance products by a third party insurer.

Taking the view that the sales of warranty extensions constituted insurance transactions exempt from VAT, RP did not account for any output VAT relating to those sales but nevertheless deducted in full the input VAT for all its activity. The Portuguese tax authorities considered that, since it was making both taxable and exempt supplies, it was necessary to apportion the input VAT between these supplies on the basis of the annual amount of the transactions concerned.

Decision of the CJEU

The CJEU first considered whether the supplies by RP were indeed exempt supplies falling within Article 135(1)(a) of the Principal VAT Directive. Was RP making a supply which qualified as “related services [to an insurance transaction] performed by insurance brokers and insurance agent”. The CJEU confirmed that since RP had the necessary relationship to both the insurer and the insured it was performing a “related service” and that it was de facto acting as an insurance agent in this regard. Accordingly, the supply of extended warranty insurance by RP fell within the exemption from VAT.

However, RP argued that nevertheless its supplies fell within the definition of “incidental… financial transactions” in Article 174 so as to be excluded from the calculation of the deductible proportion of input VAT. It submitted that the sales of warranty extensions were incidental to the main activity of selling household electrical appliances and other computer and telecommunications equipment.

The Court rejected this argument. In particular, it pointed to the fact that Article 174(2)(c) specifically excludes transactions which fall within Article 135(1)(b) to (g). In doing so, the provision drew a clear distinction between insurance transactions and “financial transactions” and that insurance transactions cannot, therefore, be treated in the same way as financial transactions.

As a result, the Court held that it follows that a transaction classified as an ‘insurance transaction’ within the meaning of Article 135(1)(a) cannot constitute a transaction of a financial and incidental nature within the meaning of Article 174(2)(c), irrespective of whether or not it is otherwise ‘incidental’.

Comment

The decision is important in confirming that the supply made by a retailer in this situation will fall within the exemption for insurance related transactions carried out by an insurance agent. As such, it is perhaps of no surprise that the Court considered that the retailer was required to apportion related input VAT between its taxable and exempt supplies.

From a UK perspective, HMRC’s approach to warranty insurance as set out in VAT Notice 701/36 would appear to be consistent with the decision of the CJEU.