Assisting PPI claims not VAT exempt insurance transaction

The Upper Tribunal has held that the services of the taxpayer in assisting claims in relation to mis-sold PPI insurance did not fall within the exemption for insurance transactions: Claims Advisory Group v HMRC [2021] UKUT 199. The services did not amount to insurance transactions and the taxpayer was not an insurance agent. The economic and commercial reality was that the taxpayer was simply assisting its customers in making claims for compensation related to mis-sold insurance, not providing services related to insurance transactions.

The decision highlights the individual nature of the insurance VAT exemption and the need to carefully consider the specific requirements of the exemption when considering its application to particular facts.

Background

Claims Advisory Group (CAG) acted on behalf of its customers in claiming compensation from financial institutions for the mis-selling of PPI to those customers. Where a claim was successful, CAG received a fee from its customer based on the amount of compensation which was paid. CAG claimed that the fee it received was exempt from VAT pursuant to Article 135(1)(a) of the Principal VAT Directive as insurance transactions, including related services performed by insurance brokers and insurance agents.

HMRC disagreed, contending that the commercial and economic reality of the services provided by CAG simply involved the obtaining of compensation for its customers. The FTT agreed with HMRC and dismissed CAG’s appeal.

Upper Tribunal

CAG argued that its supplies to its customers involved the procurement of an insurance transaction in the shape of cancellation of the insurance policy or, alternatively, CAG was acting as an insurance agent in providing a related service to the original insurance or its cancellation.

In particular, CAG argued that cancellation of a policy was an integral and necessary part of the supplies it made and that cancellation of a policy is as much an insurance transaction as the original provision of insurance. There was as yet no case on whether the cancellation of an insurance policy was an insurance transaction, but there was no reason why it should not be. CAG relied by analogy on statements of the ECJ in CSC Financial Services v HMRC [2002] STC 57 that exempt financial services transactions included “transactions liable to create, alter or extinguish parties’ rights and obligations in respect of securities”. As regards the question whether CAG could be an “insurance agent”, it argued that the concept covered any entity with an agency role between the insured and insurer and there was no requirement that the agent should be facilitating new insurance cover.

The Upper Tribunal has rejected these arguments in upholding the decision of the FTT. The UT agreed with the FTT that the economic purpose and commercial reality was that CAG was simply making claims for mis-sold PPI. This was based on the contractual documents between CAG and its customers. Cancellation of the policy was not inevitable in all cases and in many cases the policies had already ended. It was also significant that the compensation was sought from the financial institution that sold the PPI, not the underlying insurer.

As regards CAG’s reliance on CSC Financial Services, the UT considered this misplaced. That case involved the separate exemption for “transactions in securities”, which involved different considerations. There was no support for the idea that an insurance transaction included cancellation of insurance and the ECJ case law on the meaning of “insurance transaction” made it clear that these must involve the provision of insurance by way of indemnity for risk of loss in return for a payment of a premium. CAG’s supplies did not involve any customer obtaining the benefit of insurance cover. The UT also rejected the argument that CAG’s services were “related services” to insurance.

Equally, the UT rejected the argument that CAG acted as an insurance agent. This concept involved the activities of a person putting insurers in touch with potential clients. CAG’s customers were already the insurer’s clients and in any event CAG had no relationship with the insurer, it simply made claims against the financial adviser that had mis-sold insurance.

Comment

The decision stresses the restricted nature of the exemption for insurance and the need for a clear link to the bringing together of insurer and insured for the purposes of an insurance contract. In rejecting the analogy with the CSC Financial Services decision, the case also highlights the separate nature of the insurance exemption in the PVD compared to other financial services related exemptions.