Fees paid to SIPP administrator not VAT exempt

The Upper Tribunal has held that fees paid to the administrator of a SIPP (self-invested personal pension) were not exempt as consideration for a supply of insurance for VAT purposes: Intelligent Money Ltd v HMRC [2023] UKUT 236.

The Tribunal considered that, for VAT purposes, insurance must involve the insurer (or other person) bearing the cost of the insured risk or contingent event. In the SIPP under consideration, that was not the case. The amounts paid out as benefits under the SIPP came from the member's own funds and so the SIPP could not amount to an insurance arrangement for VAT purposes, even if (as a form of life insurance) it might fall to be treated as insurance for other legal purposes.

However, whilst not deciding the point, the Tribunal fell short of considering that all life insurance arrangements fell outside the scope of the VAT exemption. If it had had to decide the point, it would have held that a distinction must be drawn between life insurance where the premiums become owned by the insurance company and the cost of the benefits is made out of the insurance company's own resources (even if the amount payable is notionally determined by reference to the value of underlying investments) and a case in which the premiums remain substantially owned by the insured person and the benefits are paid out of those funds.

Background

Intelligent Money Ltd (IM) is the provider, operator and administrator of a SIPP known as the Intelligent Money SIPP. Until 2014 IM accounted for VAT on the services it provided to members of the SIPP. However, following a review, IM claimed it had incorrectly accounted for VAT on those supplies on the basis that they qualified as exempt from VAT as the provision of insurance under Schedule 9 Group 2 and sought to recover the VAT from HMRC. HMRC rejected that claim, leading to the appeal.

IM argued that the provision of a SIPP amounted to an insurance transaction both in the UK and the EU and the FTT accepted that the IM SIPP met the Prudential test of insurance. However, the FTT considered that it was clear from the case law of the CJEU that the VAT exemption for insurance was narrower than the general definition of insurance and required the insurer to take on risk in return for payment of the premiums. That was not the case with the SIPP, which was, in essence, an investment product.

Decision of the Upper Tribunal

IM appealed arguing that the FTT had erred in its interpretation of CJEU caselaw and in concluding that the lack of investment risk prevented the IM SIPP from amounting to an insurance transaction. The parties agreed that the core issue underlying the appeal was the correct interpretation of the term "insurance transaction" for the purposes of the insurance exemption and the correct criteria to apply to that test as set out in CJEU caselaw.

The UT, therefore, reviewed the four key decisions of the CJEU on the insurance exemption: Card Protection Plan (Case C-349/96), Mapfre (Case C584/13), Aspiro (Case C-40/15) and United Biscuits (Case C-235/19). From these cases, the Tribunal derived a number of principles including:

• The essential feature of an insurance contract is that the insurer agrees to in return for a premium to provide the insured, in the event of the materialisation of the risk covered, with the agreed service (which may or may not be cash).
• Under that contractual arrangement, the insured must obtain some protection or coverage from risk.
• The definition of "insurance transaction" for the purposes of the insurance exemption is not informed by the meaning of insurance for the purposes of the insurance directives.

IM argued that, even so, all that was required was the insurer to undertake to make a payment/provide a service on the materialisation of a risk - rather than assuming a financial risk adverse to the insured person. And in this context, "risk" simply meant any contingent "trigger event" for the payment or service concerned. The event must be uncertain - either in its occurrence or the timing of its occurrence - but that is sufficient for it to amount to the necessary "risk". As a result, IM argued that the VAT exemption must be capable of applying to life insurance contracts.

The Tribunal noted that there is no CJEU decision on the application of the VAT exemption to life insurance contracts and did not find it necessary to reach a conclusion on that point. However, if the Tribunal had had to decide the point, it would have found that the rationale for the insurance exemption "is capable of applying to at least some forms of life insurance contract and possibly some forms of life insurance that involve an investment element".

Even if the concept of "risk" did extend to uncertain contingent events which may not be strictly adverse to the insured person, the more important issue in this appeal was whether it is implicit in the essential features of an insurance transaction that a person other than the insured person bears the cost of the materialisation of the relevant risk or uncertainty. On this point, the Tribunal considered that it is a necessary implication of the essential features of an "insurance transaction" that, under the contractual relationship between the insured person and the insurer, the insured obtains some protection from the relevant risk or uncertainty. Under the arrangements as whole, someone other than the insured person must bear the cost of the payment or the provision of the service that is provided on the materialisation of that risk or uncertainty.

As such, even if the insurance exemption can extend to some life insurance contracts with an investment element, a distinction has to be made between cases where the premiums become owned by the insurance company and the cost of the benefits is made out of the insurance company's own resources (even if the amount payable is notionally determined by reference to the value of underlying investments) and a case in which the premiums remain substantially owned by the insured person and the benefits are paid out of funds held substantially for the benefit of the insured person and/or other beneficiaries. In this case, where the cost of the life and death benefits provided to the member is borne by a member's own fund, fell into the latter category and outside the scope of the insurance exemption.

The Tribunal noted that the FTT in Winterthur (LON/96/1787) had, on similar facts, came to the opposite conclusion, but noted that Winterthur had been decided before the CJEU cases and the Tribunal concluded that I was accordingly wrongly decided.

Whilst unnecessary to do so, the Tribunal went onto consider two other points. Firstly, it considered that none of the payments by members of the SIPP could be regarded as "premiums" paid for any insurance. A premium is an amount paid in advance of the provision of the relevant benefit and involves consideration for the assumption of risk. Neither the contributions made by members nor the annual fees met this definition. The annual fees were paid for a range of listed services and the operation of the scheme, not for the provision of life and death benefits under the SIPP. The contributions were not consideration for any supply.

In addition, the Tribunal agreed with HMRC that the service provided by IM did not amount of the provision of the life and death benefits service under the SIPP. The life and death benefits were provided to the members, their dependants, or other beneficiaries out of the members' own funds in which IM had no beneficial interest. The only benefit or service that was provided to the members (their dependants or other beneficiaries) when the life and death benefits are paid is the administrative service of releasing the funds.

Comment

The decision of the Tribunal that supply of the IM SIPP did not amount to an insurance transaction for VAT purposes would appear to be inevitable based on the recent decisions of the CJEU which have stressed that the nature of an insurance transaction (in the VAT context at least) requires payment in return for the insurer taking on risk.

Before the FTT, IM had relied on HMRC guidance at VATINS2110 which suggested that a wider definition of insurance should be accepted, referring to the Collins Dictionary definition and stating, "This clearly accords with our daily understanding of what insurance is, and it is likely that any form of insurance would fall within this definition". The FTT, whilst indicating that the tribunal had "some significant sympathy with that position", the FTT also noted that "HMRC guidance is not the law and enforcing its application is not within the jurisdiction of this Tribunal (that is a matter for a judicial review challenge in the Administrative Court)".

It should be noted that HMRC has since updated this guidance (in August 2023) to accord with the prevailing CJEU approach.