Tripartite insurance arrangements and barter

Update: The Court of Appeal has since held that the services fall within the scope of the exemption for insurance intermediary activities. See Tripartite insurance intermediary arrangements and VAT.

The Upper Tribunal has upheld the decision of the FTT that an insurance intermediary installing goods in an insured's vehicle in the form of a "black box" car monitor was not entitled to recover input VAT on the supply of those goods: WTGIL v HMRC [2024] UKUT 77. The provision of the devices was merely an element of its provision of exempt insurance intermediary services to insurers and so any input VAT was not recoverable. There was no separate taxable supply of the devices or their installation to policyholders.

The decision may, hopefully, provide something of a break on the excesses of supply arguments which depend on barter. The taxpayer had argued that the supply of the (installation of) devices was provided to policyholders in return for policyholders agreeing to enter into the insurance contract. However, both the FTT and UT have applied admirably robust rejections to this "beguiling" argument. There was simply no evidence of the necessary reciprocity (or direct link) in the arrangements. Policyholders in reality simply accepted the devices as part of the terms of the insurance contract and there was no suggestion that they were agreeing to enter into that insurance contract as consideration for the installation of devices by the taxpayer.

Background

WTGIL (formerly Ingenie) was an insurance intermediary which developed a form of car insurance aimed primarily at 17 to 25 year-olds. It introduced customers to insurers (both via its own website and comparison sites) to offer insurance which included the condition that a telematics device must be fitted to the insured's car. Ingenie agreed with insurers to provide and fit the device, which provided information about the way the car was driven. Ingenie analysed the data and provided that analysis of the insured and the insurer. The data allowed to the insurer to monitor the insured's driving and to increase or decrease the premium accordingly. In return, Ingenie received a commission of 10% of the premium plus £150 for the fitting of a device to the insured's car. Where the insured already had a device fitted (for example, on a policy renewal), the commission was simply 10% of the premium. The terms of the insurance between insurer and policyholder provided that there was no fee for the first fitting of a device, albeit a fee of £165 would be charged if the policy was cancelled within the first year.

Ingenie sought to recover input VAT incurred on the provision and fitting of the devices, taking the view that it was attributable to a taxable supply to policyholders. HMRC rejected the claim. HMRC considered that the only consideration for Ingenie's supplies was the commission paid to Ingenie by the insurer, which was consideration for an exempt supply of insurance intermediary services under VATA 1994 Schedule 9 Group 2. Accordingly, the input tax was attributable to an exempt supply and not deductible.

Ingenie argued that the input VAT was attributable to its taxable supplies being:

• the provision and fitting of a device on commencement of an insurance policy in return for either: (i) non-monetary consideration provided by the insured by entering into the contract of insurance; or alternatively, (ii) monetary consideration being £150 commission payable to Ingenie on the first provision and fitting of the device; or alternatively
• a deemed supply of goods under paragraph 5(1) of Schedule 4 to VATA 1994 when the device is transferred so as no longer to form part of the assets of Ingenie.

The FTT rejected those arguments and Ingenie appealed to the Upper Tribunal.

Decision of the Upper Tribunal

The UT has upheld the decision of the FTT, whilst admitting that it found the question whether there was a supply for consideration to policyholders a "difficult issue".

The UT noted that, based on CJEU case law, such as Naturally Yours Cosmetics, for there to be a taxable supply for VAT purposes, there must be: (1) a supply, (2) a legal relationship, (3) reciprocal performance, (4) a direct link and (5) consideration capable of being expressed in monetary terms.

In this case, the UT accepted that there was a supply of the service of fitting devices into policyholder's vehicles and this was performed pursuant to the terms of the contractual arrangements set out in the Policy Booklet between Ingenie, policyholders and insurers. However, it rejected the taxpayer's argument that there was a supply of goods to policyholders. In particular, the contractual documentation made it clear that ownership of devices was retained by Ingenie unless and until a contract of insurance ended. It also rejected the argument that the supply of installation services to policyholders was a supply of insurance intermediation services.

The UT accepted that there was the necessary legal relationship between Ingenie and policyholders. The Policy Booklet clearly created a legal relationship not only between Ingenie and insurers, but also between Ingenie and policyholders.

If there was consideration, the UT also held that such consideration was capable of being expressed in monetary terms for the purposes of (5) above. In this case, it would be possible to use the benchmark of the installation fee paid by Ingenie to third party installers as a basis for the monetary value of the supply of installation services to policyholders.

Accordingly, the question whether there was a taxable supply by Ingenie of installing devices depended on whether there was reciprocal performance and a direct link. It was Ingenie's argument that the consideration provided by policyholders was their agreement to enter into the contract of insurance. The UT placed reliance on the statements made by the AG in Tolsma on the nature and degree of the connection necessary between supply and consideration. The AG stressed the need for "a stipulated exchange of mutually dependent services" and the "stipulation of a price or consideration" and the "need for an element of contractual exchange".

In this context, the FTT had been correct 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... in return for the installed device then that could be consideration. However, the critical issue was whether, on the facts found by the FTT, [Ingenie] 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 [Ingenie] to a policyholder.... Put another way, was there a sufficiently direct link between any consideration given by a policyholder and the supply of services by [Ingenie] to the policyholder, and was there in fact a reciprocal bargain between the parties as asserted by [Ingenie]?"

The FTT had held that there was nothing in the contractual documentation to indicate that a policyholder agreed to do anything or allow anything to be done in return for the provision of a device and the UT has held that the FTT was entitled to reach this conclusion. In entering into the insurance contract on terms that the device must be fitted, the purpose of the policyholder was not to pay consideration to Ingenie for the installation but rather to comply with a requirement of the insurer. There was no "contractual exchange" in the necessary sense for there to be consideration for a supply by Ingenie for VAT purposes.

Indeed, the UT went on to affirm the correctness of the FTT's conclusion, and lack of commercial substance in Ingenie's analysis, by noting that the position "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".

The UT also suggested that Ingenie's analysis involved "an impermissible element of double counting". The supplies in relation to the device which were said by Ingenie to be made to policyholders for consideration were in all material respects supplies which Ingenie already contracted to make to the insurer. Moreover, in terms of the price to be received by Ingenie for those supplies, it earned its return by being paid its commission by the insurer out of the premiums received. "That does not mean it was impossible for [Ingenie] 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 [Ingenie's] contractual construction, which asserts that, notwithstanding the absence of explicit wording, that was the effect of Part One of the Policy Booklet."

The UT also rejected the argument that Ingenie made supplies of installation for actual monetary consideration in the form of the fitting fees charged under the insurance contract. That characterisation of the payments was at odds with the contractual arrangements under which the policyholder made no payment for first fitting and only made payments on cancellation of the insurance.

As regards the question whether Ingenie made a "deemed supply" of devices under VATA 1994 Schedule 4 para 5 to which the input VAT could be attributed, the FTT had been correct to point out that Article 16 of the 2006 VAT Directive made it clear that the disposal of the assets of a business free of charge is only treated as a deemed supply where the VAT incurred was wholly or partly deductible. Since Ingenie did not recover any input VAT in relation to the devices (since their provision amounted to part of its exempt supply of insurance intermediary services), there was no deemed supply under Schedule 4 para 5.

Comment

Not for the first time, the Tribunal in this case noted that "in the VAT world very little is straightforward" and recalled the memorable words of Sedley LJ comparing VAT to "a kind of fiscal theme park in which factual and legal realities are suspended or inverted", whilst commenting that this "perhaps suggests a level of enjoyment not always inherent in navigating the process".

The taxpayer's case ultimately rested on a "beguiling" argument based on barter. The policyholder must have entered into the insurance contract as consideration for its contractual arrangements with Ingenie to allow it to install a black box device. The world of VAT appears increasingly beset with such beguiling arguments with a tendency to see barter behind every contractual provision. In this context, the decision of the UT comes as something of a refreshing cold shower! Whilst it is possible for the act of agreeing to enter into a contract to amount to consideration, it will not always be so and, in particular, such arguments must be interrogated from the perspective of whether there was true reciprocity and direct linkage. There was simply nothing in the arrangements in this case to indicate that a policyholder was entering into the insurance as consideration for its agreement to allow the device to be fitted. The mere linkage of the two contracts was insufficient. (It is worth noting, however, that it would have been relatively simple for the contractual arrangements between Ingenie and policyholders to expressly set out the necessary direct link in this case.)

No doubt barter scenarios will continue to prove problematic and, whilst HMRC were not keen to recognise barter in this case, there are many other scenarios where they are extremely enthusiastic to see a barter involving an agreement to enter into contractual arrangements. Perhaps this case will at least give pause for thought and head off some of the excesses of this approach.