VAT and on-supplied insurance

The Upper Tribunal has held that an insured person can on-supply insurance to third parties without actually providing them with any rights under the original insurance policy: HMRC v Wheels Private Hire Ltd [2017] UKUT 51. Based on a review of European Court of Justice (ECJ) caselaw, the Upper Tribunal considered that it was sufficient to amount to a provision of insurance, even though the third parties would need to rely on the insured person to enforce the policy.

Background

Wheels ran a taxi business in the course of which it rents cars, with a radio support service, to drivers who do not have their own vehicles. Wheels offers these drivers the option of arranging their own insurance cover against third party liability while driving the vehicle or purchasing such cover from Wheels for £45 per week in addition to the vehicle rental. At the relevant time, Wheels obtained the insurance under a contract with Collingwood Insurance Company Limited. Wheels charged VAT at the standard rate on the rent for the vehicles but treated the £45 as consideration for an exempt supply of insurance. HMRC decided that Wheels made a single supply of an insured vehicle to the drivers so that VAT is chargeable at the standard rate on the whole of the consideration including the £45.

Supply of insurance

Wheels relied, in particular, on the ECJ decision in BGZ Leasing. In that case, BGZ leased goods to customers and offered optional insurance against damage to the leased goods. If the lessee accepted BGZ’s offer of insurance, then BGZ would take out insurance on the goods with an insurer and invoice the cost of that insurance to the lessee. The ECJ held in those circumstances that this amounted to a supply of insurance even though the lessees had no direct rights under the insurance policy.

HMRC argued, however, that the decision in BGZ Leasing could be distinguished as, in this case, the insurer, Collingwood, had expressly prohibited Wheels from binding cover or effecting insurance on its behalf. The Upper Tribunal rejected this submission. It was clear that Wheels could add new drivers to the schedule during the policy year. The relevant question was whether third parties obtained insurance cover. The fact that in this case the drivers would have to rely on Wheels to enforce the cover against the insurer and could not do so directly did not prevent it being a supply of insurance.

HMRC also pointed out that in BGZ Leasing, the ECJ specifically noted that there was a supply of insurance because BGZ recharged the exact cost of the insurance on to the lessees. That was not the case here as Wheels made a small profit when it charged drivers £45. The Upper Tribunal considered that the fact that Wheels made a small profit did not preclude the reasoning of the ECJ applying to this case. It was still the case that Wheels provided insurance under the expanded definition in BGZ irrespective of the fact that it made a small profit.

Single supply

HMRC also contended that, in any event, there was a single standard rated supply of an insured car in this case. Again the Upper Tribunal rejected this argument. The tribunal pointed out that the ECJ in BGZ Leasing had stated that, as a general rule, a leasing service and a supply of insurance for the leased item cannot be so closely linked as to form a single transaction. Moreover, in this case, the drivers had the option of obtaining their own insurance (even though most chose to pay Wheels for insurance) and, when Wheels did supply insurance, it did so for a separate additional charge of £45. These factors all supported the conclusion that the insurance supply is a separate transaction.

Conclusion

The Upper Tribunal’s decision highlights the fact that a supply of insurance can be made to a person even where that person obtains no direct rights under the insurance policy. It is enough if the person supplying the insurance is required to enforce the insurance on behalf of the third party. In addition, the Upper Tribunal’s decision makes clear that it is not necessary for the intermediary to charge on the exact cost of the insurance in order to benefit from the insurance exemption.