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Mapfre: VAT on warranties

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The CJEU’s judgment in Mapfre provides clarification of the breadth of the term ‘insurance’ for VAT purposes. However, the judgment does raise questions about the tax treatment of certain warranty contracts in the UK. Providers of warranties that may now be classified as insurance will need to consider pricing and other commercial matters, taking into account the restriction of input tax, together with IPT and regulatory compliance. Depending on how HMRC reacts to the judgment, there may well be ramifications for others, such as those intermediating the sale of warranties and those providing financial loss cover to warranty providers. 

On 16 July 2015, the CJEU handed down its judgment in Mapfre Asistencia and Mapfre Warranty SpA (C-584/13) (reported in Tax Journal, 24 July 2015), a case concerning the VAT treatment of second hand car breakdown warranties. The legal principles relied upon by the CJEU in reaching its conclusion may be nothing new, but its decision could have a significant impact on some taxpayers in the UK. 


Mapfre Warranty SpA (MW), an Italian company operating in France, provided warranties to cover breakdowns of second hand cars. Mapfre Asistencia (MA), a Spanish company also operating in France, provided financial loss insurance to MW, accounting for French insurance premium tax (IPT) at the standard rate. 
When purchasing a second hand car, dealerships offered customers an additional, optional warranty provided by MW to cover the breakdown of certain car parts. In the event of a breakdown, the purchaser of the car contacted a garage of his or her choosing; the garage estimated the repair costs and submitted these to MW. Once MW accepted the estimate, the garage carried out the repairs and MW covered the associated costs. 
MW considered that it was making taxable supplies of ‘after-sales’ servicing; however, a dispute arose with the French tax authorities, which considered that MW was making VAT exempt supplies of insurance. MA was also challenged on the basis that it was providing car insurance liable to higher rate French IPT. On appeal, the French Supreme Court referred the matter to the CJEU to provide guidance on the VAT liability of MW’s supplies. 

Conclusions of the CJEU

The CJEU borrowed heavily from the analysis of Advocate General Szpunar, in his opinion of 4 February 2015. Both agreed with the French tax authorities that MW’s services could be ‘insurance’ within the meaning of art 13 of the Sixth Directive 77/388/EEC (now art 135.1 of the Principal VAT Directive EC/2006/112). 
MW had argued that it had no contract with the purchaser of the car, and that it was only bound to the dealership, acting on its behalf by performing its obligations towards the purchaser. MW considered that the dealership paid the premiums for its warranties by deducting them from the margin it obtained. However, the AG and the court disagreed. Based on the warranty booklet, MW was found to have a contract with the purchaser. The dealership was simply not involved in performance of the warranty. For example, in the event of breakdown, the purchaser could approach any garage for repairs, the dealership was not involved in the repair costs and the warranty did not replace the dealership’s own statutory duties and liabilities. 
Given the lack of a definition in the Directive, past CJEU decisions, for example BGZ Leasing (C-224/11), were consulted for assistance on the essentials of an insurance transaction. It was found that in this case all aspects of an insurance contract existed, regardless of whether the purchaser entered into a contract with MW, with the dealership acting as an intermediary, or whether the dealership entered into the contract in its own name on behalf of the purchaser. Crucially there was: an insured party (the purchaser); an insurer (MW); a warranty covering the purchaser’s risk of having to bear costs in the event of breakdown; and a premium paid either in the purchase price of the car or as additional payment.
MW argued that an insurance transaction required the insurer to manage risk, something which it did not do, as it was merely taking over the dealership’s obligations to perform repairs. However, it was found that MW did spread its insured risk, as premia paid on all cars covered the cost of repairing those which broke down. Premia were never returned to the purchaser in the event of no breakdown or if repair costs were less than the premium paid. They were not a form of ‘advance payment’ to cover repair costs; they were simply standard insurance premia. How MW calculated each premium or managed repair costs was irrelevant to the VAT analysis. 
MW also argued that exempting its supplies would breach the EU principle of neutrality. Disagreeing with MW, the AG drew a distinction between the position of an insurer and a manufacturer or dealer in second hand cars. In respect of the latter, the level of risk was deemed to be low, as the manufacturer or dealerships generally know the life expectancy of their products and carry out repairs themselves or through designated repair centres, thereby controlling repair costs. By contrast, an insurer has no influence over, or knowledge of, the condition of the items it insures. The insured risk is independent of it. The court did not address this argument and, importantly, offered no conclusion on it.
Dealing with MW’s final argument that its services were so closely linked to the taxable sale of the car that they should be similarly taxed, referencing BGZ Leasing, the court restated that insurance transactions inherently link to the items they cover. However, that link is not enough itself to determine whether or not there is a single transaction. If every insurance transaction was taxable, simply because the services or goods it linked to were taxable, the aim of the insurance exemption would be frustrated. The court also confirmed that the starting point for any single or multiple supply analysis is that every transaction must normally be regarded as distinct. 
As applied to MW’s facts, the court found that the sale of the car and the independent supply of the warranty were not closely linked, so as to form a single supply. No aspects of the transaction suggested that a single transaction had taken place. The dealership did not provide the warranty; indeed, the purchaser could buy MW’s warranty or any other, and the right to terminate the warranty did not impact the contract for the sale of the car. Accordingly, there were two supplies by two independent suppliers to be considered separately for VAT purposes. 

Impact of the judgment

Warranties: The French courts will now have to apply this decision to MW’s particular circumstances; however, the case raises interesting issues in the UK. Given the court’s conclusions, warranties sold in similar situations may now be exempt from VAT, with consequences for the related input tax. 
For third party extended warranties, HMRC’s current guidance suggests there may be little change. HMRC’s VAT Insurance Manual (at VATINS3720) says that such warranties are generally treated as insurance. However, the decision may prompt increased scrutiny by HMRC of any third party warranty providers that currently charge VAT. 
In terms of retailer and manufacturer warranties, HMRC’s guidance (Notice 701/36 at 3.7.2) states that ‘guarantees and warranties provided by the manufacturer or retailer of the goods are very unlikely to be seen as insurance’. However, following the judgment, it may difficult to distinguish these warranties from those provided by MW purely on the basis that the provider has some control over risk, i.e. the quality of the products. In this respect, the silence of the court on the neutrality argument is unhelpful. It is undoubtedly the case that such warranties bear insurance-like features, and so the importance that HMRC attaches to the opinion will be critical.
The court’s single/multiple supply analysis means there is likely to be greatest uncertainty regarding manufacturer warranties. Providers will need to consider whether their position can be distinguished from that of Mapfre, due to factual differences. Their cause is not helped by the court’s acknowledgment that it had very few facts before it. Distinctions are easier to make from specific and detailed facts rather than a broad statement of principle, as is the case here.
All that said, to the extent that a provider’s facts fall squarely within HMRC’s existing guidance, there should be limited threat of a retrospective challenge from HMRC. As shown in recent cases, such as ATP PensionService (C-464/12), HMRC is generally respectful of taxpayers’ legitimate expectations.
As to other contracts with some insurance-like features, e.g. annual servicing contracts with guarantees, the first question for the provider is: Which element predominates? Contracts for annual servicing with parts guaranteed are unlikely to be insurance. The position is less clear where repair cover has an annual service as a pre-condition. 
IPT: The impact of IPT also requires thought. The CJEU’s judgment has no precedent value for UK IPT purposes. However, it will influence HMRC’s approach, as HMRC’s IPT guidance largely mirrors the VAT guidance on insurance contracts. If, going forward, more warranty and similar contracts are VAT exempt insurance, it would be surprising if HMRC did not align the IPT treatment. 
When IPT was introduced, it was intended to have the same fiscal impact as subjecting insurance to VAT (whether this remains true is debatable). The exception is, of course, the higher rate of IPT, designed to counter avoidance and subjecting certain insurance contracts to a 20% IPT rate. If it could be argued that Mapfre would have only minimal impact on warranty contracts subject to standard rate IPT, the same cannot be said for contracts attracting higher rate IPT, where the same rate of tax would be applied on ‘outputs’, but with no input tax recovery. 
For the past, there is a potential mismatch between IPT and VAT. Could it be open to warranty providers to exercise directly effective rights to seek a VAT exemption to support a retrospective claim, and shelter behind HMRC’s guidance to maintain a position that IPT is not due? The legal vires for such an approach requires careful consideration and, at the risk of stating the obvious, HMRC would regard that line as controversial.

Where does this leave us?

It is tempting to see Mapfre as ‘bad news’, but this is not necessarily the case. The guidance from the judgment is clear, and clarity in indirect tax is clearly a good thing. That said, we are reliant on HMRC interpreting the case with similar clarity in order to give taxpayers certainty for the future. We should also bear in mind that it may be good news in individual cases. A move to VAT exemption may be commercially and financially advantageous for some, and it will be interesting to see whether any taxpayers invoke their directly effective rights for past periods as a consequence of this case. In any event, providers of warranty products with insurance-like features would do well to review their position now.