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VAT appeal potentially impacts the insurance exemption

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Does the VAT exemption for an insurance transaction (and any related intermediary activity) include just the sale and formation of the insurance contract, or does it also extend to any amendment or termination activity that takes place down the line? That is the key question due to be considered by the Upper Tribunal in January, in Claims Advisory Group Ltd (CAG), in a case likely to be of particular interest to insurance professionals.

This question, which lies at the heart of the CAG case, has the potential to impact on current exempt treatment given to commissions paid to insurance brokers and agents in all sorts of situations, including potentially in the Lloyds insurance market: for instance if commission payments are made following an amendment to a policy. Dealing with mid-term changes and early terminations is very much the business as usual of the industry, so any changes to the availability of exemption for related fees would be unwelcome.

Not much attention has been given to this case so far, which is unsurprising given that at first glance the appeal may have seemed to be only of narrow interest, concerning as it does the activities of a company specialising in claims for the refund of premiums for payment protection insurance (PPI).

Dig a little deeper though, and the importance of this case becomes clear: depending on the way the decision goes, it has the potential to narrow or widen the current application of the VAT exemption for insurance transactions, and that for the related services.

The received wisdom in recent years, following cases such as Arthur Andersen & Co (Case C-472/03) and Taksatorringen (Case C‑8/01), has been that exemption is reliant on the initial sales process of the policy. This is because the essentials of an insurance transaction are that ‘the insurer undertakes, in return for prior payment of a premium to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded’ (Card Protection Plan (Case C-349/96) [1999] STC 270, at para 17) and the essential aspects of the work of an insurance agent, include ‘the finding of prospects and their introduction to the insurer’ (Arthur Andersen & Co (Case C-472/03) [2005] STC 508, at para 36).

However, CAG will seek to argue that, when an insurance policy is cancelled and the premium refunded, that activity in itself includes the characteristics of an insurance transaction under the definition above, as it involves a transfer of the risk under the policy insured from the insurer back to the insured, in return for a payment (back) of the premium. Support for this approach can be gained from Lubbock Fine [1994] STC 10, which (in the context of property) saw exemption applying to surrender of a property lease just as much as its grant, on the basis that the surrender included all the elements of an exempt transaction. CSC Financial Services Ltd (Case C-235/00) [2002] STC 57 (at para 41) also supports this approach, in referring (in relation to the meaning of the exemption for transactions in securities) to ‘transactions liable to create, alter or extinguish parties’ rights and obligations’, on the basis that these alter the legal and financial position of the parties, in just the way that the termination or alteration of an insurance policy would do so.

CAG believes that the activities of a broker or agent in relation to such a transaction should be similarly exempt, but if the Upper Tribunal finds against it, that may also impact such activities in other areas of the insurance world.  If that were to happen, the irony would be that exemption would apply for trying and failing to create a policy, but not for amending or terminating it.

Note: the author acts for the taxpayer in this case. For the First-tier Tribunal's decision in this case, click here.