Guarantee Protection Insurance Ltd v Revenue & Customs [2011] UKFTT 343 (TC) (20 May 2011

DECISION

1. Guarantee Protection Insurance Limited (“the Appellant”) appeals against an assessment to insurance premium tax (“IPT”) for the period September 2005 to March 2007, issued on 24 December 2007 in the amount of £118,010. The parties produced an Agreed Statement of Facts and Issues at the hearing of the appeal. We also received Witness Statements and oral evidence from Mr. Peter Thomas Dawson, a director of the Appellant. In addition a bundle of documents was in evidence. From this evidence we find facts as follows.

The facts

2. The Appellant is a specialist insurance company. Around half of its business consists of the provision of domestic insurance backed guarantees (“IBGs”) to, among others, double-glazing contractors. IBGs have been available in the UK insurance market for over 20 years.

3. These IBGs are regarded as taxable contracts of insurance for IPT purposes. They are provided to customers of a contractor and have the effect that if the contractor goes out of business the guarantee given by the contractor will be honoured – by the Appellant. In this way they bolster the guarantee offered by a contractor to its customers. Typically, the contracts between contractors and their customers do not make any mention of the provision of an IBG. Normally, there is no mention of the premium due for the IBG in any of the contractual dealings involving contractors’ customers. The IBG is regarded by the customer as being provided free of charge. The contractor bears the direct financial burden of the premium charged by the Appellant.

4. Before the Appellant had to pay out on a claim under an IBG there would have to be circumstances engaging the contractor’s guarantee (for example, a latent defect or the contractor’s failure to complete the work) and the contractor would have to have been unable or unwilling to honour its guarantee. For this reason IBG work was described by Mr. Dawson, in evidence which we accept, as ‘low cost, low risk and high volume’. This justifies premiums in the market in the region of £8 to £12.

5. Although the Appellant provides the insurance, the administrative work, such as issuing policy documents and corresponding with customers is carried out by the Appellant’s intermediary, Warranty Services Limited (“WSL”), which trades under the name QANW Services (“QANW”). WSL will hereinafter in this Decision be referred to as QANW.

6. Both the Appellant and QANW are authorised by the Financial Services Authority to sell insurance and handle client premiums, as required by the Financial Services & Markets Act 2000.

7. QANW markets and sells IBGs to both contractors and their customers. QANW works with about 10,000 to 20,000 contractors, including around 5,000 double-glazing firms, and sells approximately 20,000 IBGs a month. The average charge for this insurance, which is made by QANW on behalf of the Appellant, is, as indicated above, between £8 and £12, with IPT at 5% being charged in addition – i.e. an extra £0.40 to £0.60 per IBG.

8. The procedure generally followed is that every month a contractor provides QANW with the names and addresses of the customers to whom it has sold products, and pays the premium (£8 to £12 per policy) to QANW with the IPT charged in addition. QANW issues the IBG policy documents direct to each customer. QANW passes the net premium plus IPT to the Appellant, who accounts for the IPT to the Respondents (“HMRC”) by way of a quarterly return made in arrears.

9. In the course of its business, the Appellant issued IBG policy documents to the customers of one particular contractor, Pennine Windows (Home Improvement) Limited (“Pennine”) for over a decade, until Pennine went into administration in January 2008. Pennine were a company based in the north east of England, who supplied and installed windows and conservatories. There was no written agreement between the Appellant (or QANW) and Pennine covering this matter. The agreement was oral.

10. Up until 2005, the procedure followed in relation to Pennine and its customers was similar to the general procedure outlined above. Pennine paid to QANW premiums for each policy (IBG) issued directly by QANW to Pennine’s customers at a rate of £9 plus IPT of £0.45. QANW issued policy documents following receipt from Pennine of Pennine’s customers’ names and addresses on a monthly basis. QANW retained £4 out of the £9.45 received, as payment for its administration services and remitted the balance of £5 plus £0.45 IPT to the Appellant, who accounted to HMRC in respect of the IPT, by a return made quarterly in arrears.

11. In or around the summer of 2005, Pennine informed QANW that the guarantees issued by it (Pennine) to its customers would henceforth be provided by a new company, Pennine Guarantees Limited (“PGL”). At this point, while indicating to Pennine that it was a matter for them, Mr. Dawson recommended Pennine to speak to Compliance Solutions Limited, who had a team of specialist advisers providing regulation compliance advice to independent distributors in relation to the provision of financial services. Pennine did this, and on 18 October 2005 sent to QANW a letter enclosing a cheque for £3,000 which, the letter stated, represented PGL’s deposit against future IBG certificates. Pennine stated in the letter that this course had been adopted on the advice of Compliance Solutions Limited to ensure that at any time PGL would always have pre-paid for IBG certificates being issued at that time and so it could be said that PGL never held clients’ moneys. After October 2005, therefore, although the procedure for collecting premiums from Pennine/PGL continued as before, Pennine/PGL was always on average one month in advance. There was, therefore, always a balance of £3,000 held in QANW’s client account in respect of Pennine/PGL.

12. In or around April 2007, HMRC carried out a VAT inspection of Pennine. On 27 April 2007, after this inspection, Kerri Smith at QANW received an email from Julie Mills of Pennine stating:

“Following our audit for 2006, it transpires that due to the scheme we have in place, we should have been informing you of the value allocated to the insurance product, to allow you to invoice us for the 5% IPT.”

13. The Appellant and QANW became aware in this way that Pennine had changed their contract with their customers. The contract in use after the change included a section headed “Guarantee Agreement Conditions of Sale” (“GACS”) providing the terms of an agreement between the customer and PGL.

14. Clause 1 of this agreement contained a definition of ‘Guarantee Contract’ as follows:

“… the contract of insurance provided by QANW on behalf of the underwriters [the Appellant] to the Customer [i.e. Pennine’s customer] in respect of insuring the obligations of Pennine under the product warranty against defective workmanship or faulty materials as set out in clause 10 of the Pennine Agreement for the periods set out in that clause in the event that Pennine enters into insolvent liquidation or insolvent receivership;”

15. ‘Guarantee Premium’ is then defined as:

“… the cost of the Guarantee Contract paid by the Customer to PGL;”

16. Clause 3.1 of the GACS, under the heading ‘Payment’, stated:

“The Customer shall pay the Guarantee Premium to PGL. The total payment to be made by the Customer in respect of the Guarantee Premium will be determined by reference to the Purchase Price as specified in the Purchase Order. This payment shall be 12.5% of the Purchase Price provided that if the Purchase Price is greater than £12,500 the maximum payment shall be £1,562.50.”

17. Clause 4.1 and Clause 4.2 of the GACS provided:

“PGL shall act as the disclosed agent of the Customer for the purposes of arranging the Guarantee Contract for the Customer issued by QANW on behalf of underwriters [the Appellant].”

“PGL shall collect the Guarantee Premium from the Customer on behalf of QANW in respect of the Guarantee Contract provided to the Customer by QANW and pay such Guarantee Premium to QANW in consideration for QANW arranging the Guarantee Contract.”

18. There was no right of cancellation in respect of the payment of the Guarantee Premium under the terms of the agreement between PGL and the Customer (being a customer of Pennine). This was contrary to Financial Services Authority guidelines which stipulate that there should be a cancellation clause in an insurance contract. PGL purported under the agreement to collect the Guarantee Premium from the Customer on behalf of QANW. The Appellant and QANW had no knowledge of this arrangement before receiving the email sent on 27 April 2007 by Julie Mills of Pennine. The insurance premium which had actually been paid to QANW, and accounted for by QANW to the Appellant, was only £9 plus IPT of £0.45 per IBG. No amount beyond this premium in respect of the Guarantee Premium as defined (12.5% of the Purchase Price with a cap of £1,562.50 per IBG) was accounted for to QANW.

19. But following the email of 27 April 2007, PGL began passing to QANW (who passed it on to the Appellant) IPT on the 12.5% of the Purchase Price, with the cap of £1,562.50 per IBG. The Appellant accounted to HMRC for all IPT accounted for to it.

20. On 5 November 2007 Kerri Smith at QANW received a further email from Pennine, this time from Michael Bone. Attached to that email was a table showing the difference between the amount of IPT which PGL had been paying to QANW and the amount which they should have been paying. According to Pennine’s calculations they owed a total of £145,438.44 in respect of IPT. On 3 December 2007 Michael Bone sent a further email, this time to Peter Graham, a colleague of Mr. Dawson, stating that Pennine would be ‘unable to pay the full amount in one go’ and offering stage payments of £7,500 a week. This did not concern the Appellant unduly because Mr. Dawson thought it was an issue between Pennine and HMRC.

21. However, on 24 December 2007 the Appellant was assessed to IPT in the amount of £118,010 in respect of the period from September 2005 to March 2007 on the basis that IPT was due from the Appellant on the Guarantee Premium, the figure allocated by Pennine under the GACS entered into between the Customer and PGL, rather than the actual premium paid to QANW of £9 per IBG. The Appellant asked Pennine to fund this amount immediately but with no response from them.

22. Pennine went into administration in January 2008. The liquidators of PGL have sent a report to the Secretary of State recommending that director disqualification proceedings be brought against the directors of PGL.

The relevant legislation

23. The relevant legislation is in Part III of the Finance Act 1994 (“FA 1994”).

24. Section 49 FA 1994 provides that IPT is charged on a premium received by an insurer under a taxable insurance contract on or after 1 October 1994.

25. Liability to pay IPT is on the insurer in relation to the contract under which the premium is received (section 52 FA 1994).

26. As indicated above, it is common ground that the IBGs are taxable insurance contracts for the purposes of FA 1994 – see: section 70(1) FA 1994.

27. Section 72 FA 1994 (Interpretation: premium) relevantly provided in relation to the period in issue in the appeal as follows (it was amended by Finance Act 2010 in relation to payments made on or after 24 March 2010):

“(1) In relation to a taxable insurance contract, a premium is any payment received under the contract by the insurer, and in particular includes any payment wholly or partly referable to-

(a) any risk,

(b) costs of administration,

(d) any facility for paying in instalments or making deferred payment (whether or not payment for the facility is called interest), or

(e) tax.

(1A) Where an amount is charged to the insured by any person in connection with a taxable insurance contract, any payment in respect of that amount is to be regarded as a payment received under that contract …

(7) Where anything is received by any person on behalf of the insurer-

(a) it shall be treated as received by the insurer when it is received by the other person, and

(b) the later receipt of the whole or any part of it shall be disregarded.”

The submissions

28. Mr. McMeeken, for HMRC, submits that the amount of 12.5% of the Purchase Price termed the ‘Guarantee Premium’ payable by a customer of Pennine to PGL under clause 3.1 of the GACS is an amount ‘charged to the insured by any person [PGL] in connection with a taxable insurance contract [the IBG]’ and any payment in respect of that amount ‘is to be regarded as a payment received under that contract’ (cf. section 72(1A) FA 1994). Further, payment by a customer of Pennine to PGL of that amount is received by PGL on behalf of the Appellant as insurer and must therefore be treated as received by the Appellant when it is received by PGL (cf. section 72(7) FA 1994).

29. Mr. McMeeken acknowledged that the Appellant had taken all steps possible to ensure that it was collecting the correct amount of IPT and that, by the assessment appealed against, the Appellant was being penalised for the actions of Pennine/PGL ‘who were falsifying information to them’. He submitted however that the FA 1994 was quite clear on the point and that, unfortunately for the Appellant, ‘there is nothing in the statute that exempts the insurer from IPT due to the illegal activities of an intermediary’.

30. Ms. Choudhury, for the Appellant submitted that there was no valid contract between PGL and the customer at all. The GACS were a sham.

31. Alternatively she submitted that the GACS were not a contract of insurance and, therefore, not a taxable insurance contract for IPT purposes. No insurance was actually provided under the GACS.

32. She submitted that the actual contract of insurance was represented by the IBG certificate and existed between the Appellant and the contractor’s (Pennine’s) customer. The premium thereunder, which attracted IPT, was £9.

33. She submitted further that the ‘Guarantee Premium’, as defined in clause 1 of the GACS was not an insurance premium and was not a payment within section 72(1) FA 1994 because it was not received by the insurer (the Appellant) or QANW.

34. Further, she submitted that the ‘Guarantee Premium’ was not, in any event, received by any person (Pennine or PGL) ‘in connection with a taxable insurance contract’ (cf. section 72(1A) FA 1994). It was, she asserts, “merely a sum arbitrarily charged by Pennine to its customers in order to reduce its own VAT liability”. She submitted that neither Pennine nor PGA can be regarded as having acted as the Appellant’s agent or intermediary under the IBG contract (notwithstanding the terms of clause 4.1 of the GACS. They lacked FSA authorised representative status. A collection of premiums by them as agent or intermediary under the GACS would have been illegal and the contract should be regarded as void ab initio following Bedford Insurance Co. Ltd. v Instituto de Rasseguros do Brasil [1985] QB 966. Chubb Insurance Company of Europe SA v Customs and Excise Commissioners (IPT Decision 00001) and London General Insurance Company Ltd. v Customs and Excise Commissioners (IPT Decision 00002), which were relied on by HMRC, were both distinguishable on the facts, because in those cases the intermediaries were authorised to act as the insurer’s agent.

35. Ms. Chaudhury submitted that section 72(7) FA 1994 cannot assist HMRC because it is concerned only with the timing of a payment received on behalf of an insurer. She relied on Homeserve GB Ltd. v HMRC (IPT Decision 00014). She contended that if section 72(7) deemed receipt by any person on behalf of the insurer as receipt by the insurer, then the later enactment of section 72(1A) would have been unnecessary. In any event she submitted that the ‘Guarantee Premium’ cannot be regarded as having been received ‘on behalf of’ the Appellant.

36. She submitted that clearly Pennine had entered into the arrangements in issue as part of a VAT avoidance device, possibly in an attempt to exploit the decision of the House of Lords in C.R. Smith Glaziers (Dunfermline) Ltd. v Customs and Excise Commissioners [2003] STC 419. But, unlike the facts in C.R. Smith, the ‘Guarantee Premium’ in this case was not on any view attributable to the contract of insurance provided by the Appellant to the customer of Pennine/PGL. As Mr. Dawson said in his second Witness Statement (and we accept), there is no correlation between the amount of the payment made by the customer to the contractor for double-glazing or a conservatory and the payments made by the contractor to the insurer for an IBG. HMRC ought therefore, in her submission, to have assessed Pennine/PGL for VAT on the ‘Guarantee Premiums’ or sought to recover IPT from Pennine/PGL and not from the Appellant.

Discussion and Decision

37. On the facts as found, the Appellant can be charged to IPT only on receipts of premiums under one or more taxable insurance contracts (section 49 FA 1994). The contracts evidenced by the IBG certificates are taxable insurance contracts. The question for us is whether the ‘Guarantee Premiums’ actually received by Pennine or PGL from customers of Pennine, and not accounted for by Pennine or PGL to QANW or the Appellant are to be taken for IPT purposes as premiums received under those contracts.

38. We do not accept Ms. Choudhury’s submission (which was made on a ‘last minute’ basis and not foreshadowed in her Skeleton) that the GACS was a sham – at any rate in its entirety. Although we accept that the contract was artificial and likely to have been put in place as a VAT avoidance device, PGL does appear to have arranged IBGs for customers of Pennine and for the relative certificates to be issued by QANW to the customers on behalf of the Appellant as underwriters (cf. clause 4.1 of the GACS). It is true that clause 4.2 of the GACS is, at the very least, disingenuous. PGL did not (contrary to the terms of clause 4.2) collect the ‘Guarantee Premium’ on behalf or QANW or pay the ‘Guarantee Premium’ to QANW in consideration for QANW arranging the insurance contract.

39. We prefer to deal with the case on the basis that the GACS provided in law for the ‘Guarantee Premiums’ to be collected according to its terms. This is without prejudice to Ms. Choudhury’s points about the unenforceability of the GACS under the financial services legislation, which we do not need to address on the view we have taken of the effect of the relevant legislation – see: below.

40. We reject Ms. Choudhury’s argument that section 72(7) FA 1994 goes only to the timing of a receipt by a person on behalf of the insurer. We consider that on its plain words it deems such a payment both to be received by the insurer and to be so received at the indicated time. Paragraph 70 of the VAT and Duties Tribunal’s Decision in Homeserve GB Ltd., on which she relied, does not support her argument. In that paragraph Sir Stephen Oliver QC said:

“The function of section 72(7) is to identify the time of receipt for the purpose of the charge to IPT. It is dealing with the situation where an amount is received by one person on behalf of the insurer. In that respect it identifies the time of charge for the purposes of section 72(1). Section 72(1A) is dealing with the different situation where the amount may have been charged to the insured by some other person; and in that situation any payment in respect of that amount is to be regarded as a payment received under the contract by the insurer irrespective of the fact that that other person may not have received it on behalf of the insurer.”

41. Sir Stephen Oliver says nowhere that section 72(7) does not provide that a payment received on behalf of an insurer is to be treated as received by the insurer. Perhaps he regarded the point as too obvious for specific mention. In any event his analysis of section 72(1A) clearly does not support Ms. Choudhury’s argument that if section 72(7) went beyond the timing of receipt then the later enactment of section 72(1A) would have been unnecessary.

42. The question for us therefore is whether the ‘Guarantee Premiums’ received by PGL under the GACS were (1) payments received under taxable insurance contracts by the Appellant (section 72(1) FA 1994); or (2) amounts charged to the customer by any person (Pennine, or PGL) in connection with a taxable insurance contract (section 72(1A) FA 1994) – in which case a payment (by the customer to Pennine or PGL) in respect of any such amount is to be regarded as a payment received under the taxable insurance contract by the Appellant; or (3) payments received by any person (Pennine, or PGL) on behalf of the Appellant (section 72(7) FA 1994) – in which case they are to be treated as received by the Appellant when they were received by Pennine or PGL.

43. The GACS itself, of course, was not an insurance contract. The only insurance contract in issue was the contract evidenced by the IBG certificate in relation to which the Appellant received, through QANW, the fixed premium of £9 plus IPT of £0.45 for insuring Pennine’s customer against Pennine’s failure to honour its guarantee.

44. The crucial fact in our view is that the GACS was drafted and put into place by Pennine and PGL in 2005 without any reference to the Appellant, and the Appellant gave no authorisation to Pennine to arrange to charge its customers a percentage (12.5% subject to a cap) of the price of its products for arranging for IBGs to be issued to the customers by QANW on behalf of the Appellant. Neither the Appellant nor QANW gave any authorisation to Pennine or PGL to collect such amounts on behalf of QANW.

45. In fact, Pennine and PGL continued to deal with the Appellant between 2005 and 2007 on the basis that the premium liable to IPT on each IBG issued was the fixed sum of £9. This only changed as a result of a VAT inspection of Pennine/PGL. Then Pennine/PGL appeared to accept in principle the responsibility for putting the Appellant in funds for an assumed additional IPT liability brought about by the introduction of the GACS, but that does not establish any connection between the GACS arrangements and the Appellant.

46. It follows that in our judgment the ‘Guarantee Premiums’ were not, in any sense relevant to the construction of section 72(1A), charged to the insured under the GACS by Pennine or PGL ‘in connection with a taxable insurance contract’. There was no relevant connection between the charge of the ‘Guarantee Premiums’ and the insurance contracts evidenced by the IBG certificates. The provision of the IBG certificates merely provided a specious rationale for Pennine via PGL to attempt to divert 12.5% of the consideration charged to customers for their product away from being consideration attracting VAT at the standard rate (17.5%) to being consideration attracting IPT at the lower rate of 5%.

47. Accordingly, section 72(1A) FA 1994 does not assist HMRC in this appeal.

48. Plainly, in these circumstances, the ‘Guarantee Premiums’ were not received by Pennine or PGL ‘on behalf of’ the Appellant. If they had been, Pennine or PGL would have had to account to the Appellant for them. Given that they represented a very significant proportion of the sales proceeds of Pennine’s products, clearly neither Pennine nor PGL ever had any intention of accounting to the Appellant for them and they never did so or gave any indication that they ever intended to do so.

49. Accordingly, section 72(7) FA 1994 does not assist HMRC in this appeal.

50. Equally clearly the ‘Guarantee Premiums’ were not payments received under the taxable insurance contracts by the Appellant and so section 72(1) FA 1994 cannot on its terms apply to them.

51. For these reasons we allow the appeal. We consider that if we had accepted HMRC’s arguments the result would have been to render the scheme of IPT virtually impossible to operate in this type of case. The Appellant would have been held to be subject to a charge to IPT because of circumstances completely outside its control and which it had objectively no means of controlling. This might have given rise to further legal issues going to the enforceability of the IPT legislation.

52. We announced our decision to allow the appeal at the end of the hearing, reserving our reasons. We give liberty to apply to Judge Walters QC sitting alone in relation to any resultant application in respect of costs.

Right to apply for permission to appeal

52. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN WALTERS QC

JUDGE OF THE FIRST-TIER TRIBUNAL

RELEASE DATE:20 May 2011

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Insurance Premium Tax) Respondents

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