England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
IN THE CHANCERY DIVISION
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
[2002] V & DR 202

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th February 2003

1. This judgment concerns several appeals from decisions of the VAT and Duties Tribunal, on appeals by the two Appellants against decisions of the Respondent Commissioners as regards various linked VAT matters. I do not need to go into the interrelationship between the various decisions and the appeals against them. Large sums of tax are in dispute. It is common ground that three issues arise for decision. Two of them were decided wholly against the Appellants, and the other partly against the Appellants. Insofar as the latter was decided in favour of the Appellant, the Commissioners do not challenge this. But the Appellants challenge the rulings against them on all three points.
2. The Commissioners have served a Respondent's Notice, by which they seek to uphold the decision of the Tribunal, if necessary, on other grounds. I have not yet heard argument on those points, which only arise if the appeals would otherwise be successful. It has been agreed that I should decide the points on the Appellant's Notice, and then there should be argument, if necessary, as to the fate of the points in the Respondent's Notice, which might require a reference to the European Court of Justice, or an adjournment pending the result of another reference which has already been made.
3. The underlying subject matter of the transactions under consideration is motor breakdown insurance. Purchasers of cars, mainly but not only second hand, may purchase, through the car dealer, a form of warranty or extended warranty by which they are protected against the cost and some consequences of the breakdown (otherwise than by wear and tear) of the vehicle upon failure of any of its parts. This warranty may take a number of different forms, and may last for a shorter or a longer period. It may involve insurance, either directly or indirectly, or there may be no insurance element. In the latter case the organisation providing the warranty takes its own risk as to the level and amount of claims. It may, however, be more attractive to car buyers to have an element of insurance in the package, so as to provide more confidence in the arrangements. An insured warranty might be one whereby the provider of the warranty covers itself, giving the car owner no direct benefit. The insurance may however be the primary content of the scheme, as it is in the present case. The car owner buys an insurance policy through the garage, under which he is promised the relevant protection in the event of breakdown. The cover might be expressed as a financial indemnity, covering the cost of having the car repaired. Alternatively, as here, it may be expressed as an undertaking to have the repairs done.
4. As regards VAT, the implications of a simple arrangement for a motor breakdown warranty are these, in summary. The garage will be registered for VAT and will charge the standard rate of tax on its supplies of labour and parts. If the car owner is not registered, or the car is not used for business purposes, then the car owner cannot recover the VAT on the repairs by deduction from output tax charged. If the insurer indemnifies the car owner against the cost, then it also has to pay the VAT as part of that cost. Even if the repairs were done for the benefit of the insurer, so that a supply of services was made to that body, in the normal way it could not recover that input tax, because insurance is exempt and insurance undertakings cannot recover their input tax. For an insurer in any substantial way of business, that inability to recover the input tax represents a substantial addition to the costs of the business, which have to be covered by premiums.
5. The present case concerns arrangements put in place in March 1998 which were set up in order to seek to reduce the costs of the warranty business by making it possible to recover the input tax. There was some evidence as to the previous position, but it does not seem to me that anything turns on the detail of that for present purposes. The new arrangements were set up as part of a project which the Tribunal referred to as Project C.
6. The arrangements involve an insurance company, which I will call NIG, and a number of other companies which are part of a group known as Oriel. NIG issues motor breakdown insurance policies to car purchasers. An Oriel company called Warranty Holdings Ltd acts as its agent in getting this business, and car dealers act as introducers. The security of NIG as an insurer is offered to the car owners. The real commercial risk, however, is taken elsewhere, in the Oriel Group. The whole of NIG's risk under the policies is reinsured with an Oriel company incorporated and trading in Gibraltar, called Crystal Reinsurance Company Limited. In turn 85% of the risk is retroceded to another Gibraltar based Oriel company, Viscount Reinsurance Company Ltd. The task of claims handling is passed down the line with each of these arrangements, and Viscount therefore has responsibility not only for its own risk but also for the share which rests with Crystal. Viscount delegates the task of claims handling to another Oriel company, this one based in the UK, WHA Limited. WHA sets up systems and arrangements with approved garages under which the work that may be necessary in the event of the breakdown of an insured's car will be done at appropriate rates, and paid for by WHA so long as it is within the terms of the policy. The intention of these arrangements is that, when a garage repairs a car under the policy, the taxable supply of services for VAT purposes will be made by the garage to WHA, and WHA will therefore be able, in principle, to deduct the input tax suffered by it on paying the garage's bill. The next question is whether WHA has to charge VAT to Viscount on any of its services, WHA claiming that its services are exempt. If it is exempt then because its supplies are to a customer outside the EU, input tax is recoverable. Thirdly, if it does have to make such a charge, then it is said that Viscount can recover the input tax so charged under rules relating to supplies to traders in third countries, because its customer in turn (Crystal) is also outside the EU.
7. The first two of these issues are related, in that they both require an analysis of what supplies of what services there are and to whom, and of the nature of WHA's business. The third issue is distinct.

The documents

8. I heard submissions as to the approach to be taken in deciding what supplies of services take place in a given situation, to which I will refer in due course. On any basis, however, the starting point is to look at the terms of the relevant documents. I will therefore start with the typical policy issued to car owners. On page 1, under the heading "contract of insurance", there is the following passage:

"Your contract of insurance is between you ... and [NIG]. Warranty Holdings Ltd acts as agent for NIG in respect of the issue of this policy. In return for the premium, NIG provides the benefits described in this policy booklet. These are on and subject to the terms and conditions in this policy booklet."

On the same page there is this separate text:

"WHA Limited will deal with any claims arising under your policy. If your vehicle breaks down please call WHA's Customer Support line… for advice on the best course of action and the nearest approved repairer."

9. On the next page, under a heading "Your questions answered", information is given as to the extent of the cover under the policy, including that breakdown due to normal wear and tear is not covered. The point is made that all claims must be made in accordance with the claims procedure, described elsewhere, and the terms and conditions. Car owners are advised to contact WHA in the event of breakdown, to be advised of the best course of action and told of the nearest approved repairer. The point is also made that if the insured wishes to use a garage which has not been approved in advance by WHA, this is possible so long as the garage in question follows WHA's claims procedures, which will include getting authorisation for the work, and sends their invoice with the necessary supporting documentation, quoting the authority reference, to WHA at an address given.
10. Under the heading "How to make a claim", insured car owners are given the following instructions. They should contact WHA's Claims department to have the claims procedure explained. They should book the vehicle in with the dealer or a recommended repairer, and give permission for the work necessary to diagnose the fault to be done to the car. They should agree to pay the costs of dismantling and repairing the vehicle if the cause of the problem is not covered by the policy and, if it is covered, then any costs which exceed the limit of cover. The repairer must telephone WHA, quoting the policy type and number, and seek authority to do the repair. If the claim is accepted, the repairer will be told how much will be paid under the policy and an authority number will be given. Any amount billed which exceeds the authoriised amount has to be met by the insured. When the repairs are complete the repairer must submit an invoice addressed to WHA showing the authority number and all other relevant information.
11. Under the terms and conditions, a number of points are made which I should quote. It states that WHA has been appointed "to deal with all matters relating to claims handling and settlement, including payment of claims arising under this policy." The basic cover is described as follows:

"NIG will provide cover for mechanical breakdown as set out in the policy during the period of insurance."

12. Under item 6, the essential need for a claims authority number is mentioned if any repairs are to be carried out under the policy, and likewise the need for the claims procedure to have been followed. It continues: "NIG reserves the right to provide replacement parts and to carry out repairs under this policy or to arrange for their provision by other persons"
13. WHA has a list of authorised repairers with whom labour rates and parts discounts are agreed It has issued a claims procedure leaflet to these repairers. This is in the following terms:

"1. Obtain policy type and number from the proposal form … Check proof of servicing.

2. With policyholder's authority, including agreement to pay all costs incurred by the repairer which do not form part of an authorised repair, establish precise cause of failure and the cost parts and labour required for the repair.

3. To obtain authorisation to carry out a repair phone WHA's Claims department. No rectification to be carried out without prior authority from WHA.

4. After obtaining authority and having carried out the repair in accordance with the authority given, send a detailed VAT repair invoice for all parts used in the authorised repair and the authorised labour costs together with any relevant service invoices to WHA.

5. Obtain payment from policyholder of all costs in excess of those authorised by WHA."

14. Moving away from dealings with car owners and garages, the liabilities under the insurance policy were fully reinsured with Crystal, first by a novation agreement, by which Crystal stepped into the place of another company which had performed the same function previously, and then by a reinsurance deed. Not many of its provisions require mention. By clause 3.1 it was a condition precedent to liability under the agreement that: "in the event of a claim or loss hereunder or under a NIG Policy, no payment, repair, offer, or compromise shall be made in respect of any claims or losses under any NIG Policy without the consent of the Reinsurer who shall have the sole right to appoint adjusters and / or assessors and to control, or to appoint such person as it thinks fit to control, all claims handling, negotiations, investigations, adjustments and settlements in connection with such claims and losses and to make payment in respect thereof under and in accordance with the terms of the relevant NIG Policy Document"
15. Crystal was to be liable for all claims and losses. Under clause 5 it was agreed as follows:

"It is agreed that in consideration for the payment by the Reinsured of the premiums hereinafter referred to and the right of the Reinsurer to control or to appoint such person as it thinks fit to control, all claims handling

…

5.2 the Reinsurer shall procure that title to all parts which are appropriated for use in a repair under a valid claim under any NIG Policy shall be transferred to the Reinsurer together with the benefit of all rights in respect of such parts including the benefit of all warranties implied by law and the Reinsurer hereby agrees that all such parts and such rights which are transferred to it shall immediately after such transfer to it be transferred to the Reinsured prior to such parts being fitted in the policyholder's vehicle"

16. In turn the Deed of Retrocession between Crystal and Viscount matched some of these provisions. Clause 3.1 was included in corresponding terms, giving Viscount the same protection. Clause 4 required Viscount to settle all claims, subject to Crystal indemnifying it for the 15% not retroceded. Clause 5 also followed the terms of the reinsurance agreement quite closely, save that it did not refer to manufacturer's warranties, but only to title to parts.
17. The more important document for present purposes is the Claims Handling Agreement between Viscount and WHA, dated 3 March 1998. It refers in the recitals to Viscount having the right to control the handling of claims under the NIG policies by virtue of the retrocession agreement, and to WHA having agreed to be appointed to deal with claims handling in respect of claims made under the NIG policies. Clause 3 deals with delegation of powers to WHA:

"3.1 Viscount hereby appoints WHA, and WHA hereby accepts its appointment by Viscount, subject to the terms of this Agreement, to appoint adjusters and / or assessors and to control all claims handling, negotiations, investigations, adjustments and settlements in connection with claims and losses under NIG Policies and to make payment in respect thereof under and in accordance with the terms of the relevant NIG Policy Documents which are subject to the terms of the Retrocession Agreement"

18. WHA's duties are set out in clause 6 Clause 6.1(i) and (iii) to (v) deal with matters of general obligation and administration. Paragraph (ii) is as follows:

"[WHA will] handle, investigate, control, negotiate, validate, process, administer, and settle all claims arising under NIG Policies in accordance with the terms of the relevant NIG Policy Documents including during any run-off period should this Agreement be terminated"

19. Clause 7 deals with title to parts, and provides, among other things, that immediately after appropriation by, in turn, a repairer and WI-IA of a part for an authorised repair, and prior to it being fitted in the relevant vehicle, title to that part, and the benefit of all rights in connection with it including warranties, will pass immediately to WHA and Viscount in turn, subject to an obligation to reimburse the party concerned for the cost of the part.
20. By clause 8, among other things, Viscount's prior authority was required for any ex gratia payment, just as it was, by clause 3.2, for any settlement which would involve paying more than £3,500.
21. Clause 9 deals with consideration. In consideration for the performance of its obligations Viscount is to pay to WHA sums as set out in the clause, to be reviewed annually. There are two elements in the payment to be made: the costs of all claims plus VAT paid by WHA pursuant to the Agreement; and £17.60 for each claim settled and paid by WHA pursuant to the Agreement, subject to a cap of 125,000 claims paid per 12 months. This in turn is subject to provisos, two of which protect WHA as regards the volume of business, and the third gives an incentive to WHA to try to reduce the average value of claims settled to below £153, by providing for a payment to WHA of part of the difference between the average value (if less) and that figure.

Facts found by the Tribunal

22. The Tribunal's decision includes passages dealing with the facts which I should cite, since their findings are unchallengeable unless no reasonable tribunal could have made such findings, which has not been suggested to me in argument on the points now at issue.

"47. Mr McVeigh [the claims handling executive with WHA] was asked about the claims procedure. It is the insured who takes a car to a garage, gets the fault diagnosed by the garage and finds that it is not covered (e.g. because of fair wear and tear), bears the cost of diagnosis. If the fault is not covered, any corrective work and parts will be the insured's responsibility. Those features will have been agreed between policyholder and garage. Mr McVeigh was asked about repairs which are done and subsequently not authorized by WHA, e.g. because they turn out to relate to fair wear and tear. In that situation WHA may disclaim. The precise position is unclear. Mr McVeigh thought that in practice the garage would not proceed against the insured although there was nothing in writing to substantiate this. In any case, Mr McVeigh said, WHA only disclaimed in a very small percentage of cases.

48. We were shown a batch of 30 invoices issued by garages for work carried out under NIG Policies. Twenty-four of these were directed at and required payment from WHA. Six of them recorded that the insured had already paid. Mr McVeigh explained that these latter invoices would usually have related to emergency repairs. This, he said, was "within the tolerances". In those cases WHA would reimburse the insured.

49. Where the bill for labour and parts has exceeded the policyholder's cover, WHA has paid up to the amount of the cover. The garage's invoice might relate to parts that were covered and to parts that were not covered by the NIG Policy without specifying which; and WHA might pay the amount covered by the policy. What happened to title in this situation? Did it, as the arrangements envisaged, go from Viscount to Crystal to NIG? What happened to title when the invoice for the particular part exceeded the amount of the cover with the result that the insured had to make a contribution? Did the title to the whole of the new part go round the Gibraltar loop; or did only an undivided share go round the Gibraltar loop and if so what share? Mr McVeigh's answers to these questions did not convince us that the title trail sought to be set up by the contractual arrangements could work in practice. Then there were problems because some garages published their own terms and conditions. WHA had agreed with Viscount that "on an appropriation by WHA of a part for an authorized repair, and prior to such repair being fitted in the vehicle to be repaired, the title to such part, together with the benefit of all rights of WHA in respect of that part including the benefit of all warranties implied by law, will immediately pass to Viscount" : see clause 7.1 of the Claims Handling Agreement. But at least one of the garages whose invoices we saw stipulated that that it (the garage) retained title to the parts it used until payment was received in full.

50. Another aspect of the title problem was that, according to the documentation, title to any part covered by a policy goes, not to the policyholder, but through the Gibraltar loop and back to NIG where it stops. There is nothing in the policy document that transfers it to the insured. Mr McVeigh said that no practical issue about title had arisen.

51. What about manufacturer's warranties and guarantees relating to parts installed by garages in insureds' cars? Here there was some confusion. Arthur Andersen, in a letter to the Commissioners, explained of the guarantee that "it remained with the owner of the part fixed to the vehicle". The agreement between WHA and Viscount passed the benefit of the warranty to Viscount; but the Deed of Retrocession did not pass it on to Crystal. Mr McVeigh's response was that WHA would take care of it.

…

54. The evidence we saw showed that WHA in fact authorized all claims. How many claims in excess of £3,500 there were, we do not know. Mr Kentish [director of Crystal and Viscount] told us that NIG issued 30,000 MBI Policies each month. All premiums for these policies were set by Warranty Holdings. The monthly receipts of cash by Crystal were of the order of £2-2.5 million. There were, Mr Kentish said, some 10,000 claims each month.

55. …..The evidence before us showed that WHA settled [claims exceeding £3,500] first and referred to Viscount afterwards. There was no evidence of any occasion on which either Mr Kentish or Mrs Cruz [manager of Viscount] had authorized a claim before it was met or of any occasion on which Viscount had refused to authorize a claim; they did not have the necessary information available to them, said Mr Kentish. The reality was that Viscount kept records of claims and built up statistical information. Whether WHA paid the insured direct (because the insured had engaged the garage directly and paid it) or paid the garage had not been a concern of Viscount.

56. By clause 8.1(c) of the Claims Handling Agreement, WHA was not authorized to make ex gratia payments unless previously authorized by Viscount. These, said Mr Kentish, were not in fact authorized in advance by Viscount. On some occasions rebates on premiums were paid to successful dealers. These were borne by Viscount which collected an equal amount from Crystal.

….

67. In our opinion the garages make their supplies of repairs and parts to the insured. WHA pays for those to the extent that the bill of the garage in question is within the cover provided by the policy and so long as the repairs and parts are in other respects authorized by the terms of the policy.

68. Features of the arrangements that support that conclusion include the following -

• The insured chooses the garage. WHA has a list of approved repairers and the insured is free to choose any one of these. Exceptionally, if the insured wishes or if an emergency dictates, he may use a non-approved repairer. In these circumstances the amount payable under the policy may be limited to the amount which would have been charged under the approved repairer arrangements; the repairer obtains payment so long as he has followed WHA's claims procedures.

• The insured authorizes the garage to carry out the investigatory work.

• The insured is liable for work done by the garage where it is not covered by the policy. Work already done (including investigatory work relating to it), which WHA disclaims because it relates to a breakdown caused by any of the circumstances which are excluded from cover by the NIG Policy (see paragraph 24 above), is the responsibility of the insured. Also outside the cover will be the cost of the labour and parts where this exceeds the cover or where the labour and parts are otherwise outside the scope of the cover.

• A significant number of invoices that we were supplied with (i.e. six out of thirty) showed, as mentioned in paragraph 48, that the garage had been paid by the policyholder.

• • WHA, as claims handler appointed to carry out the particular functions referred to in clause 3.1 of the Claims Handling Agreement, is put in funds to meet claims. It is accountable to Viscount for what it spends. Those funds are handled by it for the purpose of its appointment. They are, to use Mr Ross-Roberts' [finance director of Warranty Holdings Ltd] words, "a claims float". The supplies made by the garages are not used for the purposes of WHA's own business which is simply to handle claims for a flat rate fee. That is the position whether those supplies are used for the purpose of the insurer's business or (as we think to be the case) are used by the insured.

• Mr McVeigh, when asked who the garage was providing its services to struck a note of reality when he replied "They were providing the services to the ... insured vehicle". (The insured vehicle is, of course, owned by the insured.)

• As an indication of industry practice we have an observation of Mr Main of Arthur Andersen made at a meeting with the Commissioners in June 1998. The note records his agreement that it was industry practice to view the repair services being provided to the insured. He is, however, recorded as going on to say that "in this case significant time had been invested to break this perception".

69. We turn now to the documentation. The policy document itself contains nothing that indicates that the supply is other than to the insured. The insured is covered for the cost of the repair. When an insured event occurs the insured claims the cost of the repair and this is met within the policy conditions and limits. The policy document identifies WHA as the authorized claims handler. But it does not oblige WHA to provide the labour and parts. That is the responsibility of the garage. Insofar as WHA is obliged to make payments in settlement of a claim, that obligation arises from the terms of its appointment but not under the NIG Policy itself.

…

71. We are satisfied that the documentation and the arrangements, designed to divert the supplies of labour and parts from their normal direct route from garage to insured by routing them instead via the Gibraltar loop, do no more than create a paper trail. Their purpose is to facilitate Project C. The reality is quite different. The following passage from the judgment of Laws J in Customs and Excise Commissioners v Reed Personnel Services [1995] STC 588 at 595b-e is in point. That ends with these words-

"In principle, the nature of a supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties."

"The whole facts" in this case point irresistibly to the conclusion that the documentation does not determine the nature of the garage's supply. The garage supplies the labour and parts to the insured."

The first issue: do garages make a taxable supply to WHA?

23. The contractual position is not conclusive as to what taxable supplies are made to whom, but it must be the starting point. What I have set out above shows that there are several contracts which must be considered. First there is the contract of insurance between NIG and the car owner, under which NIG promises, in the relevant events, to have the owner's car repaired. Then there are the two agreements by which NIG's obligations are assumed in turn by Crystal and Viscount. Then there is the agreement between Viscount and WHA under which WHA handles all claims. Coming to the involvement of a particular garage, there is an agreement in each case between the car owner and the garage under which the car owner permits the garage to do necessary diagnostic work to the car, and agrees to pay for the work if it is not covered by the policy. There must also be an agreement between WHA and the garage under which WHA agrees to pay for the work insofar as it is covered by the policy and authorised by WHA. WHA contends that there is a taxable supply of services by the garage to it, which must be by virtue of this contract.
24. The precise nature of this contract was the subject of some debate before me. Clearly there are prior arrangements between WHA and some garages under which the latter become approved repairers (see paragraph 13 above). The Tribunal made no finding as to the legal nature of these arrangements, and they may be purely practical. In relation to a claim which is processed according to the claims procedure set out in the policy leaflet, WHA's involvement as regards the garage comes when the garage, having identified the nature of the fault, and that it comes within the terms of the policy, telephones WHA to obtain authority to do the repair. WHA then gives that authority (if appropriate -if not the question does not arise) and an authority number to be quoted when claiming settlement. It seems likely that when WHA does that, it comes under an obligation to the garage to pay for the work if and when it has been done, and if the garage makes the claim in accordance with the correct procedure. It is more difficult to say, from the material before me, that the garage comes under any positive obligation to WHA to do anything. No doubt it is obliged, if it does the repair work, to do it with reasonable care and skill. But it seems difficult, on the material I have, to say that the garage owes a duty to WHA to do the work, such that if it did not do it WHA could claim that it was in breach of contract. Moreover, whereas under the claims handling agreement WHA was obliged to Viscount to see that the garage passed title to parts appropriated to a repair to WHA (and to the corresponding warranty) before they were fitted in the insured's vehicle, so that WHA could pass title to Viscount in turn, the Tribunal noted that at least in some cases the terms on which the garage did business were inconsistent with that, the garage as supplier retaining title until it was paid.
25. Mr Cordara's submission was that there was a contract between WHA and each garage, under which the garage was obliged to do the necessary repairs to the insured's car and WHA was obliged to pay the approved cost of those repairs, so long as the correct procedure was followed. He submitted that WHA received a benefit under this contract, namely the discharge of its obligation to Viscount to see to the settling of proper claims, which in turn, via Crystal, amounted also to the settling of the insured's claim under the policy, and this benefit was used by WHA in the course of its business. He submitted, accordingly, that there was a taxable supply of services by the garage to WHA, and that WHA therefore incurred the input tax charged by the garage.
26. This submission flows from the terms of the Value Added Tax Act 1994, section 24(1), which is relevantly as follows:

"Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say -

(a) VAT on the supply to him of any goods or services

…..

being (in each case) goods or services used or to be used for the purposes of any business carried on or to be carried on by him"

27. It is also necessary to bear in mind the provision as to the meaning of a supply of services, in section 5(2) of the Act:

"(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services"

28. So Mr Cordara says that garages do something for WHA under each contract which is not a supply of goods, but is done for a consideration, namely payment of the approved cost of the repairs, and thereby they supply WHA with services, those being services which WHA uses for the purposes of its business. That something is the repair of the insured's car. Clearly that is to the direct benefit of the insured, but he submits that it is also to the benefit of WHA, and through it to the insurers, by constituting the discharge of their respective obligations.
29. The Tribunal rejected this argument, by reference to the speeches of the House of Lords in Customs & Excise Commissioners v. Redrow Group plc [1999] 1 WLR 408. In that case the taxpayer operated a sales incentive scheme under which it agreed to pay the fees of estate agents which it instructed on the sale of the existing house of a potential buyer of a Redrow house, if the buyer completed that purchase. Buyers contracted with the estate agents separately so as to be liable for the fees if they did not complete the purchase of a Redrow house. Redrow's part in the transaction included choosing and instructing the estate agent, having a valuation done, monitoring progress on the sale, in order to keep up pressure on the estate agent to sell the house, and paying the fees at the end of the day if the Redrow sale went through. There were two reasons for the scheme, on the one hand as a financial incentive to make the purchase of a Redrow house more attractive and on the other to ensure an early sale for the buyer's existing house, which itself would facilitate the sale of the Redrow house. It was not disputed that, in a case where the purchaser did complete the purchase of a Redrow house, and Redrow accordingly paid the estate agents' fees on the sale of his previous house, Redrow incurred the expenditure and did so in connection with Redrow's business activities. The question was whether the expenditure was incurred in the supply by the estate agent of services to Redrow. The tribunal had held that the estate agents' services were supplied to both Redrow and the buyer. Potts J had dismissed the Commissioners' appeal, but the Court of Appeal allowed a further appeal. In turn the House of Lords restored the decision below. Lord Hope and Lord Millett gave speeches with both of which each of the other Lords agreed. I can limit my quotation to two passages, the first from Lord Hope at 412-3:

"Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted VAT? The fact that someone else -in this case the prospective purchaser -also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction."

Secondly, Lord Millett at 418:

"[The taxpayer] must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to a deduction. Once the taxpayer has identified the payment the question to be asked is did he obtain anything -anything at all -used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services."

30. In applying these tests to the facts of this case, the Tribunal said this:

"WHA's business in this connection is, as we have already noted, to discharge the liabilities of the insurer using money provided for the purpose by Viscount. There was no evidence showing that the benefit of the garage's supply of labour and parts is used for the purposes of WHA's business. The benefit of those enures to the insured or the insurer but not to WHA. It follows that there is no supply by WHA to Viscount of the benefit of the supplies of labour and parts."

31. Mr Cordara criticised this conclusion on the basis that the fact of the garage's carrying out the repair work to the insured's car is as important to WHA's business, in that it thereby discharged its obligations to Viscount, as it is to the several insurers in discharging their obligations in turn.
32. I was shown authorities about the correct approach to deciding what taxable supply, if any, is made in a given situation, and in particular about the relevance of contractual documents, including the decision of Laws J in Reed Personnel Services, cited by the Tribunal, which was approved by Lord Slynn in Eastbourne Town Radio Cars Association [2001] STC 606, [2001] UKHL 19, and Plantiflor Ltd, decided since the Tribunal's decision in the present case, [2002] STC 1132, [2002] UKHL 33, as well as a very recent decision of the European Court of Justice, Auto Lease Holland BV v. Bundesamt für Finanzen (Case C-185/01) in which judgment was delivered on 6 February 2003. The contractual documents do not conclude the question, even if they are consistent with the reality, especially if more than two parties are concerned in the transaction.
33. Mr. Peacock, for the Commissioners, submitted that the Tribunal's decision is right and is supported by the findings of fact which they made. In particular he pointed to various inconsistencies between the documents and the reality, as regards for example the title to the parts and the warranties, and questions which would arise where the cost of the repair exceeded the amount of the cover, and so had to be paid in part by the insured, as well as the cases where the insured paid for the repair immediately and then asked for WHA to pay him by way of indemnity. These are among the points discussed in paragraphs 47 to 51 and 70 of the Tribunal's decision and they seem to have contributed to their decision that there was no supply by the garages to WHA.
34. The documents are not all neat and consistent. There is certainly a degree of artificiality about the provision for the title to the parts and warranties to pass from the garage to WHA between appropriation to the job (e.g. when the mechanic takes it out of the garage's stock) and the mechanic fitting it to the car, and in turn for the title to pass down the line to NIG. In the absence of evidence as to the terms of the dealings between WHA and the garages it is not clear what WHA actually did to secure that they did get title. The only relevant documents in evidence appear to be inconsistent with this, in that they show at least one garage holding on to the title until payment, which would certainly be after the job has been completed. But it is not clear to me how important this point is. Maybe WHA failed to perform its obligation to Viscount to secure title to the parts and warranties. Maybe the reality is that title to the parts and the warranties passed to the insured on completion of the job. But the question still needs to be answered as to whether there was a supply by the garage to WHA of anything relevant, there being clearly a contract of some kind between WHA and the garage.
35. There were some cases where the prescribed claims procedure was not followed, and the insured paid the garage himself, probably because he wanted the work done especially urgently, and then sought to be reimbursed by WHA. In practice WHA paid up in those circumstances. The number and proportion of these cases is not clear. The Tribunal referred to 6 out of 30 sample cases as being of this kind. Other evidence suggested that the proportion was very small, and much less than 20%. It might be that such cases raise issues of their own, but that does not seem to have been suggested. The Commissioners' case was that these represented the reality, but on any footing it seems that they were a minority of cases, and not a large minority. They were not the norm.
36. I can agree with the Tribunal when they say that the garages make their supplies of repairs and parts to the insured, using the word "supplies" in a general sense, not necessarily meaning a taxable supply for VAT purposes. There is a contract between the insured and the garage and the repairs and parts are provided by the garage to the insured together with, I am prepared to assume, the benefit of title to the parts and of the warranty. But it does not follow, because this is what the insured gets from the garage, that WHA does not receive anything itself which is relevant for VAT purposes.
37. The Tribunal's reasoning on this is found first at the fifth point under paragraph 68, in the following words which I will quote again:

"The supplies made by the garages are not used for the purposes of WHA's own business which is simply to handle claims for a flat rate fee. That is the position whether those supplies are used for the purpose of the insurer's business or (as we think to be the case) are used by the insured."

38. There is another relevant passage in paragraph 70, as follows:

"The "Claims Procedure" ... requires the garage to obtain authorization from WHA to carry out repairs and directs that invoices for authorized repairs are to be sent to WHA. As we read it, this commits WHA to pay for authorized repairs. It does not, however, make WHA the customer of the garage. Still less does it operate to transfer title to the parts through WHA and into the Gibraltar loop."

39. They return to this point at paragraph 72, after referring to Redrow, as follows:

'What does WHA obtain in return for the payment that is used for the purposes of its business? WHA's business in this connection is, as we have already noted, to discharge the liabilities of the insurer using money provided for the purpose by Viscount. There was no evidence showing that the benefit of the garage's supply of labour and parts is used for the purposes of WHA's business. The benefit of those enures to the insured or the insurer but not to WHA. It follows that there is no supply by WHA to Viscount of the benefit of the supplies of labour and parts."

40. The last sentence of that passage is odd, because the prior question is whether there is such a supply by the garage to WHA, but no doubt the two go together, in a sense. I see much force in Mr Cordara's criticism of this aspect of the decision. WHA's duty to Viscount includes seeing that proper claims are met, by having the appropriate repairs done. Only if that is done are the obligations of the successive insurers to the insured discharged. WHA sees to that by having the work done, that is to say by setting up arrangements whereby garages will do the work with the necessary authority from WHA, and will look to WHA for payment. The service which, it is submitted, a garage supplies to WHA is the service of repairing the insured's car, thereby satisfying the obligation of NIG to the insured, and in turn the corresponding obligations of every other party in the insurance chain.
41. The passage quoted at paragraph 39 above from paragraph 72 of the decision focusses on the test that the service supplied has to be used for the purposes of the taxpayer's business. That is, of course, the statutory test in section 24(1): "services used or to be used for the purposes of any business carried on or to be carried on by him". Given the breadth of the concept of services which may be supplied for VAT purposes, it seems to me that the concept of such services being used must also be approached in a broad sense. It is easy to see how a taxpayer "uses" (in an active sense of the word) for the purposes of its business on the one hand supplies of stationery and, on the other hand, services of, for example, lawyers or accountants. How, by contrast, is a supply such as it is suggested that garages make to WHA "used" for the purposes of WHA's business? Mr Peacock submitted that by paying the garages WHA discharges its obligations to Viscount, and that while the fact of payment is relevant to WHA's business, the benefit which WHA gets from having made the payment is not. It seems to me that this is an inappropriate analysis. WHA makes a contract with a garage. Even if it is a unilateral, or "if", contract, WHA gets a benefit from it, in that the garage will rely on WHA's authority to do the work, and thereby WHA secures the discharge of its obligations to Viscount. In due course, the work having been done, WHA pays the garage against the appropriate invoice. The fact that payment comes at the end of the process, by which time the insured is satisfied, does not seem to me to permit one to disregard the benefit secured by WHA in the way that the Tribunal do, by describing it as something of use to the insurer or the insured but not to WHA. I therefore disagree, respectfully, with the Tribunal in their conclusion that the service supplied by the garage is not used for the purposes of WHA's business. I consider that, while no doubt services are delivered (to use a neutral word) by the garage to the insured, services are also provided by the garage to WHA, and those services are used (in a passive rather than an active sense) for the purposes of WHA's business, in that it is only by securing those services that WHA performs its obligations to Viscount. The services are supplied to WHA for a consideration, and accordingly it seems to me that, on the first issue, WHA is correct, and the Commissioners and the Tribunal wrong.

The second issue: WHA's supplies to Viscount -exempt or not?

42. I turn to the second issue. This concerns the status, as regards VAT, of the supply by WHA of services to Viscount. WHA contends that they are all exempt. The Commissioners contended that they were all taxable and standard-rated. The Tribunal found that WHA supplies a claims handling service which is exempt, to the value of £17.60 per claim, but that the rest of the service supplied, which they described as the satisfaction of the claim, is a separate supply, involving paying the garage, which they held was not exempt but taxable at the standard rate. The Commissioners do not challenge the finding that there is a claims handling service which is exempt, but WHA's primary contention is that this covers the whole of the service which it provides to Viscount.
43. For this purpose, different statutory provisions have to be considered. Exemptions are governed principally by article 13 of the Sixth Council Directive on VAT, 77/388/EEC. This includes the following provision at B:

"B. Other exemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance on abuse:

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents"

44. This is implemented in UK law, so far as "related services" are concerned, by (now) the Value Added Tax Act 1994 Schedule 9, Group 2, item 4, in these terms, taken with the relevant part of Note (1):

"4. The provision by an insurance broker or insurance agent of any of the services of an insurance intermediary in a case in which those services

(a) are related (whether or not a contract of insurance or reinsurance is finally concluded) to any such provision of insurance or reinsurance as falls, or would fall, within item 1, 2 or 3; and

(b) are provided by that broker or agent in the course of his acting in an intermediary capacity.

Notes:

(1) For the purposes of item 4 services are services of an insurance intermediary if they fall within any of the following paragraphs

…..

(c) the provision of assistance in the administration and performance of such contracts, including the handling of claims;"

45. Mr Cordara submits that all that WHA does for Viscount is within the scope of "related services performed by ... insurance agents" in the Directive, and of "the provision by an ... insurance agent of any of the services of an insurance intermediary" in the terms of item 4 of Group 2, and in particular "the provision of assistance in the administration and performance of such contracts, including the handling of claims" in Note (1)(c). He submitted that the Tribunal was wrong to hold that, if they had been wrong on issue 1, WHA provided two distinct services to Viscount, of which only the smaller part, in terms of the value of the consideration, amounted to claims handling, and the rest was not exempt.
46. Before the Tribunal the Commissioners had accepted that there was a claims handling service that was supplied by WHA to Viscount, but they said that to the extent that WHA's invoices to Viscount covered the garage bills for labour and parts they related to a quite separate service. The Tribunal accepted this submission. At paragraph 81 they said that the distinct provisions for payment in clause 9 of the claims handling agreement pointed to separate supplies, the first covering everything done in response to the insured's claim under the policy, and the second covering the discharge of the insurer's obligation to meet the claim. "The first is the claims handling supply. The second is that of satisfying the claim." They enlarged on this in paragraph 82 of the Decision:

"82. The claims handling supply involves responding to the insured when he wants to make a claim, checking whether he is covered, advising him of suitable authorized repairers (or, where he has already had the vehicle repaired, advising him to get the garage's invoice met by WHA), setting up bulk supply arrangements for parts, appointing loss adjusters, authorizing repairers authorizing repairs, etc. All those functions are carried out by WHA as principal and in return for the flat rate fee. Then comes the satisfaction of the claim. That supply does not start until the claim has been authorized. It involves checking and paying the garage's invoice using funds provided for the purpose by Viscount as the float."

47. The label "claims handling" is useful and convenient, but it is not to be forgotten that this is not the statutory phrase which needs to be applied to decide whether the supplies are exempt or not. The Tribunal's decision that there is an exempt claims handling service involves an acceptance that WHA is an insurance agent, providing services of an insurance intermediary. On that basis it seems to me that what WHA does satisfies the terms of item 4 read by itself, and the question is whether it is brought within the exemption by Note (1)(c) or excluded from it by Note (10).
48. Note (1)(c) does of course refer to claims handling, but it is not limited to that: "the provision of assistance in the administration and performance of [insurance] contracts, including the handling of claims". It is not clear to me why the Tribunal regarded the process of "satisfying the claim" as falling outside the scope of this phrase. Mr Cordara submitted that what WHA did was one whole and indivisible process of dealing with claims on Viscount's behalf, of which paying the garage's bill was a late stage, but still a stage in the operation. He said that what Viscount had done was to contract out the functions of dealing with claims to WHA, which otherwise it would itself have to undertake. If it had done these various things itself it could not have been said that it was not administering or performing the insurance contracts. By outsourcing the task to WHA, it was obtaining WHA's assistance in performing these operations, without changing their nature. Mr Peacock submitted that the process on WHA's part of buying the benefit of the labour and parts from the garage and selling it on to Viscount was not assistance in the performance of the contract, because by then the contract had been performed, and that it did not amount to assistance with the administration of the contract because it had nothing to do with the insurance contract.
49. It seems to me that the Tribunal's view on this point was inevitably influenced by the fact that, on their decision as regards the first issue, the point did not arise. They therefore had to consider it on a hypothetical basis, the hypothesis being as to what supply it was that WHA obtained from the garage. Quite what their hypothesis was is not altogether clear, but it may well have been the converse of what they stated in the last sentence of paragraph 72 (quoted in paragraph 39 above), namely that there was a supply by WHA to Viscount of the benefit of the labour and parts. That is one way of putting it, but not, I think, sufficiently precise. On the basis of my decision on the first issue, it seems to me that the service supplied by the garage to WHA is that of supplying the parts and doing the work for the insured, thereby satisfying WHA's obligation to Viscount, and in turn Viscount's to Crystal, Crystal's to NIG and NIG's to the insured. On the part of the garage in relation to WHA it is the provision to WHA of the benefit to that company of having a service provided to the insured. On the part of WHA in relation to Viscount it is a service of procurement, procuring the garage to do the necessary work. It seems to me that that whole process, up to and including seeing to payment of the garage's bill, can fairly be described as claims handling on behalf of Viscount, and certainly as assisting Viscount in the administration and performance of the relevant insurance policies, including the handling of claims. To treat the process of paying garages as being separate and distinct from the process of giving authority to them to do the work seems to me an artificial distinction.
50. In Century Life plc v. Customs and Excise Commissioners [2000] STC 276, affirmed by the Court of Appeal [2001] STC 38, the question at issue was whether the services supplied by the appellant, relating to checking as to compliance with relevant regulatory provisions on the part 'of an insurer in selling personal pensions, were within the exemption under article 13B or Group 2 item 4, Note (1)(c). It was held that they were. That exercise was a good deal less close to the performance and administration of the insurance contracts than that which WHA did for Viscount, but it was held to be within the respective phrases, rejecting an argument for the Commissioners that the exemption only covered "the formation and discharge of contracts (in other words the settling of claims)" (see [2000] STC 284). Jacob J, in the Court of Appeal, said at [2001] STC 45, paragraph 15:

"Applying [the principle that exceptions are to be read narrowly] one can say that if a service is only remotely or incidentally connected with an insurance transaction it is not "related to" it; there must be a close nexus between the service and the insurance transaction concerned. So, for example, if an insurance agent supplies secretarial or general computer supplies to an insurance company the exemption would not apply."

51. The Tribunal relied on Note (10), as did Mr Peacock before me. Mr Cordara, on the other hand, while resisting this argument, referred to Note (9) in support. That Note has two effects. First it provides that the services of loss adjusters are, generally, not exempt. Secondly, however, if and insofar as they do claims handling work in circumstances prescribed by the Note, those services are exempt. Mr Cordara's point is that in those prescribed circumstances loss adjusters would be exempt in respect of exactly the work that WHA does on behalf of Viscount, in just those circumstances. The Note is in these terms:

"(9) "Item 4 does not include the supply of any services' by loss adjusters, average adjusters, motor assessors, surveyors or other experts except where

(a) the services consist in the handling of a claim under a contract of insurance or reinsurance;

(b) the person handling the claim is authorised when doing so to act on behalf of the insurer or reinsurer; and

(c) that person's authority so to act includes written authority to determine whether to accept or reject the claim and, where accepting it in whole or in part, to settle the amount to be paid on the claim."

52. That seems to me to be a fair point. The Note does not give any more specific help as to whether paying the garage, as opposed to merely agreeing what should be paid, is part of the function of "handling the claim", but I find it difficult to see why it should not be, and why the relevant exemption should cover everything up to agreeing the quantum to be paid, but stop short of making the payment so agreed on.
53. Note (10) is as follows:

"(10) Item 4 does not include the supply of any services which

(a) are supplied in pursuance of a contract of insurance or reinsurance or of any arrangements made in connection with such a contract, and

(b) are so supplied either

(i) instead of the payment of the whole or any part of any indemnity for which the contract provides, or

(ii) for the purpose, in any other manner, of satisfying any claim under that contract, whether in whole or in part"

54. The Tribunal having determined that, if issue 2 arose, WHA made a separate supply distinct from claims handling, of "satisfying the claim", said at paragraph 87 that this separate service was excluded from exemption by this Note. I was told that the main purpose of this Note was thought to be to ensure that a person such as the garage in the present case, supplying parts and repair services to the insured under the insurance arrangements, by which supply the claim under the insurance contract would be satisfied, could not be regarded as making an exempt supply rather than the normal standard rated supply. That may be so, though the situation to be guarded against would involve a somewhat far-fetched proposition that the garage was an insurance agent, since otherwise the exemption could not arise. Mr Cordara's submission is that this Note only applies to a supply of services to the insured, because of the terms of paragraph (b)(i) and (ii). I accept Mr Peacock's proposition that the phrase "or of any arrangement made in connection with such a contract" is deliberately wide. However, paragraph (b)(i) does seem clearly to be speaking of a supply to the insured in place of a payment which would otherwise be due, which must be a payment to or for the benefit of the insured. The next phrase, "for the purpose, in any other manner, of satisfying any claim under that contract" also looks as if it is deliberately wide, in order to prevent evasion. But I think there must be a limit to how widely that phrase is read. Otherwise any aspect of a claims handling service provided by an agent to the insurer might be caught by it, being said to be supplied for the purpose, in a broad sense, of satisfying the claim. I therefore accept Mr Cordara's submission that Note (10) is concerned only with services provided (to use a tax-neutral word) to the insured by which, in one way or another, his claim under an insurance contract is satisfied in kind, rather than by payment. Accordingly it does not apply to exclude from the exemption, if otherwise within it, the sort of services provided by WHA to Viscount, including the process of paying the garage.
55. The Tribunal relied on the two-fold structure of the consideration payable to WHA. I agree that the structure of the payment provisions could be relevant, but it does not seem to me that this is a fair comment on this particular contract, when one examines what it is that WHA is to do under it. As a small point, the Tribunal's comment at paragraph 86 that WHA could earn nothing from the process of discharging claims is not quite correct, because of clause 9(ii)(c) under which WHA would get an additional payment if claims were settled at an average of less than £153. Even apart from that, however, it seems to me that WHA's obligations under the contract are all to be regarded as constituting a single service, provided for a consideration which is, essentially, "cost plus", that is to say the cost of discharging the claims and a payment per claim on top.
56. Mr Peacock also submitted that WHA's case involved a conjuring trick, whereby a taxable service supplied by the garage to WHA became an exempt service on the part of WHA when supplied to Viscount, even though it was the same service. There are at least two answers to that forensic point. One is that the two services are by no means necessarily identical. The garage's service to WHA is that of doing to the insured's car the necessary repair work, including supplying parts. WHA's service to Viscount is a more general procurement service. Secondly, there is nothing strange, in the context of VAT, in the same service being treated one way if done by one entity and another way by another. The garage is not an insurance agent, and would be caught by Note (10) if it were. WHA is an insurance agent, and therefore has the benefit of article 13B and Group 2 item 4 if the services it supplies are within the terms of those provisions.
57. I conclude that the service which WHA provides to Viscount is a single service which may be broadly described as claims handling, but in any event falls within the phrase "related services" in article 13B, and within Group 2 item 4, Note (1)(c) in Schedule 9 to the Value Added Tax Act 1994. It is therefore an exempt supply. It is common ground that the consequence of that, subject to the arguments raised in the Respondent's Notice, is that WHA is entitled to recover the input tax which it bears, charged by the garages, by virtue of section 26(2)(c) of the 1994 Act and the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (and before 2000 under its predecessor), because the services are supplied to a person who belongs outside the Member States, (i.e. Viscount, based in Gibraltar) and the supply would have been exempt, if made in the United Kingdom, by virtue of Group 2. (Insurance supplies are treated as made in the place where the customer is based, so these supplies are made in Gibraltar, even though the work is done in the United Kingdom.)
58. I was told that this was not the result that Oriel had been led to expect by their advisers at the time of planning the scheme, and the Tribunal refers to this at paragraphs 36 and 83, but I do not see that this can influence my decision. I therefore hold in favour of WHA on the second issue. Apart from the issues on the Respondent's Notice it would follow that WHA's appeal would succeed. The Tribunal's decision seems to have been influenced by their view as to the artificiality of the scheme, but it seems to me that, if that is a relevant factor, it comes in under the Respondent's Notice, and is not directly an answer to the points argued so far.

The third issue: could Viscount recover input tax if WHA had to charge it?

59. This point does not arise, in the light of my decision on the second issue. It is aptly described by the Tribunal as complex, and depends on a close reading and comparison of UK regulations and of provisions of several EC Directives. Counsel in their respective submissions, admirably clear on this as on the other issues, each contended that the Directives were fully and correctly implemented by the UK legislation, and thereby produced the respective, diametrically opposed, results for which they argued. They recognised that, if I were not satisfied that one side or the other was clearly right, it might be appropriate to refer a question to the European Court of Justice. Similar considerations seem to have been mentioned to the Tribunal. Since, however, the point does not arise on the conclusion I have reached on the first two issues, it would be hypothetical and therefore no reference is possible. In the circumstances, despite the Tribunal, also strictly unnecessarily, having held in favour of the Commissioners on this issue, I prefer, especially in order to avoid further delay before delivering judgment, not to express any view on this issue.

Conclusion

60. But for the Respondent's Notice, I would allow the appeal having decided the first two issues in favour of WHA. As it is I will invite submissions as to how to proceed as regards the issues raised in the Respondent's Notice.