First-tier Tribunal (Tax)

[2010] UKFTT 494 (TC)

TC00752

Appeal reference: TC/2009/15512

VAT – exemption – commercial lettings – landlord insuring the properties – block policy – “insurance transactions” – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

OM PROPERTIES INVESTMENT CO. LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting (Judge)

Simon Bird (Member)

Sitting in public in Birmingham on 6 September 2010

Nigel Ferrington, VAT consultant for the Appellant

Nigel Bird, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.           The Appellant, (“OM”), appeals against part of an assessment dated 31 July 2009.  The disputed element, in the sum of £17,566, relates to OM’s insurance charges to tenants of commercial properties which had been opted to tax, OM having treated such charges as exempt.

2.           We heard oral evidence on behalf of the Commissioners but had before us two unchallenged witness statements from Lesley Fehrn and Anne Joyce Hooley.  On behalf of OM we heard oral evidence from Mr. Arjun Chugani, the sole director of OM.  Mr. Chugani’s witness statement stood as his evidence in chief and he was cross-examined by Mr. Bird.

3.           Mr. Bird, with the express agreement of Mr. Ferrington, set out the issues before the tribunal in the following terms.  Had there been an “insurance transaction” within the meaning of article 13B(a) of the Sixth Directive?  If not there could be no exemption and the appeal would have to fail.  If there had been, the supply would be exempt and the question would arise as to whether there was one single taxable supply, as contended by the Commissioners, or two separate and distinct supplies, one taxable and one exempt, as contended by OM.

4.           The facts were not in dispute and we find them to be as follows.  OM began trading in 1984, its main business being the letting of commercial properties, on some of which OM had opted to tax.  We were concerned with the leases on six such properties let out variously to Pizza Hut, Wilkinsons, and Burger King.  On all the properties, pursuant to its contractual obligations within the leases, OM had, through its brokers Willis, taken out buildings insurance.  The policy also secured up to three years payment of rent in the event that the property was for some reason uninhabitable.  The premium payable per property was negotiated on an individual basis fixed, at least in part, by reference to the risk inherent in the nature of the activity being carried on by the tenant.

5.           There was just one single policy with one policy number made up of three elements, namely the terms and conditions, the policy endorsements and the schedule.  We did not have the schedule in front of us but it was accepted by both parties that this would have listed and identified the various properties covered at any one time and also, we understand, would have named the tenants.  Each tenant was individually provided with a certificate of insurance.  This certificate named OM as the insured and recited the policy number; the period of insurance; the premises; the occupant; the building sum insured; the rent sum insured; the standard insured contingencies and the annual premium.  The premium would be paid by OM and taken in the exact sum by direct debit out of the tenant’s bank account.

6.           Mr. Ferrington did not refer us to any part of the policy documents, but Mr. Bird referred us to a couple of the clauses.  First Policy Condition 4 provided that it was to be the insured (ie OM) who shall notify any claim.  Secondly Condition 6 precluded anyone other than the parties enforcing the contract.  In other words, as Mr. Bird pointed out, the tenant itself had no rights of enforcement.

7.           In reference to these two clauses, Mr. Ferrington produced to us a copy email dated 23 April 2010 from Pizza Hut.  This email had been produced for the purposes of the hearing and advised that in a recent claim which they had had they had dealt directly with the brokers, including setting the claim to them.  We should say at this stage that we don’t think that this in any way breaches the policy conditions because the brokers of course were OM’s brokers and on behalf of OM, they, the brokers, would then deal with the insurers.

8.           We saw only four leases, two of them relating to the same premises.  We understand that all the leases differed slightly as they were inherited from the previous landlords but of those before us we were specifically referred to a couple of features.  First, in all cases the obligation was upon the landlord to insure the premises and specific covenants were contained to that effect.  Secondly, we were referred to the covenants by the tenant to repay the insurance premium.  In three cases the insurance premium was repayable as “rent” or “additional rent”.  In the fourth the tenant covenanted simply to reimburse the landlord the monies spent in insuring the property but the lease went on to say that that sum would be recoverable “by means of distress as for rent in arrears”.  We were also referred to a rent abatement clause whereby if at any time during the term the premises were unfit for occupation, provided the landlord’s insurance cover was valid and in place, the tenant was relieved of his obligation to pay rent.

9.           It was up to each tenant to take out its own public liability insurance and any other insurances appertaining to its own activities.

10.        The final piece of evidence we were referred to by Mr. Ferrington was a letter from Willis, the brokers, dated 26 August 2009 which confirmed that its clients, OM were “block policy holders… and are the acting principals with regard to any insurance transactions”.  In cross-examination Mr. Chugani confirmed that this letter originated during the Commissioners’ enquiries and Mr. Chugani had written to Willis asking them to confirm in writing that OM was the block policy holder.  Commenting at this stage on this letter, as with the email referred to earlier, we do not think that this letter takes matters any further and certainly, given its origin, does not indicate definitively or conclusively that there was a block policy in place.

Submissions and conclusions

11.        Mr. Ferrington in his Notice of Appeal put forward three contentions and we here adopt his wording.  First, the recharge for insurance was exempt and was a separate supply.  Alternatively, as the tenant was named in the policy it was a block policy under paragraph 2.5 of VAT Leaflet 701/36/02.  Alternatively, since the cost of the premium was passed on pound-for-pound to the tenant, it was a disbursement.  Mr. Ferrington did not argue his third alternative before us either verbally or within his skeleton argument, and given the terms of the lease and the contractual obligation upon OM to insure and the tenant to reimburse, it is difficult to see that it could have been a disbursement.  Adopting the approach agreed by the parties, we take the second argument first as the existence or not of a block policy is fundamental to whether there was or was not an insurance transaction.

12.        We were referred by the parties to the Commissioners’ Leaflet 701/36/02 and also to the case upon which it draws, Card Protection Plan Ltd v Customers & Excise Commissioners 1999 STC 270.  It was, by implication, common ground between the parties that OM would not be authorised by statute to issue their own insurance policies and for the company to be found to be making an exempt supply of insurance, it would have to be the holder of a block policy.  If OM was the holder of a block insurance policy, as with CPP, it would be given authority by the insurer to arrange for its tenants to become insured under the policy.  OM would in effect be acting as a principal when affecting insurance transactions.  It was quite simply Mr. Ferrington’s submission that OM did hold a block policy and Mr. Bird’s submission that it did not.  Paragraph 2.5.1 of the Commissioners’ Leaflet lists the key characteristics of a “block policy” when using this term in reference to the ECJ decision.  It is therefore by reference to these characteristics which draw upon the judgment that we will consider whether or not OM did hold a block policy.  Again, Mr. Ferrington contended that he features of OM’s insurance arrangement did coincide with the key characteristics whereas Mr. Bird submitted that they did not.

13.        The first characteristic listed in the Leaflet is “there is a contract between the block policy holder and the insurer which allows the block policy holder to effect insurance cover subject to certain conditions”.  In this case, there is quite clearly no contract between OM and the insurer which allows OM to “effect insurance cover”.

14.        The second characteristic is that “the block policy holder, acting in their own name, procures insurance cover for third parties from the insurer”.  Mr Ferrington contended that this characteristic was met because under the terms of the insurance policy, not only was the landlord protecting his buildings but the tenant was also benefitting by “having three years’ rental insured”.  In fact, as shown by the rent abatement clause referred to above, the tenant is contractually released from its obligation to pay rent.  The tenant is not falling back on an insurance policy designed to protect the tenant itself.  OM has not in this respect procured any form of insurance cover for the tenant.

15.        The third characteristic is “there is a contractual relationship between the block policy holder and third parties under which insurance is procured”.  Mr. Ferrington submits that this characteristic is met by reason of the fact that the tenant is named in the schedule to the policy and is provided with a certificate of insurance.  This feature is an essential characteristic of a block policy.  Note paragraph 21 of the judgment in CPP:

“In those circumstances, it must be noted that CPP is the holder of the block insurance policy under which its customers are the insured.  It procures for those customers, for payment, in its own name and on its own account, to the extent of the services mentioned in the Continent policy, insurance cover by having recourse to an insurer.”

In no way, in our case, can the tenant see itself as the insured.  Throughout the policy documents and the certificates, the insured is always OM, never the tenant.  There is no contract between OM and the tenants under which OM procures insurance cover.  The obligation is upon the landlord to insure his own premises.

16.        The final characteristic is that “the block policy holder stands in place of the insurer in effecting the supply of insurance to third parties”.  Again that feature does not exist here.  OM is not effecting any supply of insurance to its tenants.  As stated previously the tenant is never the insured and there is no relationship between the insurer and the tenant.  The tenant at no time has any right to enforce the contract.  Mr. Ferrington refers, in his skeleton argument, to OM “selling the insurance on”.  As pointed out by Mr. Bird, this is a mis-description of the arrangement.  The insurance is not “sold on”, rather under the terms of the leases, the tenants, by way of rent or additional rent, reimburse OM for the cost of the premium.

17.        Mr. Ferrington referred us to the tribunal case of Global Self Drive Ltd v HMRC 19162.  In this case, the tribunal found that a vehicle hire trader charging customers for insurance cover arranged by way of a policy taken out by the trader with a third party trader was making exempt supplies of insurance to its customers.  Having so found, in paragraph 29, the tribunal expressed the following view:

“However before leaving this part of the case we express our view that the Commissioners’ submissions on the first limb of this issue have placed too much emphasis on the need for a block policy as featured in the facts of Card Protection Plan, as a pre-condition for supplies by a person who is not an insurer constituting insurance transactions within the exemption in article 13B(a).  We consider that this approach implements the ratio decidendi in Card Protection Plan too narrowly.  In our view the provision of insurance cover by a taxable person who is not himself an insurer but who procures such cover for his customers by making use of the supplies (to the taxable person) of an insurer who assumes the risk insured would be an insurance transaction within the exemption, whether or not a block policy was used…”

We take Mr. Ferrington to be arguing here, although he did not specifically say so, that even if we were to find that there was not a block policy in place, the arrangement itself could be seen to constitute an insurance transaction.  In Global Self Drive Ltd, in fact the tribunal found that there was a block policy in place but the one specific and crucial distinction between that case and this case is that in Global Self Drive Ltd, the Appellant’s customers were themselves insured.  The customers were specifically and expressly included in the persons insured.  In the present case, the tenants are quite simply not the insured.  At all times and throughout, it is the Appellant, OM, who is the insured.

18.        For all these reasons we find that there has not been an insurance transaction within the meaning of the Directive and there is therefore no need to go on to consider the subsequent questions.  The appeal is dismissed.

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.

LADY MITTING

JUDGE
Release Date: 12 October 2010