United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19411

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Winterthur Swiss Insurance Company v Revenue and Customs [2005] UKVAT V19411 (05 January 2006)

19411

SUPPLY – whether supply of a UK insurance business to a Swiss insurer not itself intending to carry on insurance business in the UK is the transfer of a going concern – no – whether the place of supply of goodwill was outside the UK under article 9(2)(e) of the Sixth Directive – no – whether the Swiss insurer (having an establishment within the EU) is entitled to a refund under the Eighth Directive – yes

LONDON TRIBUNAL CENTRE

WINTERTHUR SWISS INSURANCE COMPANY Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

LYNNETH SALISBURY

Sitting in public in London on 7 to 9 November 2005

David Milne QC, counsel, and Greg Sinfield, solicitor, instructed by Lovells, for the Appellant

Alison Foster QC and Eamon McNicholas, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. This is an appeal by Winterthur Swiss Insurance Company against first, a decision letter dated 10 June 2003 to Prudential Assurance Company Limited ("Prudential") that a supply of business goodwill was not a transfer of a going concern and was liable to VAT of £61,252,926, against which the Appellant appeals as recipient of the supply, and secondly, a decision letter dated 18 March 2005 refusing the Appellant's claim to repayment of this tax under the Eighth Directive. The Appellant was represented by Mr David Milne QC and Mr Greg Sinfield, and Customs by Miss Alison Foster QC and Mr Eamon McNicholas.
2. The issues in this appeal are (1) whether there was a transfer of a going concern; (2) if not, what was the place of supply; and (3) if tax is payable, whether the Appellant can reclaim it under the Eighth Directive, this Directive being relevant because it has a Dutch branch.
3. We had two ring binders of documents. The Chairman would like to record his thanks to Lovells for also providing him with a set on a CD-Rom which prevented the need to carry heavy bundles of documents.
4. We heard evidence from Mr Anton Hermann Lay, the Swiss Tax Director of the Appellant, and a witness statement by Mr Stephen Nicholas Hardy, at the relevant time Group Finance Director of the Churchill Group, was admitted. We find the following facts:

(1) The Appellant is a substantial Swiss insurance company, which is a subsidiary of Credit Suisse Group. A document contemporary with the transactions in issue stated that the Appellant employed 28,000 people in 30 countries.

Sale of general insurance business from Prudential to the Appellant

(2) On 1 November 2001, Prudential, the Appellant and its UK subsidiary, Churchill Management Limited ("CML"), entered into the Framework Agreement. The Framework Agreement granted a put option to Prudential and a call option to the Appellant and CML, the exercise of which options would oblige the others to enter into the documents listed at paragraph 4(3) to 4(5) below relating to "all the personal lines insurance comprising the household insurance, motor insurance, creditor insurance, travel insurance, and legal expenses insurance carried on by [Prudential] in the UK, Channel Islands and Isle of Man at the Completion Date" subject to three exceptions ("the Business"). A party would not be obliged to complete these contracts unless all the others were completed. The put and call options were exercisable subject to competition clearance being obtained.

(3) On 31 December 2001, Prudential, the Appellant and CML entered into the Reinsurance and Administration Agreement under which Prudential's Reinsured Business book was reinsured to the Appellant in return for payment by Prudential to the Appellant of a 100% quota share reinsurance premium. Reinsured Business was defined as the Business (as above) carried on:

"at any time on or before the Migration Commencement Date [defined as 1 August 2002 (or such other date as [Prudential] and [the Appellant] may agree: they agreed on 28 February 2002) being the date by which [the Appellant] shall start to renew policies comprised in the Reinsured Business and write new policies using the brand name of [Prudential] using [the Appellant's] group systems] and excluding [three exclusions are set out]."

The Reinsurance and Administration Agreement also provided for CML to take over the administration of the policies comprised in the Business.

(4) On 4 January 2002, Prudential and the Appellant entered into and completed the following agreements:

(a) Renewal Rights Agreement under which Prudential assigned the Business Goodwill to the Appellant for a consideration of £350,011,088. "Business Goodwill" was defined as:

"all the goodwill of the Seller consisting solely of the right to renew the Business as an insurer but, for the avoidance of doubt, not including [the rights granted by the Brand Licence Agreement]."

The Business comprised 1.9m policies. The Renewal Rights Agreement also provided for the transfer of Business Intellectual Property (the intellectual property owned by Prudential but not including the rights granted by the Brand Licence Agreement) to the Appellant for a consideration of £1.

(b) Brand Licence Agreement under which Prudential granted to the Appellant (for nil consideration) an exclusive licence to use the Licensed Rights (trade marks and all elements of the Prudential brand including Pru Sans typeface) in providing the Licensed Services (the Business insurance products and services) in the UK, the Isle of Man and the Channel Islands for a term of 15 years;

(c) Marketing Agreement under which Prudential provided the Appellant with exclusive use of the In-Force GI [General Insurance] Data (broadly, the details of the in-force general insurance customers) for a 15 year term and provides for the way in which the Appellant will conduct itself in relation to the renewals process. The Appellant agreed to pay commissions to Prudential calculated by reference to each Prudential-branded general insurance policy which is written. However, commissions in respect of the renewal of Prudential's in-force business are set against and reduce the Debit Account (which is a notional account, with an initial balance of £350m on which notional interest accrues). The full amount of commission in respect of the renewal of Prudential's in-force business only becomes payable when the Debit Account has been reduced to zero. In respect of sales of Prudential-branded general insurance products to new customers, 50 per cent of the commissions are payable on a monthly basis to Prudential and the other 50 per cent is set-off against the Debit Account. The Debit Account of £350m arose since the payment of consideration of £350m for Business Goodwill and Business Intellectual Property was considered to be an upfront non-refundable payment of commission for the right to sell Prudential-branded general insurance products to Prudential's in-force customer base and others. At the time of entering into the Marketing Agreement it was anticipated that the Debit Account would be reduced to zero by approximately 2006. There are also provisions relating to cross-marketing between Prudential and the Appellant. The term of the Marketing Agreement is 15 years.

(5) On 4 January 2002, Prudential and CML entered into the Business Purchase Agreement under which the fixed assets and 1,200 employees relating to the administration of the Prudential general insurance business were transferred from Prudential to CML for £3m apportioned as to £900,000 for computer equipment, £2,099,995 for business furniture and £1 each for goodwill, three leasehold properties, motor vehicles, contracts, and business records. On the same date Prudential, the Appellant and CML entered into a Transitional Services Agreement under which Prudential provided services to CML (such as finance, banking, accounts payable, HR, IT and property services), and CML provided services to Prudential.

(6) The Appellant entered into further contractual arrangements with Churchill Insurance Company Limited ("CICL") as follows:

(a) On 31 December 2001, the Quota Share Retrocession Agreement whereby the risk relating to Prudential's general insurance book was reinsured from the Appellant to CICL. The Appellant paid £320m on completion.

(b) On 4 January 2002, the Operational Agreement under which the Appellant granted a sub-licence of the Brand Licence to CICL, and licensed to CICL the rights granted to the Appellant under the Marketing Agreement. The Operational Agreement provided for CICL to pay commissions to the Appellant. The term of the Operational Agreement was 3 months.

Sale of general insurance business from the Appellant to WAL

(7) After the Framework Agreement was entered into, it became obvious to the Appellant that the regulatory requirements upon the Appellant in operating the business in Switzerland would be onerous. The decision was taken to transfer the business to Winterthur Atlantic Limited ("WAL") in Bermuda where it was considered that the regulatory environment would be more favourable.

(8) In order to effect the transfer of the general insurance business to WAL, the following documentation was entered into:

(a) On 28 February 2002, Prudential, the Appellant and WAL entered into three agreements under which the rights and obligations under the Marketing Agreement, the Reinsurance and Administration Agreement and the Renewal Rights Agreement were amended and novated from the Appellant to WAL.

(b) On 27 February 2002, the Appellant and Prudential entered into the Deed of Guarantee and Indemnity under which the Appellant guaranteed WAL's obligations (including, in particular, its payment obligations) to Prudential under the novated Marketing Agreement, Reinsurance and Administration Agreement and Renewal Rights Agreement.

(c) On 31 July 2002, the Appellant, CICL, the National Insurance & Guarantee Corporation Limited ("NIG") and WAL entered into an agreement to novate the Quota Share Retrocession Agreement to WAL, with effect from 28 February 2002 so that WAL took the Appellant's place leaving the risk retroceded to CICL.

(d) On 31 July 2002, the Appellant, CICL, WAL and NIG entered into an agreement to novate the Operational Agreement to WAL with effect from 28 February 2002. On the same date CICL, WAL and NIG entered into an agreement to amend the Operational Agreement with effect from 28 February 2002. The Operational Agreement (as novated and amended) provided that WAL would provide "Insurance Intermediary Services" to CICL and NIG. The Insurance Intermediary Services "consist of bringing to CICL and NIG customers seeking Prudential-branded general insurance products and servicing those insurance contracts once concluded." Essentially, WAL was to sell and administer the Prudential-branded general insurance products on behalf of CICL and NIG who underwrote the risk. Commission payments were made by CICL and NIG to WAL for the Insurance Intermediary Services. The Operational Agreement (as novated and amended) also stated that CICL and NIG were allowed to use the Prudential name (as granted to the Appellant under the Brand Licence) in connection with Prudential branded policies written by CICL or NIG. (The reason for NIG being included as a party is that NIG was authorised to write certain classes of business which CICL had not applied to write.)

(e) On 31 July 2002, WAL and CML entered into the Intermediation and Administration Agreement, pursuant to which CML agreed to provide insurance intermediation and administration services to WAL with effect from 28 February 2002. These intermediation and administration services enabled WAL to perform the Insurance Intermediary Services under the Operational Agreement (as novated and amended). WAL was obliged to pay CML an amount equal to cost plus 10% for these services.

(9) For Swiss VAT the Appellant's acquisition of the Business was taxed under the reverse charge mechanism. The transfer of the Business to WAL was treated as taking place outside Switzerland but with a right to deduct the tax paid on the reverse charge. Since both transactions took place in the same quarter they did not give rise to any net charge to Swiss VAT.

Sale of general insurance business from WAL to UKI

(10) Although not an issue in this appeal we record that pursuant to an agreement dated 11 June 2003, the Royal Bank of Scotland plc agreed to purchase Churchill Insurance Group plc from Winterthur (UK) Holdings Limited (the "Share Sale"). Completion of the Share Sale was subject to a number of conditions (including regulatory and competition clearances).

(11) Pursuant to a further agreement dated 11 June 2003, UKI, a subsidiary of the RBS, agreed to purchase the Business from WAL. Completion of the sale of the Business was conditional upon completion of the Share Sale. Completion of the Share Sale and the transfer of the Business from WAL to UKI took place on 1 September 2003.

(12) Following Customs' decision that the sale of Business Goodwill by Prudential to the Appellant pursuant to the Renewal Rights Agreement was not part of a TOGC, tax on the supply was paid on 22 September 2003 and invoiced by Prudential on 10 December 2003.

5. It would be an understatement to say that the agreements which we have summarised above do not speak for themselves. Fortunately Mr Lay explained the reason for adopting these transactions instead of the more natural one of Prudential selling the Business to CICL. A sale to CICL would have required additional capital of £160m for the Churchill Group from the Appellant, which it was not in a position to provide. The transaction was therefore split between the Appellant and the Churchill Group. Involving the Appellant in this way in turn caused a Swiss problem with the £350m receivable, because they had already used the whole of the limit for foreign currency assets, and the maximum value for any one debtor was 5% (about £125m). It was not thought likely that the Swiss regulator would have waived both requirements. The Appellant decided to hold the Business through Bermuda, which required the incorporation WAL on 13 December 2001 and its licensing by the Bermuda insurance authorities which was not ready in time for the completion of the transactions on 4 January 2002 (the Appellant formerly had a Bermuda subsidiary but this had been sold). WAL's business plan dated 26 November 2001, presumably in connection with its application to the Bermuda authorities set out its proposed involvement in the transaction with Prudential. We also saw reference in the papers to its not being possible to change the proposals once they had been presented to the EU competition authority. It is clear that by 4 January 2002 the intention was that WAL would step into the shoes of the Appellant but it was not possible this to happen immediately. It is also understood that Prudential insisted on the Appellant being the contracting party.
6. Summarising the facts, the Prudential presumably had a reason for wanting to sell the Business by 31 December 2001 and not incur any further risks, although the contract envisaged that the Prudential would continue to write the Business which would be reinsured by the Appellant (and retroceded to CICL) until the Migration Commencement Date, following which WAL started to write the Business. Next, on 4 January 2002 the Prudential and the Appellant entered into the Renewal Rights Agreement (including the sale of Business Goodwill for £350m), the Brand Licence Agreement, and the Marketing Agreement, and the Prudential sold the administration business to CML for £3m. On the same day the Appellant sub-licensed CICL the rights under the Brand Licence Agreement and Marketing Agreement for 3 months. Prudential continued to write the renewal Business which was reinsured by the Appellant and retroceded to CICL, so that the risk relating to the Business was with CICL and the administration was carried on by CML. CICL were liable to pay commission to the Prudential (via the Appellant) on new Business pursuant to the licence of the rights granted by the Marketing Agreement. It is not clear why CICL needed the sublicenses of the Brand Licence Agreement if Prudential were writing the Business in its own name anyway, but it was presumably required under the original proposal that CICL would carry on the Business.
7. Immediately following 4 January 2002, the Appellant had the benefit of the Renewal Rights Agreement, the Brand Licence Agreement, and the Marketing Agreement, subject to the 3 month sublicence of the second and third of these to CICL. That position continued until 28 February 2002 when the Reinsurance and Administration Agreement plus those three agreements were novated to WAL, leaving the risk with CICL. Between 4 January and 28 February 2002 the Appellant was reinsurer of the Business taken over plus renewals and new business, which had been ceded to CICL. The strange feature is that the recipient of those supplies, the Appellant, while a large Swiss insurer, is not authorised to carry on insurance business of this type on the UK, although it does have a UK subsidiary, CICL, which is authorised, and another subsidiary, CML, which has purchased the assets needed to administer the assets acquired.
8. In continuing to write the Business, Prudential became liable under the policy to the renewing, or new, policyholder. Miss Foster made the interesting suggestion, although in connection with the Eighth Directive claim (in support of her contention that the Appellant must have made supplies in the UK to Prudential to enable it to write the Business) that the Appellant was carrying on the Business from 4 January 2002 to 28 February 2002 as undisclosed principal with Prudential merely fronting as agent. This was not dealt with by Mr Milne who did not focus on this period in his summary of the facts, although he accepted in reply that Prudential were carrying on the Business during this period. Commercially there are attractions in this analysis. The Appellant and CML had bought the assets of the Business on 4 January 2002 but Prudential went on using them, paying the premiums received to the Appellant for reinsurance, the Appellant paying commissions to Prudential (and recovering them from CICL), and CML paying Prudential for services. We are reluctant to find as a fact that the Appellant carried on the Business as undisclosed principal not having heard argument from the Appellant particularly as there may be implications for insurance authorisation.

Is there a transfer of a going concern?

9. Article 5(8) of the Sixth Directive provides:

"In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax."

Article 6(5) of the Sixth Directive provides:

"Article 5(8) shall apply in like manner to the supply of services."

Article 4 of the Sixth Directive provides:

"(1) 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

(2) The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity."

Article 5(8) of the Sixth Directive is implemented in the UK by Article 5 of the VAT (Special Provisions) Order 1995 Order. Article 5(1) of the 1995 Order provides as follows:

"….there shall be treated as neither a supply of goods nor a supply of services the following supplies by a person of assets of his business

…

(b) their supply to a person to whom he transfers part of his business as a going concern where

(i) that part is capable of separate operation,

(ii) the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part, and

(iii) in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person…"

Section 3(1) of the VAT Act 1994 provides:

"A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act."

10. On this aspect Mr Milne contends in outline:

(1) One must read the Renewal Rights, the Brand Licence, and the Marketing, Agreements together and in the light of the clause of the Framework Agreement that all these agreements (plus the Business Purchase Agreement ) are to be completed together

(2) The condition in article 5(1)(b)(ii) of the 1995 Order is contrary to the ECJ decision in Zita Modes.

(3) The condition in article 5(1)(b)(iii) is not authorised by the second sentence of article 5(8) of the Sixth Directive as a measure to prevent distortion of competition, and could not be authorised by any other provision. Far from preventing distortion of competition it would promote it. A transfer to a UK insurer with a low recovery rate would qualify, but a transfer to a French foreign insurer with a high (French) recovery rate would not.

11. Miss Forster contends in outline:

(1) One must consider the Renewal Rights Agreement on which tax was charged separately.

(2) The Appellant had no intention of operating the Business that had been operated by Prudential.

(3) The Business could not have been operated by the Appellant because the tangible assets and staff had passed to another entity, CML. Only if they had been sold to the Appellant could there be the transfer of a business as a going concern.

(4) The Appellant did not become a taxable person and so could not satisfy article 5(1)(b)(iii).

Reasons for our decision

12. The first point is whether we should consider the Renewal Rights Agreement in isolation, as Miss Foster contends, or as part of a series of interlocking agreements, as Mr Milne contends. As Widgery J said in Kenmir v Frizzell [1968] 1 WLR 329, 335:

"In deciding whether a transaction amounted to the transfer of a business regard must be had to its substance rather than its form, and consideration must be given to the whole of the circumstances, weighing the factors which point in one direction against those which point in another. In the end the vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern the activities of which he could carry on without interruption."

We consider that we must read all the agreements together in their context; the fact that Prudential and the Appellant entered into separate agreements is a matter of form rather than substance. The Framework Agreement shows that they are related and by its terms all of them are expected to be completed together (and any party can refuse to complete if they are not). While the assets on which tax is charged are supplied under the Renewal Rights Agreement they are part of a package with the Reinsurance and Administration Agreement, the Brand Licence Agreement and Marketing Agreements. The context includes that Prudential and CML were completing the Business Purchase Agreement at the same time, which Customs agree is a TOGC.

13. The next question is whether the package of assets supplied under the Renewal Rights Agreement, the Brand Licence Agreement and Marketing Agreements amounts to part of Prudential's business, or are merely a bundle of assets not constituting part of a business. Those Agreements gave the Appellant the In-Force GI Data (details of Prudential's in-force general insurance customers), the right to approach such customers inviting them to renew as if the Appellant were Prudential, together with the right to use the Prudential trade mark and logo, and any other intellectual property, and the goodwill of Prudential consisting solely of the right to renew the Business. We have no doubt that they constitute part a business. We do not consider that it matters that the tangible assets and staff needed for the administration of the Business were simultaneously acquired by CML, a wholly-owned subsidiary of the Appellant under a transaction that is agreed to be a TOGC. We are concerned only with the supplies made between Prudential and the Appellant. Suppose that Prudential had kept all its staff, premises, business furniture and computer equipment and the Business Purchase Agreement had never been entered into, because the Appellant knew that it could buy-in these facilities from elsewhere in the group, the sale of the remainder of the assets would still in our view be a business. It was certainly a going concern: there were 1.9m policies in force.
14. The fact that the Appellant did not have the premises, equipment and staff needed to operate it did not prevent the business from being capable of separate operation. If necessary, they could be bought-in. But that was not necessary because by the Reinsurance and Administration Agreement the Prudential would continue to write the Business which would be reinsured by the Appellant, about which we understand there was no problem about authorisation, until the Migration Commencement Date, defined as the date by which the Appellant shall start to renew policies comprised in the Reinsured Business and write new policies using the brand name of the Prudential using the Appellant's group systems. We find that the Business was capable of separate operation.
15. Mr Milne impliedly accepted that the Appellant was not carrying on the same kind of business as had been carried on by Prudential; the undisclosed principal point would be material here. However, he contended that Zita Modes prevented Customs from relying on article 5(1)(b)(ii) ("paragraph (ii)") of the 1995 Order. Assets of a retail clothing business were transferred to perfumery business that was not authorised to trade in the clothing sector. The Court said:

"39. The context of Article 5(8) and the purpose of the Sixth Directive, as set out in paragraphs 36 to 38 of this judgment, make it clear that that provision is intended to enable the Member States to facilitate transfers of undertakings or parts of undertakings by simplifying them and preventing overburdening the resources of the transferee with a disproportionate charge to tax which would in any event ultimately be recovered by deduction of the input VAT paid.

40. Having regard to this purpose, the concept of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof must be interpreted as meaning that it covers the transfer of a business or an independent part of an undertaking including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity, but that it does not cover the simple transfer of assets, such as the sale of a stock of products.

41. As the Advocate General correctly noted at paragraph 39 of his Opinion, special treatment is justified in these circumstances in particular because the amount of VAT to be advanced on the transfer is likely to be particularly large in relation to the resources of the business concerned.

42. Secondly, concerning the use which is to be made by the transferee of the totality of assets transferred, clearly Article 5(8) of the Sixth Directive does not contain any express requirement as to that use.

43. As regards the fact that Article 5(8) provides that the transferee is to be treated as the successor to the transferor, it follows from the wording of that paragraph, as the Commission correctly points out, that the succession does not constitute a condition for the application of the paragraph, but is merely a result of the fact that no supply is considered to have taken place. /BLOCKQUOTE>

44. However, it is apparent from the purpose of Article 5(8) of the Sixth Directive and from the interpretation of the concept of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof which flows from it, as set out in paragraph 40 of this judgment, that the transfers referred to in that provision are those in which the transferee intends to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.

45. On the other hand, nothing in Article 5(8) of the Sixth Directive requires that the transferee pursue prior to the transfer the same type of economic activity as the transferor.

46. The answer to the first and second questions must therefore be that Article 5(8) of the Sixth Directive must be interpreted as meaning that when a Member State has made use of the option in the first sentence of that paragraph to consider that for the purposes of VAT no supply of goods has taken place in the event of a transfer of a totality of assets, that no-supply rule applies - without prejudice to use of the possibility of restricting its application in the circumstances laid down in the second sentence of the same paragraph - to any transfer of a business or an independent part of an undertaking, including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity. The transferee must however intend to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any."

16. Although we find this passage slightly obscure we understand the court to be saying that, while the transferee need not have previously been carrying on the type of business transferred (at [45]), following the transfer the transferee must intend to operate the business and not simply immediately to liquidate the activity and sell the stock (at [44]). This seems to follow from the fact that the activity is an undertaking or a part of an undertaking capable of carrying on an independent economic activity (at [40]). We are dealing here with a part of a business (or undertaking). If that part is capable of being carried on an independent economic activity, the nature of the activity must already have been determined, and it follows from the fact that the transferee must intend to carry on the business that the assets will be used by the transferee in carrying on the same kind of business. Accordingly we agree with Miss Foster that Zita Modes does not prevent the imposition of the condition in paragraph (ii). Indeed it seems inherent in the decision. We find that the Appellant had no intention of itself carrying on the same general insurance business as Prudential had carried on, and so paragraph (ii) is not satisfied.
17. Turning to article 5(1)(b)(iii) of the 1995 Order ("paragraph (iii)"), the obvious example of distortion of competition requiring an exception from article 5(8) is where a person with a full or high input tax recovery rate sells the (part of a) business to a person with a low input tax recovery rate. Even that example is unrealistic because if he is taking over an existing (part of a) business and continuing to run it, he is likely as a result to have a higher recovery rate, particularly so to the extent that attribution of inputs can be made to that business separately. The reverse charge under s 44 of the VAT Act 1994 on a TOGC to a company that is a member of a group seems designed to deal with different recovery rates. Paragraph (iii) is a very blunt instrument to deal with different recovery rates as it applies only to the extreme case of the transferee having a nil recovery rate (which may be the situation in this appeal).
18. Paragraph (iii) may be concerned with registration limits. One can have a TOGC from a non-registered to a registered trader, but not from a registered to a non-registered trader. The transferee would become liable to be registered if his (including his predecessor's) taxable supplies in the past year exceed the registration limit or if his supplies are reasonably believed to exceed the registration limit within the next 30 days. Suppose the transferor is a voluntarily-registered person and the effect of deeming the transferee to have made the same supplies would not make the transferee registerable, paragraph (iii) prevents the assets from being sold free of tax as a TOGC. This prevents distortion of competition as it would otherwise enable the transferee to sell free of tax assets on which the transferor would have charged tax.
19. On Mr Milne's example of the French insurer, if it intends to carry on the business itself (or to use a UK subsidiary), bearing in mind that they will be continuing to carry on the same business, either it or a UK subsidiary may be able to register. But if in carrying it on neither will make any taxable supplies, paragraph (iii) prevents assets passing from the transferor at a price that effectively takes into account the transferor's rate of recovery (even though that may be small) on a TOGC, whereas if the French insurer acquired the same assets not on a TOGC it would recover no input tax. That prevents distortion of competition. Miss Foster originally suggested that the French insurer not intending to carry on the business itself could make an Eighth Directive refund claim, but this was contrary to her argument that as an exempt person the Appellant could not do so, which we deal with below.
20. There is, in our view, a danger of reading too much into Zita Modes in which the transferor and transferee were clearly fully taxable. If Advocate General Jacobs had had partial exemption in mind he would surely not have said "…the principle of neutrality of VAT means that the application of article 5(8) must lead to exactly the same result as if tax had been charged and deducted in the normal way" (at [15]). The court's reference to "a disproportionate charge to tax which would in any event ultimately be recovered by deduction of the input VAT paid" (at [39]) shows that partial exemption was not in the court's mind either.
21. In this case, assuming that the Business makes only exempt supplies, and that Prudential is registered on account of other businesses that it carries on, paragraph (iii) prevents the Appellant doing what we consider the wholly-exempt French insurer in Mr Milne's example (see paragraph 19 above) was prevented from doing. Whether or not everything that is excluded by paragraph (iii) can be justified as preventing distortion of competition, its application to the facts of this case does prevent distortion of competition. We consider that paragraph (iii) is therefore authorised by the second sentence of article 5(8) of the Sixth Directive
22. Accordingly although we find that there is in this case the transfer of part of a business and not merely assets, and that part is capable of separate operation, the transfer fails to satisfy paragraphs (ii) and (iii). Even if we had been inclined to adjourn to allow the Appellant to pursue the undisclosed principal argument which might enable it to satisfy paragraph (ii), it would make no difference to paragraph (iii) and so we do not propose to allow it to make that argument. Should it wish to do so on an appeal we believe we have found the relevant facts.

What is the place of supply of the goodwill?

23. On the basis that the supply of Business Goodwill in the context does not constitute a TOGC we turn to consider the place of supply.
24. Article 9(2)(e) of the Sixth Directive provides:

"the place where the following services are supplied when performed for customers established outside the Community … shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied … :

– transfers and assignments of copyrights, patents, licences, trade marks and similar rights,

…

– services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the supplying of information."

Article 9(2)(e) of the Sixth Directive is implemented in the UK by a combination of primary and secondary legislation. Section 7 of the VAT Act 1994 provides:

"(1) This section shall apply … for determining, for the purposes of this Act, whether goods or services are supplied in the United Kingdom.

…

(10) A supply of services shall be treated as made -

(a) in the United Kingdom if the supplier belongs in the United Kingdom; and

(b) in another country (and not in the United Kingdom) if the supplier belongs in that other country.

(11) The Treasury may by order provide, in relation to goods or services generally or to particular goods or services specified in the order, for varying the rules for determining where a supply of goods or services is made."

Article 16 of the VAT (Place of Supply of Services) Order 1992 provides:

"Where a supply consists of any services of a description specified in any of paragraphs 1 to 8 of Schedule 5 to the Act, and the recipient of that supply

(a) belongs in a country, other than the Isle of Man, which is not a member State; or

(b) is a person who belongs in a member State, but in a country other than that in which the supplier belongs, and who

(i) receives the supply for the purpose of a business carried on by him; and

(ii) is not treated as having himself supplied the services by virtue of section 8 of the Act,

it shall be treated as made where the recipient belongs."

Paragraphs 1 and 3 of Schedule 5 to the VAT Act 1994 are as follows:

"1. Transfers and assignments of copyright, patents, licences, trademarks and similar rights.

…

Services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services; data processing and provision of information (but excluding from this head any services relating to land)."

25. Mr Milne contends in outline:

(1) The supply of Business Goodwill is within article 9(2)(e) of the Sixth Directive as a licence (or similar right) or as the supplying (or provision, in domestic law) of information, and accordingly the place of supply is in Switzerland.

(2) The right in question is the right to approach Prudential customers asking them to renew as if the Appellant were Prudential.

(3) Goodwill cannot exist separately from the Business.

26. Miss Foster contends in outline:

(1) The Business Goodwill is merely the value of the future income from the Business. To qualify under article 9(2)(e) it is the nature of the supply that is important, as in von Hoffmann, Case C-145/96, that a lawyer acting as arbitrator was not providing the services of a lawyer.

(2) There is no "right" to renew the policies that is similar to the rights in the first indent.

(3) The type of information within the article is limited to the type of information that is sold, for example financial information, not the information that is found in any commercial contract.

27. Although we are looking solely at the supply of Business Goodwill pursuant to the Renewal Rights Agreement (it is common ground that the supply of intellectual property pursuant to that agreement, which did not include the rights granted by the Brand Licence Agreement, for £1 is within article 9(2)(e)), we consider, as before, that we should view this supply in the context of the agreements taken together. That agreement defined Business Goodwill as:

"all the goodwill of the Seller consisting solely of the right to renew the Business as an insurer but, for the avoidance of doubt, not including [the rights granted by the Brand Licence Agreement]."

28. Goodwill is generally understood as the premium which a buyer pays over and above the tangible asset value for the seller's intangible assets such as contacts, reputation, brand name etc. In the case of insurance companies—where typically the physical assets tend to be small in relation to the asset base—"goodwill" as so understood is likely to be a significant part of the asset base when selling a book of business, which is probably why the parties here chose to attach the bulk of the purchase price to it. The reason that the goodwill has value is that customers are more likely to renew (or strictly to take out a new policy for another year) their insurance if approached by Prudential using Prudential's trade mark and logo, than if approached by anyone else. In this instance, however, the Appellant was given the right to use the trade mark and logo by a separate agreement, the Brand Licence Agreement without consideration (which rights are expressly excluded from the definition of Business Goodwill above), while the information needed to enable it approach the customers was granted by a third agreement, the Marketing Agreement, in consideration of the commissions payable to Prudential. Hence while the goodwill derives its value from those agreements we do not consider that we are able to change the consideration stated in those agreements as this would be to rewrite the bargain entered into by the parties. What is left within the scope of the Renewal Rights Agreement is that Prudential allows the Appellant not merely to make a representation that it is Prudential's successor, but to make a misrepresentation that it is Prudential, something that would otherwise amount to passing-off as damaging Prudential's goodwill. We regard this as a right; it is certainly not something that the Appellant was at liberty to do without these agreements.
29. Breaches of copyrights, patents and trade marks are protected by law as such. It is less clear what "licenses" are (or why licenses are not specifically included with transfers and assignments of the listed rights). The Appellant's right to pass itself off as Prudential is not, in our view, a right of the same kind as those protected by intellectual property law, although since Miss Foster was arguing that there was no right and Mr Milne was arguing that goodwill described the intellectual property and information, we did not hear any submissions on the difference. We find that the supply does not fall within item 1 of Schedule 5 or the first indent of article 9(2)(e) of the Sixth Directive.
30. So far as information is concerned, the useful information is the In-force GI Data supplied pursuant to the Marketing Agreement for which the consideration is the commission payable to Prudential. For the reasons already given, we do not consider that we are able to attribute part of the consideration for goodwill to this information even though the value of the Business Goodwill depends on this information. We find that the supply does not fall within item 3 of Schedule 5 or the third indent of article 9(2)(e) of the Sixth Directive.
31. Accordingly we find that the normal rule applies and the place of supply of the Business Goodwill was in the UK.

Whether the Eighth Directive applies

32. The Eighth Directive provides:

Article 1. "For the purposes of this Directive 'a taxable person not established in the territory of the country' shall mean a person as referred to in Article 4(1) of Directive 77/388/EEC who …has had in that country neither the seat of his economic activity, or a fixed establishment from which business transactions are effected … nor … his domicile or normal place of residence, and who, during the same period has supplied no goods or services deemed to have been supplied in that country with the exception of:

(a) transport services and services ancillary thereto, exempted pursuant to Article 14(1)(i), Article 15 or Article 16(1)B, C and D of Directive 77/388/EEC

(b) services provided in cases where tax is payable solely by the person to whom they are supplied pursuant to Article 21(1)(b) of Directive 77/388/EEC [that article applies to taxable persons to whom services covered by article 9(2)(e) are supplied].

Article 2. Each Member State shall refund to any taxable person who is not established in the territory of the country but who is established in another Member State … any value added tax charged in respect of services or movable property supplied to him by other taxable persons in the territory of the country … in so far as such goods and services are used for the purposes of the transactions referred to in Article 17(3)(a) and (b) of [the Sixth VAT] Directive …"

Article 17(3)(a) of the Sixth Directive provides:

"(3) Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

(a) transactions relating to the economic activities referred to in Article 4(2), carried out in another country, which would be deductible if they had been performed within the territory of the country …"

The Eighth Directive is implemented in the UK by Regulations 173 to 184 of the 1995 Regulations. Regulation 174 provides:

"… a person to whom this Part applies shall be entitled to be repaid VAT charged on … supplies made to him in the United Kingdom if that VAT would be input tax of his were he a taxable person in the United Kingdom."

Regulation 175 provides:

"This Part applies to a person carrying on business in a member State other than the United Kingdom but does not apply to such a person in any period referred to in regulation 179 if during that period

(a) he was established in the United Kingdom, or

(b) he made supplies in the United Kingdom of goods or services other than

(i) transport of freight outside the United Kingdom or to or from a place outside the United Kingdom or services ancillary thereto,

(ii) services where the VAT on the supply is payable solely by the person to whom the services are supplied in accordance with the provisions of section 8 of the Act, and

(iii) goods where the VAT on the supply is payable solely by the person to whom they are supplied as provided for in section 9A or 14 of the Act."

Section 8, referred to in Regulation 175(b)(ii), applies the reverse charge to Schedule 5 services (corresponding to article 9(2)(e) of the Sixth Directive) but excludes exempt supplies within Schedule 9 from the definition of "relevant supplies" to which the reverse charge applies.

Section 24 of the VAT Act 1994 provides:

"(1) 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;

(b) VAT on the acquisition by him from another member State of any goods; and

(c) VAT paid or payable by him on the importation of any goods from a place outside the member States,

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

Section 25(2) of the VAT Act 1994 provides:

"Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him."

Section 26 of the VAT Act 1994 provides:

"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business

(a) taxable supplies;

(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;

(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection."

33. Mr Milne contends:

(1) Regulation 174 deems the Appellant to be a taxable person for the limited purpose of determining entitlement to the refund. All that is required is that the input tax is on the supply of any goods or services which are used or to be used for the purpose of any business carried on by him. Such input tax is attributable to the supply of the Business Goodwill to WAL which would have been a taxable supply if made in the UK, on which credit for input tax would be available.

(2) The place of supply of the reinsurance services to Prudential was in the UK by virtue of article 9(2)(e) and was accordingly to be ignored by article 1(b) of the Eighth Directive.

(3) VAT was actually charged when it was invoiced on 10 December 2003. The relevant period is therefore 2003 during which the Appellant made no supplies.

(4) The Appellant did carry on an economic activity in acquiring and holding the Business Goodwill for a short time and then disposing of it to WAL. In any case the Appellant did exploit the rights obtained by the Brand Licence Agreement and Marketing Agreements by licensing them to CICL.

34. Miss Foster contends:

(1) If the Appellant were a taxable person in the UK it would have no claim to input tax as it would be making only exempt supplies.

(2) The Appellant is ineligible to make a claim as it did make supplies in the UK, namely supplies of reinsurance. This is not excluded by article 1(b) of the Eighth Directive because reinsurance services are exempt and so they are not "services provided in cases where tax is payable solely by the person to whom they are supplied."

(3) Alternatively, Prudential were between 4 January and 28 February 2002 merely fronting and the insurance was carried out by the Appellant as undisclosed principal. The Appellant must have made supplies to Prudential of the assets required by Prudential to write insurance after Prudential had disposed of all the assets needed to do so to the Appellant.

(4) Alternatively, the Appellant was merely holding the assets pending the establishment and authorisation of WAL and did nothing to exploit the assets.

(5) The tax was charged when the consideration for the supply of the goodwill was paid. The relevant period for testing whether supplies were made is therefore 2002 (or alternatively the 3 month period January to March 2002).

(6) By Regulation 177 tax is not repaid if it would be excluded from credit under section 25, which excludes tax incurred in the course or furtherance of a business of making exempt supplies.

Reasons for our decision

35. Dealing first with the question of what is the relevant period, article 7(1) of the Eighth Directive provides: "The application for refund provided for in Articles 3 and 4 shall relate to invoiced purchases of goods or services or to imports made during a period of not less than three months or not more than one calendar year." The claimant must not have made supplies in the country during the same period. Regulation 179 required a claim to be made not later than six months after the end of the calendar year in which the VAT claimed was "charged." The Appellant did not have an invoice until 10 December 2003 and could not make a claim until it had an invoice (article 3; Regulation 178). On the other hand, the invoice shows the tax point, correctly, as 4 January 2002; this was the date on which tax was charged. The Appellant was entitled to an invoice and the only reason for the delay was obtaining a ruling from Customs whether tax was payable. We consider that the understandable delay in providing the invoice should not change the period for deciding whether the Appellant has made supplies in the UK. Accordingly we read "invoiced purchases" in the Eighth Directive to mean the period for which the purchases were supplied and should have been invoiced. Similarly, in domestic law we read "charged" as referring to the tax point. If it were the case the condition about not making supplies in a country could easily be circumvented by delaying invoicing.
36. We are therefore considering the period 2002, or at least the first three months of 2002. Under article 1 of the Eighth Directive the Appellant must have "supplied no goods or services deemed to have been supplied in that country." The Appellant supplied exempt reinsurance services to Prudential for which payment was made on 4 January 2002 in relation to the existing policies and monthly for new policies; the fact that these were retroceded to CICL does not alter the fact that the Appellant made reinsurance services and incurred liability to Prudential. Under the fifth indent of article 9(2)(e) insurance transactions including reinsurance supplied by someone established outside the UK to someone established in the UK are treated as supplied in the UK. This applies to the Appellant's reinsurance services supplied to Prudential. The Appellant also made supplies to CICL by the Operational Agreement for which it received commissions for the licence of the rights granted by the Marketing Agreement, which is also within article 9(2)(e) as the provision of information and taxable under the reverse charge mechanism. It also sub-licenced the Brand Licence Agreement to CICL for which there was no consideration, and accordingly this is not a supply.
37. By the Eighth Directive one category of supplies in the refund state that are ignored is "services provided in cases where tax is payable solely by the person to whom they are supplied, pursuant to Article 21(1)(b) of [the Sixth Directive]." Article 21 provides:

Persons liable for payment for tax.

"(1) Under the internal system, the following shall be liable to pay value added tax:…

(b) taxable persons to whom services covered by Article 9(2)(e) are supplied…"

This provision clearly applies in terms to the licence to CICL of the rights granted by the Marketing Agreement, but does it apply to the exempt reinsurance services? First, article 1(b) of the Eighth Directive refers to cases where tax is payable…pursuant to article 21(1)(b) of the Sixth Directive. Secondly, article 21 is solely concerned with persons liable for payment of tax. If the Eighth Directive had intended a reference to all article 9(2)(e) supplies there was no need to bring in article 21; it could more easily have sent one to direct to article 9(2)(e) (and similarly for the article 28b intra-Community transport and related supplies, which we believe will normally be collected by the reverse charge mechanism). Regulation 175 follows the same approach as the Eighth Directive of requiring that the person makes no supplies other than (inter alia) services where "the VAT on the supply is payable by the person to whom the services are supplied" under the reverse charge mechanism, which itself excludes exempt supplies, see s 8(2) which excludes Schedule 9 services from the definition of "relevant services." These factors tend to support Miss Foster's contentions.

38. The other exception, contained in article 1(a) of the Eighth Directive, relates to transport (and ancillary) services in connection with supplies qualifying for exemption with refund (zero-rated) covering services in connection with importation of goods, exports of goods outside the Community, goods intended to be, and supplied while, warehoused, including related services. We did not receive any submissions on this and so are reluctant to draw any conclusions from its existence.
39. It is difficult to detect a purpose for excluding taxable article 9(2)(e) services, but not exempt ones, when deciding whether the claimant has made any supplies of goods or services in a state; one would expect an exclusion for article 9(2)(e) transactions, whether or not taxable, when the question is whether the claimant had made any supplies in the state concerned. The only article 9(2)(e) services that are exempt are likely to be those within the fifth indent: "banking, financial and insurance transactions including reinsurance." There is an option to tax some of these, but never insurance services, and so there are some services within article 9(2)(e) to which article 21 (or the reverse charge mechanism in UK law) will never apply if it is read literally. Why should the state of the recipient be concerned that a person established in another Member State had made such an exempt supply to the extent of denying them a refund of tax actually paid on something else in that state when the tax paid did not form a cost component of the exempt supply? Clearly if the tax in question did form a cost component of an exempt supply the refund may be restricted for that reason.
40. It seems likely that the principle is that persons established in another Member State incurring input tax in a State should either have to register there, or be eligible for Eighth Directive refunds. If the draftsmen of the Eighth Directive were deciding into which category to place cases where tax is payable by the recipient under the reverse charge mechanism, it would make no sense to require the supplier to register in order to reclaim input tax on something else rather than claim an Eighth Directive refund when the tax on the supply is already being collected from the recipient. On that basis one would expect to find that the exception is framed in terms of payment of tax, which is exactly what the Eighth Directive does. In short, the draftsman has either assumed that all article 9(2)(e) supplies are taxable, or that if they are exempt, no input tax would be repayable anyway because the input tax would be attributed to the exempt supply. The draftsman has clearly not considered the possibility, which arises in this appeal, that there are exempt supplies treated as made in the state but that input tax incurred in that state is attributable to supplies outside the state on which input tax is fully recoverable. If one excludes from eligibility for Eighth Directive refunds those who cannot register because they make only exempt supplies, one would bring into existence a third category of those who cannot do either, which must be contrary to the purpose of the VAT system. Accordingly we consider that one should not read "services provided in cases where tax is payable solely by the person to whom they are supplied, pursuant to Article 21(1)(b) of [the Sixth Directive]", ie by "taxable persons to whom services covered by Article 9(2)(e) are supplied," literally so as to exclude exempt supplies falling within article 9(2)(e). We read it to include exempt supplies within article 9(2)(e) where tax would, if the services were taxable, be so payable. We considered whether we should make a reference to the ECJ on this point and concluded that the purpose of the provision is clear and so there was no need for us to do so. We therefore conclude that by making exempt supplies of reinsurance services the Appellant is not excluded from eligibility for refund.
41. The analysis under UK law is different because Regulation 175 excludes "services where the VAT on the supply is payable solely by the person to whom the services are supplied in accordance with the provisions of section 8 of the Act," and section 8 excludes exempt supplies from the definition of "relevant services." Accordingly, it is not possible to argue that exempt supplies within the equivalent of article 9(2)(e) are excluded. Regulation 174 also makes the different assumption that the claimant is a taxable person in the UK. However, the Appellant is entitled to rely on the Directive.
42. Having concluded that the Appellant is eligible for a refund in principle we turn to article 2 of the Eighth Directive. This provides that the refund is of tax used for the purposes of transactions within article 17(3)(a) and (b) of the Sixth Directive, which in relation to the former is that inputs are used for the purpose of transactions are economic transactions within article 4(2) carried out in another country, the input tax would be deductible if they had been performed in the UK.
43. We are not persuaded by Miss Foster's contention that the Appellant was not exploiting the Business Gooodwill in an economic transaction, in a similar way to the Wellcome Foundation not exploiting shares in Wellcome Trust, Case 155/94. We consider the facts of a charitable trust selling shares that it had received under a will to be so far removed from this case as to derive no help from it. We consider that the Appellant's purchase and sale to WAL of the Business Goodwill for over £350m to be economic transactions.
44. The transaction for which the input was used is the sale of the business by the Appellant to WAL, which is a transaction carried out in another country, Switzerland so far as UK VAT is concerned (although outside Switzerland from their point of view). One next assumes that this transaction had been performed in the UK. On that basis we would have attributed the input directly to it and granted deduction of the input tax regardless of the fact that other exempt supplies had taken place in the UK. Although it is not directly in issue in this appeal, it seems to us that the Appellant's supplies to WAL are not a TOGC because WAL intends to provide insurance services whereas the Appellant merely held on to the Business Goodwill pending WAL's authorisation as the Appellant has done, and so article 5(1)(b) (ii) is not satisfied.
45. Accordingly we find that the Appellant is eligible for a refund under the Eighth Directive.
46. In summary we conclude:

(1) The transfer to the Appellant did not satisfy all the conditions for a TOGC;

(2) The place of supply of the Business Goodwill was in the UK;

(3) The Appellant is eligible for a refund of the tax under the Eighth Directive.

47. We are not sure whether any issue relating to interest on the claim arises but in case it does we give liberty to the Appellant to raise it by notice to the Tribunal within 30 days of the date of release of this decision.
48. Accordingly we allow the appeal and award the Appellant the costs of, incidental to, and consequent upon the appeal to be determined in default of agreement by a Taxing Master of the Supreme Court on the standard basis.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 5 January 2006

LON/03/0827 (rev)