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Morganash Ltd v Revenue & Customs [2006] UKVAT V19777 (19 September 2006)

19777

VAT exemption – Item 4 Group 2 Schedule 9 to VATA 1994 – company providing insurance related services – whether services exempt from VAT under domestic law although not exempt under European Community law – yes – appeal allowed

MANCHESTER TRIBUNAL CENTRE

MORGANASH LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack (Chairman)

Miss Susan Stott FCA CTA

Sitting in public in Manchester on 29 August 2006

Nigel Gibbon, solicitor, for the Appellant

Jonathan Cannan of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

Mr Andrew Gething, who is the founder and managing director of the appellant company, Morganash Ltd ("Morganash"), established it to fill what he considered to be a gap in the provision of insurance related services, namely the completion of health questionnaires by persons submitting proposals for life assurance policies. The Company claims that the services so provided to a number of life assurance companies are exempt from VAT as insurance related services falling within Item 4 of Group 2 (Insurance) in Schedule 9 to the Value Added Tax Act 1994. We are required to decide the correctness or otherwise of that claim.

In evidence to us, which we accept as fact, Mr Gething explained that Morganash receives instructions from a number of life assurance companies to carry out telephone interviews of persons who have submitted proposals to them for life assurance cover as to their medical history and condition. The interviews, which take between 20 and 40 minutes each, are carried out by qualified nurses. At the end of each interview, Morganash prepares a report containing the information obtained, and submits it to the assurance company. Morganash makes no recommendation as to whether the proposal should be accepted or declined: that is for the life assurance company to decide. A typical contract entered into by Morganash is that it entered into with American Life Assurance Company (trading in the UK as AIG Life) on 22 July 2005, which defines the services to be supplied as:

"The Services

1 AIG Life agrees to engage Morganash to carry out telephone interviews with Applicants in order to obtain Medical Information about the Applicants and provide AIG Life with Reports of information collected following each interview

2 AIG Life engages Morganash and Morganash agrees to provide the Services to AIG Life for the duration of this Agreement upon the terms and subject to the conditions contained in this Agreement including in particular the Agreed Service Levels as set out in the Schedule.

3 AIG Life shall provide details of Applicants to be interviewed to Morganash via Morganash's secure website by way of an Approved Form. Morganash shall carry out the Tele-Interview with such Applicants as set out in the Approved Forms.

4 Morganash shall provide AIG Life with a Report with respect to each completed Tele-Interview. Such Report shall be provided to AIG Life via Morganash's secure website, or if requested by AIG Life, in hard copy form.

5 Morganash shall provide the Services using all due skill, care and diligence and to the level expected from an experienced provider of tele-interview services of the scope, type and complexity of the Services.

6 Morganash agrees to perform the Services as requested by AIG Life from time to time. The Parties agree that the first 80-100 interviews are to be undertaken as a pilot project after which the Agreement shall be reviewed by the Parties to assess the effectiveness of the Services as part of AIG Life's underwriting process.

7 AIG Life agrees that Morganash tele-interviewers shall identify themselves as representing AIG Life whilst carrying out the Services. Morganash undertakes to ensure that the tele-interviewers act in a manner which does not prejudice the reputation and standing of AIG Life.

8 Morganash will provide training to Tele-interview operators and will monitor the quality of the calls to ensure that all statements and facts given are correct and not presented in a way which may mislead an Applicant.

9 Scripts and training materials developed by Morganash will not be used before they have been reviewed and approved by AIG Life. Morganash is not authorised to make any representation regarding AIG Life's products or services including the probability of any underwriting decision.

Morganash will record all the Tele-Interviews to the extent that it can legally do so and will ensure that each Applicant is informed that the call is being recorded, before any Personal Data is collected. Morganash shall provide copies of any such recordings to AIG Life on a monthly basis and upon request for up to 6 months after the recording is made or for any longer period agreed between the Parties. AIG Life shall retain such recordings for as long as it deems is necessary in order to comply with the law and fulfil any Regulatory Requirements. Morganash shall destroy recordings of Tele-Interviews after 6 months from the date of recording of each Tele-Interview."

We find that the services defined in the AIG agreement are those supplied to the life assurance company to which Morganash is contracted.

It is common ground that Morganash's supplies fail to qualify for exemption under Article 13B(a) of the EC Sixth VAT Directive (77/388/EEC), as that Article was interpreted by the Court of Justice of the European Communities ("the ECJ") in the case of Staatssecretaris van Financien v Arthur Andersen & Co Accountants cs (Case C-472/03)[2005] STC 508. Article 13B of the Sixth Directive, so far as material, reads:

"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 or abuse;

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

5. The Arthur Andersen case was concerned with the VAT liability of certain 'back office' services provided by an Andersen subsidiary to a life assurance company. The subsidiary used qualified personnel to undertake most of the activities related to insurance on behalf of the insurer including the issuing, management and cancellation of policies, the management of claims and, in most cases, taking decisions that bound the insurer to enter into insurance contracts. The ECJ was required to decide whether those 'back office' activities were exempt from VAT under Article 13B(a) of the Sixth Directive as "related services performed by insurance brokers and insurance agents". To qualify for exemption, the subsidiary had to fall to be defined as an insurance broker or insurance agent. The ECJ held that the essential characteristic of insurance brokers was that they had complete freedom as to the choice of insurer for their clients and that, although insurance agents were tied to a particular insurer, their essential characteristic was that they introduced prospective customers to that insurer. As the subsidiary qualified on neither count, its services were held to be standard rated.

Similarly, in the instant case, since Morganash is neither an insurance broker, nor an insurance agent, its services do not qualify for exemption from VAT under Article 13B(a) of the Sixth Directive.

7. Having disposed of Morganash's claim under European law, we now turn to deal with the matter under the domestic law. In Item 4 of Group 2 of Schedule 9 to the 1994 Act and the notes thereto, the United Kingdom has sought to implement into domestic law what is much more shortly stated in Article 13B of the Sixth Directive. Item 4 of Group 2 reads as follows:

"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 an insurance transaction or a reinsurance transaction; and

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

8. The lengthy notes to Item 4 form part of the legislation. So far as material, they read:

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

(a) the bringing together, with a view to the insurance or reinsurance of risks, of-

(a) persons who are or may be seeking insurance or reinsurance, and

(b) persons who provide insurance or reinsurance,

(b) the carrying out of work preparatory to the conclusion of contracts of insurance or reinsurance;

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

(d) the collection of premiums.

(2) For the purposes of item 4 an insurance broker or insurance agent is acting 'in an intermediary capacity' wherever he is acting as an intermediary, or one of the intermediaries, between-

(a) a person who provides insurance or reinsurance, and

(b) a person who is or may be seeking insurance or reinsurance or is an insured person."

For Morganash, Mr Gibbon submitted that under the domestic law:

1. it is an insurance agent;

it provides the services of an 'insurance intermediary' on the basis of Note (1) to Group 2;

it acts in an 'intermediary capacity' between a provider of insurance services and the proposed insured according to Note (2) of Group 2; and

its services are related to the provision of insurance according to Item 4(a)

10. In relation to (1), Mr Gibbon confined himself to submitting that Morganash acts as agent for insurance companies, and thereby acts as an insurance agent. Mr Cannan, on the other hand, dealt with the point in somewhat more detail. First, he accepted that the definition of 'insurance agent' laid down by the ECJ in the Arthur Andersen case does not necessarily apply to Item 4. He further observed that in Century Life plc v Customs and Excise Commissioners [2001] STC 2 after some consideration of what an insurance agent normally does by reference to provisions of article 2 (1)(b) of EC Council Directive 77/92 (the Insurance Intermediaries Directive), the Court of Appeal concluded that it is one who has power to bind an insurer. However, he conceded, in that case the issue did not arise directly for it was accepted that Century Life was otherwise in business as an insurance agent, and in any event Jacob J (who delivered the leading judgment in the Court of Appeal) was construing 'insurance agent' as used in the Sixth Directive. Mr Cannan continued, observing that the President of these tribunals, His Honour Stephen Oliver QC, considered the meaning of 'insurance agent' in C&V (Advice Line) Services Ltd v Customs & Excise Commissioners (2001) Decision No 17310 and found its meaning in Article 13B(a) to be wider than the general meaning of the term in England and Wales, and, based on Article 2(1)(b) of the Insurance Intermediaries Directive to extend to persons who have no power to bind their principals. Mr Cannan submitted that, in the instant case, there is no evidence to suggest that Morganash provides any assistance related to insurance contracts; and, further, on any view Mr Oliver's decision, so far as it concerns Article 13B(a), cannot stand following the Arthur Andersen case: his observations in relation to the domestic meaning of 'insurance agent' do, however, remain persuasive. He concluded his submissions on the point by maintaining that Morganash's supplies are not exempt for it is neither an insurance agent within the accepted meaning of that term in the UK, nor within the meaning in the Insurance Intermediaries Directive: it has no power to bind an insurer, but simply acts as a conduit for information between the proposer and an insurer.

We find it helpful at this juncture to rehearse paragraphs 54 to 58 of Mr Oliver's decision in C&V (Advice Line). They read as follows:

54 "It is not suggested that C&V is an insurance broker. Nor, I think, would C&V properly be described as an insurance agent as that expression is used at least in England and Wales. This is because any agency characteristics that it obtains under the Service Agreement have nothing to do with the making of the FLP policy contracts with the policy holders or with the acceptance and settling of claims under those policies. I shall explain what I mean. In a normal sense an agent who acts within its authority has the capacity to contract with third parties on behalf of his principal. His acts, falling within his authority, are imputed to and bind his principal. Here the Services Agreement makes C&V Direct Line's agent for certain limited purposes. Clause 4.2, for example, requires C&V to keep the equipment provided by Direct Line "in good working order, properly serviced and maintained"; contracts with third parties entered into by C&V for these purposes will no doubt bind Direct Line. But in relation to Direct Line's activities of providing FLP cover, C&V has no authority to bind Direct Line. It cannot accept a claim; it cannot settle a claim. All it can do is to express the opinion that the policyholder is not covered. That involves no settlement of any claim; it simply means that Direct Line, the insurer, does not perform under the contract and the insured policyholder gets no benefit.

If C&V is to succeed it must establish that the expression "insurance agent", as used in Article 13B(b), has a wider connotation than its strict meaning in England and Wales. (No mention was made to the position in Scotland but I assume that an insurance agent in Scotland has the same characteristics as an insurance agent in the rest of the United Kingdom.) This is where the Insurance Intermediaries Directive (Council Directive 77/92) becomes relevant because the Sixth Directive itself has no definition of insurance agent. The Court of Appeal in Century Life, supra, recognized (at 44g-h) that the definition or, perhaps more accurately, the description of insurance agent in the Insurance Intermediaries Directive was applicable to Article 131B(a); in this respect they accepted the opinion of the Advocate General (Fennelly) in Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270.

Recital 8 of the Insurance Intermediaries Directive contains the following provisions:

"Whereas, where the activity of agent includes the exercise of a permanent authority from one or more insurance undertakings empowering the beneficiary, in respect of certain or all transactions falling within the normal scope of the business of the undertaking or undertakings concerned, to enter in the name of such undertaking or undertakings into commitments binding upon it or them, the person concerned much be able to take up the activity of broker in the host Member State."

Article 2(1) contains the following provisions:

'This Directive shall apply to the following activities …

(a) professional activities of personas who, acting with complete freedom as to their choice of undertaking, bring together, with a view to the insurance or reinsurance of risks, person as seeking insurance or reinsurance and insurance or reinsurance undertakings, carry out work preparatory to the conclusion of contracts of insurance or reinsurance and, where appropriate, assist in the administration and performance of such contracts, in particular in the event of a claim;

(b) professional activities of persons instructed under one or more contracts or empowered to act in the name and on behalf of, or solely on behalf of, one or more insurance undertakings in introducing, proposing and carrying out work preparatory to the conclusion of, or in concluding contracts of insurance, or assisting in the administration and performance of such contracts, in particular in the event of a claim …'

The Insurance Intermediaries Directive is a measure "to facilitate the effective exercise of freedom of establishment and freedom to provide services in respect of the activities of insurance agents and brokers": see the opening words of the Directive. The message in Recital 8 is obscure. It starts by noting that the activity of agent includes the exercise of authority from one or more insurance undertakings to bind its principal; but it then concludes by saying that the person concerned must be able to take up the activity of broker in the host Member State. On the face of it this is saying that anyone who is an insurance agent must be allowed to become a broker in his host Member State. I do not read the opening words of Recital 8 as an all-embracing definition of insurance agent. That is the function of Article 2.1(a) and (b) respectively which describe them by reference to their activities. The opening words of Article 2.1(b) cover the situation of the insurance agent as he will be recognized in England and Wales, i.e. the agent who has power to bind his principal to a policyholder. But the concluding words stand on their own and are not qualified by that requirement. The concluding words, i.e ."… or in assisting in the administration and performance of such contracts, particularly in the event of a claim", cast the net wider. This was recognized by Jacob J in the Court of Appeal in Century Life at 44g-h.

The matter comes down to the same question of fact as was relevant to the issue of whether C&Vs services contained the elements present in the description of "the services of an insurance intermediary" in Schedule 9 Group 2 item 4. I refer to the reasons that I gave in that connection (see paragraph 47 above). While C&V plays no role in actually providing the insured benefits, i.e. the legal costs arising once a claim has been accepted, it assists in the administration and performance of the particular FLP policy.

12. While Morganash plays no part in actually providing the insured benefits, it does "carry out work preparatory to the conclusion of … contracts of insurance." For that reason, we agree with Mr Oliver (see paragraph 59 of his decision in C&V (Advice Line), and consider that Morganash is within the scope of Article 2(1)(b) of the Insurance Intermediaries Directive. It is plain from the wording of Group 2 of Schedule 9 to the 1994 Act, and from the words of Note (1) in particular, that the domestic provisions draw extensively on the Insurance Intermediaries Directive. The domestic provisions can, therefore, be given a compliant construction. In our judgment, Morganash acts as an insurance agent.

For the purposes of Note 1, Mr Gibbon submitted under (2) that as Morganash's services are those of an insurance intermediary in that it carries out work preparatory to the conclusion of contracts of insurance (Note 1(b)): therefore, for the purposes of Item 4 it provides the services of an insurance intermediary who is acting in an intermediary capacity.

14. In response, Mr Cannan observed that the services of an insurance intermediary are specifically defined in Note 1. On one view the services provided in conducting medical interviews amount to work carried out preparatory to concluding an insurance contract. But for this work being carried out, either by the insurer directly or by outsourcing, in practical terms the insurance contracts would not be concluded. However, he submitted, that is to ignore the context, namely that the work is being carried out by an intermediary: it must therefore be limited to the bringing together of parties referred to in Note 1(a). The services of an insurance intermediary which are exempt would not be limited to the actual bringing together of the parties.

15. In our judgment, Note 1 (a) is of no relevance in the instant case. The Note opens by stating that 'For the purposes of Item 4 services of an insurance intermediary if they fall within any of the following paragraphs …' (emphasis added). Paragraph (b) of Note 1, dealing with "the carrying out of work preparatory to the conclusion of contracts of insurance" may be used in isolation. Indeed, that is the way in which we do read it in concluding that Morganash provides the services of an insurance intermediary.

In relation to the requirement that to qualify for exemption a taxpayer must be acting in an intermediary capacity, (Mr Gibbons submission (3)), Mr Cannan maintained that it must add something to the test which is not present merely from its acting as an insurance agent. He submitted that acting as an intermediary involves acting somewhere in the chain of supply of an insurance contract, and not simply acting in place of one of the parties to the contract from the sidelines. He drew an analogy with exemption for the provision of intermediary services in the granting of credit under Group 5 of Schedule 9 where under Article 13B(d)(i) of the Sixth Directive what is required is a distinct act of mediation (see paragraph 36 of the opinion of the Advocate General in Arthur Andersen and paragraph 38 of the judgment of the ECJ). Mr Cannan therefore submitted that Morganash is not acting in an intermediary capacity: it is merely performing administrative tasks in the name of the insurer that would normally be undertaken by the insurer.

Were we dealing with Article 13B of the Sixth Directive, we should have no hesitation in accepting Mr Cannan's submissions, and deciding that Morganash does not act as an intermediary. But we are dealing with the domestic legislation from which that Article has been transposed, and which is couched in terms considerably wider than those found in Article 13B. In our judgment, Note 2 to Group 2 of Schedule 9 can be interpreted only as indicating that in the instant case Morganash is an insurance agent acting as an intermediary.

Mr Cannan accepted that the insurance contracts in the instant case would not be concluded but for the work being carried out by Morganash but submitted that that is not the test to determine whether its services are related to an insurance contract: it is not sufficient for the services to have some connection with the insurance contract. As Jacob, J explained at paragraph 15 of his judgment in Century Life:

"Of course, the words involve a question of degree. But that is true of many legal tests. And one does have the 'exceptions are narrow' principle to help here. Applying that, 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 also be a close nexus between the service and the insurance transaction concerned. So, for example, if an insurance agent supplies secretarial or general computer services to an insurance company, the exemption would not apply. Those services would only be incidental to insurance transactions."

In supplying the answers to various medical questions, Mr Cannan maintained that Morganash might just as easily performed its services for an employer medically screening existing or prospective employees. It is merely coincidental that the services concerned in the instant case are supplied in an insurance context: they are analogous to the secretarial or general computer services referred to by Jacob J. Mr Cannan therefore submitted that Morganash's services are only remotely or incidentally connected to the insurance contracts. In response, Mr Gibbon merely maintained that the services provided by Morganash are related to the provision of insurance within Item 4 of Group 2: there is sufficient nexus between Morganash's services and the contract of insurance provided by the insurer.

Having most carefully considered the matter, and mindful of the fact that the judgment of Jacob J in Century Life was delivered in a Sixth Directive context, we are satisfied that the essential characteristics of the services supplied by Morganash are those related to insurance contracts: as Morganash's services form an essential part of the risk assessment process there is the required nexus between its services and the contract of insurance provided by the insurer.

Having accepted all of Mr Gibbon's submissions under the domestic law, it follows that we allow the appeal. We also direct HMRC to pay Morganash's costs calculated on the standard basis.

DAVID DEMACK

CHAIRMAN
Release Date: 19 September 2006

MAN//05/0749