United Kingdom VAT & Duties Tribunals Decisions

 


19750

EXEMPTION – Appellant manufacturing and selling cars through dealers – promotion offers include free insurance cover and RAC membership – whether for purposes of calculating VAT on sales of cars amounts paid by customers to be reduced by sums paid by appellant for the insurance cover and breakdown service availability – whether supplies made for consideration, whether Appellant making supplies for insurance, whether insurance cover and breakdown service are ancillary services and therefore part of the standard rated supply – yes –Appeal dismissed - EC Council Directive 77/388. Art 13B(a) – VAT Act 1994, Sch 9, Gp 2, item 3

LONDON TRIBUNAL CENTRE

FORD MOTOR COMPANY LIMITED	Appellant
and
THE COMMISSIONERS OF HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal: Rodney P Huggins (Chairman)

Mrs J M Neill

Sitting in public in London on 19 and 20 June 2006

Jonathan Peacock QC, for the Appellant

Rupert Anderson QC instructed by the Acting Solicitor for Her Majesty's Revenue and Customs for the Respondents.

... CROWN COPYRIGHT 2006

DECISION

The appeal

1. Ford Motor Company Limited ("the Appellant") appeals against the partial refusal by the Commissioners for Her Majesty's Revenue and Customs (" Customs") of three voluntary disclosures made by the Appellant on 30 September 1997, 23 November 2000 and 28 November 2000 claiming a total of £10,856,487 by way of overpaid output tax. The claims were initially rejected in their entirety. On 26 October 2001, they were allowed insofar as they concerned VAT paid in relation to supplies made to 'ultimate consumers' by Ford Credit, which is a member of the Appellant's VAT group.

The balance remaining in dispute was some £5,013,911 and concerned supplies made by dealers outside the Appellant's VAT group. The refusal of the first claim was contained in a letter of 14 October 1997 to the Appellant, from Richard Miller, an officer of the Basildon VAT office. Although the latter two claims were made after the initial refusal, and were not independently appealed, Customs acceded to the Appellant's request that they be included in this appeal. The first two claims were made in relation to the provision of free insurance to motorcar purchasers. The claim made on 28 November 2000 however, concerned the provision of free RAC breakdown service on the sale of motorcars. There is also an appeal against a notice of assessment referred to in a Customs letter of 26 October 2001 relating to the overpaid tax.

The legislation

1. The relevant European provisions relating to this appeal are contained in three Articles of the Sixth Council Directive (77/388/EEC) ("the Sixth Directive")

(1) Article 2 is in these terms (so far as is material):

"The following shall be subject to value added tax : 1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such …"

(2) Article 11A.1 provides that "the taxable amount shall be (a) in respect of goods or services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or the third party for such supplies …"

Article 11A.2 continues that the taxable amount shall include

"(a) taxes, duties, levies and charges, excluding the value added tax itself." and

Article 11A.3 states that

"the taxable amount shall not include (a) price reductions by way of discount for early payment; (b) price discounts and rebates allowed to the customer and accounted for at the time of supply; (c) the amount received by a taxable person from his purchaser or customer as repayment for expenses paid in the name and for the account of the latter and which are entered in his books in a suspense account. The taxable person … may not deduct any tax which may have been charged on those transactions".

Article 11C.1 provides that

"in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States."

(3) Article 13B(a) provides :

"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 reinsurances transactions, including related services performed by insurance brokers and insurance agents".

2. These provisions were implemented in the United Kingdom by item 4 of group 2 of Schedule 9 to the Value Added Tax Act 1994 (the 1994 Act).
3. The United Kingdom legislation gives effect to the Sixth Directive and is to be interpreted with that in mind.

(a) Section 1 of the 1994 Act provides (so far as is relevant)

"(1) Value added tax shall be charged, in accordance with the provisions of this Act – (a) on the supply of goods or services in the United Kingdom (including anything treated as such a supply), … and references in this Act to VAT are references to value added tax.

(2) VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply."

(b) Section 4(1) of the 1994 Act provides that VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. In that context, a taxable person is a person who is, or is required to be, registered under the Act (see s 3(1); and a taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply (see s 4(2) of the 1994 Act). Section 5 applies Schedule 4 for the purposes of determining what is, or is to be treated as, as a supply of goods or a supply of services. It is sufficient to note that, subject to any provision made by that Schedule and to Treasury orders made under s 5(3) to (6), 'supply' includes all forms of supply, but not anything done otherwise than for a consideration.

(c) Section 19 of the 1994 Act provides for the determination of the value of a supply of goods or services. The second sub-section is in the following term :

"(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration."

(d) Section 31(1) is the enabling provision stating that a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 and as mentioned in Group 2, Item 4 the provision of insurance and the provision by an insurance broker or insurance agent of any of the services of an insurance intermediary (in certain circumstances) are exempt supplies.

The issues

4. The appeal related to the offer of (1) "free" motor insurance and (2) "free" breakdown insurance by Ford to its customers on certain models. The issue between the parties was whether some part of the price paid by the customer was for the benefit of this "free" insurance cover provided by Norwich Union Limited (Norwich Union) and the RAC respectively and, as such, should be treated by Ford as giving rise to two separate supplies, one (being standard rated) of the car and the other (being exempt) of the insurance. Customs contended that there was only a single standard rated supply. In the alternative, they argued the supply was not by the Appellant. Any "free" insurance and insurance-related services being supplied, if at all, by the insurer Norwich Union.
5. Basically, there were three arguments which are as follows :

(1) Customs submitted that the customer who purchased a car paid one fixed sum for the car and not three different amounts for the car, insurance and breakdown services. The additional insurance was therefore provided for no further consideration to the customer. The question therefore is

"was something done for a consideration in addition to the basic cost of the car ?"

(2) If it was accepted by the tribunal that there were two supplies (one of the car and the other of the insurance-related services) and the customer makes payment for those latter supplies, the question to be asked "is the insurance –related supply exempt in VAT terms or not ?"

(3) Assuming that there was a consideration in the transaction and the insurance-related supply was found to be exempt, was that supply subsumed into the standard-rated supply of the car within the principles laid down by the European Court of Justice ("ECJ") in Case 349/96 Card Protection Plan [1999] STC 270 (Card Protection Plan).

Each of these issues will be considered by the tribunal in turn after the facts have been found and will be referred to as Issues 1, 2 and 3 following the above sequence.

The evidence

6. Two bundles of documents were produced at the hearing consisting of 750 pages. Oral evidence was given on behalf of the Appellant by Mr Paul Flanagan, Manager of all UK retail incentive programs within Ford. He is a Chartered Management Accountant and specialises in Sales and Marketing Operational roles within Ford; also, Mr Paul Sell who had been involved in the relationship between Ford and Norwich Union (for whom he worked) for five years and was at the time of the hearing sole Account Manager for the business relationship with Ford. Mr Peacock also produced a skeleton argument.
7. Mr Anderson did not call any witnesses and relied upon the documentary evidence and his submissions including a skeleton argument.

The facts

9. From the evidence before us we find the following facts.

Introduction to the Insurance Arrangements

8. Ford is a major manufacturer of cars which it sells. Ford also maintains a network of (largely independent) dealers in the UK through which Ford cars are sold to the general public. Another company in the Ford group, Ford Credit, provides finance to purchasers of cars who wish to acquire the vehicles on HP or other credit terms.
9. In cases where the customer does not finance the purchase of the car through Ford Credit the car is manufactured by Ford and sold to the dealer (outside the Ford VAT group) and then sold on to the customer. In cases where finance is provided by Ford Credit the car is manufactured by Ford, sold to the dealer (outside the Ford VAT group) and then sold by the dealer to Ford Credit (within the Ford VAT group) for Ford Credit to sell it to the customer on HP or other credit terms.
10. As part of its promotional activities, from time to time Ford offers, through its network of dealers, special deals or arrangements to purchasers of certain Ford models. Such offers are communicated by Ford to the dealers and then made available to customers on their purchase of the cars from the dealer or from Ford Credit. This appeal related to the arrangements Ford made with the major insurance companies to insure motor cars. In addition, there was the issue of the provisions of "free" RAC breakdown service.

The pre-October 1998 Guardian Direct / RAC Insurance arrangements

11. The tribunal was not supplied with any specific documentation relating to the overall arrangement whereby Ford appointed Guardian Direct to provide insurance policies to purchasers of their motor cars except a Ford insurance customer information sheet valid for the insurance programme in the period 1 June – 30 September 1997 with the Escort brand Ford motor car marketing programme; a circular letter to dealers dated 29 May 1998 including an Appendix of the terms, conditions and definitions relating specifically to the period 1 June to 30 September 1998; with accompanying schedules.
12. The main agreement was between Ford and Guardian Direct Services Limited who traded as RAC Insurance Services. The cover was comprehensive for one year, the cost of which was paid by Ford. The cover was restricted to the policy holder and up to five other named drivers aged 17 to 80. There was no refund of premium if the policy was terminated before the renewal date. Each customer had to complete and sign what was described as "the free insurance application form". All advertising material referred to "Free insurance".
13. The customers had to acquire the vehicle, register it and then take out the policy. Ford paid all the premiums. The purchasers filled in the Declaration forms which were faxed either to RAC Insurance Services or the Ford Insurance Centre.
14. Only specific models carried free insurance. In the period from 1 June to 25 September 1998 free insurance was available for Ka, Fiesta and Escort models. The other feature of this early arrangement before October 1998 was that only fixed premiums were charged by Guardian Direct to Ford. This was a basic estimate and did not reflect the risk element depending on the volume of sales.

The Ford Insurance arrangements with Norwich Union.

17. On 20 October 1998 Ford (which included various associated companies) and Norwich Union entered into an agreement that forms the framework of the "Ford Insurance" arrangements ("the 1998 Agreement"). The document is entitled "Insurance Agency Agreement" and became effective from 26 September 1998. It replaced the Guardian Direct contract. Norwich Union made an upfront payment of £5 million to Ford by way of an advance on commissions. (No further commissions were payable in respect of insurance arrangements to which this appeal relates.)

15. The purpose of the 1998 Agreement was for Norwich Union to become Ford's provider of motor insurance branded as Ford Insure and offered by Ford dealers throughout the UK to customers purchasing Ford cars. The Ford Insure programme required Norwich Union to make insurance available to customers in return for premiums paid by customers for the insurance. Also covered by the 1998 Agreement was "free insurance". Norwich Union undertook with Ford to become the provider of what was presented to customers as free insurance. The provision of free insurance was part of a promotional package used by Ford and Ford dealers to promote the sales of selected Ford models to eligible customers. Premiums on free insurance were paid by Ford to Norwich Union and the promotional material implied that the cost of the insurance was not borne by the customer as part of the price of the car. It was the same arrangement in principle as had occurred previously with Guardian Direct.
16. The 1998 Agreement, by clause 2 made Ford the "agent" of Norwich Union "to make arrangements" on Norwich Union's behalf to enable Norwich Union to carry on the insurance business relating to Ford products. This included reviewing proposals from potential insurants, issuing policies, dealing with renewals, collecting premiums and settling claims. Ford gave an exclusivity undertaking to Norwich Union (i.e. always to accept Norwich Union as the insurer unless a competing insurer offered better terms). The 1998 Agreement was to last ten years and it covered "customer funded" and "free insurance". Free insurance was defined as "annual motor insurance provided free of charge to customers of Ford Motors in connection with the purchase of a car by them and in respect of which the premiums are paid by Ford." No commission was to be charged to Norwich Union by Ford under the free insurance program.
17. Clause 5.1 of the 1998 Agreement gave Ford authority "to the extent permitted by the Binding Authority" to bind Norwich Union to a "Ford Contract" (i.e. a Norwich Union Ford Insure policy) "issued to an insured". Clause 25 enabled Ford as Norwich Union's agent to appoint sub-agents so long as approved by Norwich Union and those sub-agents might be Ford dealers. The sub-agents had power to bind Norwich Union within the framework of the "Binding Authority".
18. The Binding Authority of 7 January 1999 between Norwich Union and Ford related exclusively to free insurance. It took effect from September 1998. It authorised Ford, which term included sub-agents, to bind Norwich Union to free insurance policies "in the form attached to this Binding Authority" meeting certain eligibility criteria such as the models of Ford motor cars, the ages of the drivers (17 – 80) and the driving records (including convictions) of insurants and drivers. Other relevant provisions were :

* Clause 2.3 which directed that on cancellation of a free insurance policy no part of the premium was refundable and

* Paragraph 3.2 of Appendix 1 which enabled the insured to transfer the enefit of free insurance to another Ford model during the period of the free insurance policy, but the insured who cancelled his free insurance was entitled to no refund.

19. There were certain other features relating to individual car purchases under the 1998 Agreement. Amongst those were the following :

* drivers could include four additional persons

* customers were enabled to qualify for maximum no claims discount in later years

* purchasers were required to read an information sheet and fill in a declaration form.

* a three day turn around for the policy to be issued was expected.

* customers had to acquire their vehicles, register them and then take out the insurance.

* in Schedule II to the 1998 Agreement under the heading "Financial Agreement – Motor Insurance - Free Insurance" there was an illustrative example which included the phrases "Premium payable by the Customer = 100" and "Premium Payable to Norwich Union = 100"

* the insurance premiums were calculated on an average basis per unit [ there was no change in this regard until later]

The paperwork involved in a single transaction

20. We were provided with an example of a customer pack (customer order form, dealer invoice, policy document, certificate of motor insurance). We were also supplied with samples of customer documentation. The sample policies supplied to individual customers made it quite clear that no annual premium had been paid by the individuals and the cover was described as "Free Comprehensive". Letters were sent to customers by the Head of Customer Management of Ford Insure enclosing the initial cover note and stated "your annual free insurance policy begins from the day your vehicle is registered and will be shown on your schedule."
21. The two specimen invoices from car dealers to customers supplied to the tribunal for the purchase of a Ka model on 9 December 1999 and a Fiesta car on 20 December 1999 did not mention an initial one year's free insurance cover although the latter did refer to 24 months extra cover without mentioning a figure.

Changes in the policies and administration of the programs

22. There have been several changes in the terms of the policies since 1998. In the year 2000 the policy terms were expanded to cover the insured and other drivers with the permission of the insured. Named drivers could be added at the cost of additional premiums. The customer was permitted to drive other cars and the belongings of third parties became covered. The July to October 2002 programme decreased the number of named drivers to four. The policy covered passengers and the domestic partner of the insured was covered whilst driving.
23. In 2002 another Binding Authority was entered into between Norwich Union, Ford Credit and Ford. It fundamentally altered the manner in which the premiums were calculated. Before, these had been fixed whatever the personal circumstances of the individual purchasers. Under the new arrangements, the premiums were calculated by reference to estimated risk according to age and where the customer lived by postcode definition. Not all customers qualified as eligible for free insurance. No one was entitled to refunds of premium. Ford continued to pay all the premiums.
24. There were further changes in subsequent years and a further Binding Authority signed by the major parties on 23 January 2004. This provided for the premiums to be calculated on an actual risk, actual premium basis. Each customer had to acquire the new car first and then take out insurance if the customer wished to do so and qualified under the programme. The customer telephoned Norwich Union and was provided with a cover note pending completion of the annual policy. The amount of the premium would depend on the age of the customer, location and his or her driving history.
25. In the years prior to February 2005 the Ford dealers were able to bind Norwich Union to provide insurance under the terms of the 1998 Agreement. As a result of new regulations exercised by the Financial Services Authority this had to change. The customer was introduced for the first time by the dealer to Ford Insure (Norwich Union) who administered the paperwork for the customer and invoiced Ford for the cost of the policy. The Ford dealers are effectively "introducers". If an individual customer's requirements exceeded normal insured risks the customer had to pay an extra premium.
26. From the year 2000 to 2005 whilst the price of any vehicle in the model range within the free insurance offer fluctuated due to market pressure, at the time that the free insurance element was added to the purchase price of the car any other offers (such as cash back) were reduced. Therefore the price the customer paid for a vehicle increased.

RAC cover

27. Ford entered into a renewal agreement with RAC Business Solutions

(RAC) [ not to be confused with RAC Insurance Direct which is a separate

body] on 24 September 2002 whereby RAC would provide breakdown cover to all Ford customers who purchased Ford cars.

28. In contractual terms RAC promised to provide breakdown insurance to customers and Ford provided the benefit of that promise to its dealers who in turn passed on the benefit to all purchasers of their cars. Included was the rights for owners of Ford motor cars to be offered the opportunity to take RAC Membership and RAC European Motoring Assistance at preferred rates.
29. Ford paid RAC varying amounts on purchase of new vehicles depending upon the model and other circumstances. The basic amount in 2003 for a new car was £8.60.
30. Customers did not pay separately for this breakdown cover. It was included in the invoice price of the cars.

The voluntary disclosures claiming repayment and subsequent claim

31. On 30 September 1999 Ford made a voluntary disclosure and claimed a repayment from Customs in respect of the output tax which was asserted to have been overpaid on free insurance.
32. A reply was sent by Officer Richard Miller of Customs' Basildon VAT Sub Office on 14 October 1997 rejecting the repayment claims : he gave the following reason :

"In these two schemes the output tax collected is already the same as the tax paid by the final customer. The provision by Ford Motor Company of free insurance to the final customer, or the payment by Ford Motor Company of a subsidy to Ford Credit for lost interest do not affect the overall tax position, and are rather, seen as third party payments for business promotions.

I also have to inform you that voluntary disclosures have already been submitted and rejected for other Motor Manufacturers who operate similar schemes. At least one of these is now proceeding to Tribunal; any appeal to Tribunal would therefore most probably be stood over pending the outcome of the cases already due to go before Tribunal."

[the case in question involved Peugeot Motor Company PLC and Citroen UK Ltd and is referred to in paragraph 44 of this decision specifically]

33. Further voluntary disclosures were made on 23 November 2000 and 28 November 2000 by Ford and notices of appeal lodged on 14 November 1997 and 23 November 2001.
34. As a result of the decision of the Value Added Tax and Duties Tribunal in the appeal of Peugeot Motor Company plc and Citroen UK Ltd

(1999) VAT decision 16104 on 26 October 2001, Customs Officer Terence Kalloo of the Basildon VSO Motor Trade Group made a decision in the following terms :

"I refer to the following claims :-

a)	30/09/97	Free insurance	£1,390,156.00
b)	30/11/00	Free insurance	£4,042,061.00
c)	28/11/00	Free RAC cover	£ 410,359.00

The amount of £5,842,576.00 has been repaid/credited to your account.

This repayment/credit is in line with the decision of the VAT and Duties Tribunal in the case of Peugeot Motor Company Plc and Citroen UK Ltd (LON/98/388).

The Commissioners have, however, appealed to the Court of Appeal (CO/3173/99) to have the decision overturned. If the court rules that the provision of "free" insurance and RAC cover to customers at the expense of suppliers of the cars should not be taken into account when calculating the suppliers liability to output tax on the consideration received from the customer on the supply of the car, you will be expected to repay the amount of £5,842,576. Default interest may also be charged on this amount.

To that end an assessment under section 80(4A) VAT Act 1994 has been made for the amount of £5,842,576. We will not request payment of the assessment until such times as the Court of Appeal judgment is known. We will advise further what action the Commissioners are going to take at that time. However, payment will be accepted now should you wish to avoid the default interest …"

35. As a result of receiving this suspended notice of assessment, Ford appealed on 23 November 2001. The appeals before the tribunal were then stood over pending the outcome of the Peugeot and Citroen case (judgment being issued in the High Court in October 2003) and another tribunal appeal known as Lindsay Cars Limited v the Commissioners of Customs and Excise [2005] VATDR 21 (Lindsay Cars).
36. On 29 July 2003, Mr Mark Duncan, the Ford VAT Manager, sent an E-mail to Officer Kalloo in the following terms insofar as it relates to the current appeals :

"I have attached updated claim schedule for the Free Insurance claim (Free Insurance ref Lon/1997/1559 a Protective assessment Lon/2001/1228), which now extends the period to July 2002 and provides the split between FCE and non-FCE. Please accept this notification as an extension to the claim previously submitted. We still need to retrieve the historic claims information for the RAC, and will shortly update the free insurance numbers for the periods since August 2002. Free Insurance April 1995 – July 2002 FCE £7,731,907 Non FCE £9,091,276. I can confirm that the Free Insurance promotions are still running and the method of accounting is still the same as previously notified …"

37. On 31 August 2005 Officer Kalloo responded by E-mail and said " …The updated claims have been associated with the previous claims now under appeal."
38. On 28 November 2005 Mr Duncan sent a further E-mail to Officer Kalloo attaching an updated claim schedule for the Free Insurance Claim and Protective assessment (both under appeal to the tribunal) which extended the period to July 2005. There were two additional voluntary disclosures for the periods August 2003 to July 2004 and August 2004 to July 2005 which were updated on 30 November 2005 in the sums of £1,718,061 and £787,713 respectively.
39. An amended Notice of Appeal was sent by Ford on 29 November 2005.

Cases referred to in lists of authorities and at the hearing.

[reference to CCE is Commissioners of Customs and Excise]

40. Card Protection Plan v CCE (ECJ [1999] STC 270) and (H/L [2001] STC 174)

CCE v Primback (ECJ) [2001] TC 803

Peugeot and Citroen v CCE [2003] STC 1438

Lindsay Cars

Kuwait Petroleum v CCE (ECJ [1999] STC 488) and (High Court [2001] STC 62

Hartwell v CCE [2003] STC 396

Case C-8/01 Taksatorringen )ECJ 20.11.03)

Case C-427/98 Commission v Germany

CCE v Littlewoods [2001] STC 1568

Arthur Anderson & Co Accountants (ECJ Case C-472/03)

Leightons v CCE [1995] STC 458

Redrow v CCE [1998] STC 161

Littlewoods Organisation PLC v CCE [2001] STC 1568

Century Life v CCE [2001] STC 38

WHA Ltd and Viscount Reinsurance Company Limited v CCE [2004] STC 1081

Dr Benyon and Partners v CCE [2005] STC 55, [2004] UKHL 53

College of Estate Management v CCE [2005] STC 1597, [2005] UKHL 62

41. There were two cases which affect the outcome of these appeals and as indicated at paragraph 39 of this decision, the appeals were stood over until they were concluded. As both Counsel referred to them in their arguments we set out below the brief facts and extracts from the judgment and decision which are applicable.

The High Court judgment in Peugeot and Citroen v CCE [2003] STC 1438 (Peugeot).

42. The case was similar to these appeals and the head note states the facts of which an extract is as follows :

"The appellants sold cars to members of the public (the end-user) either through dealers within the appellants' respective value added tax (VAT) groups (the direct sales) or with the intervention of independent franchised dealers (not within the VAT groups) or finance houses (the indirect sales). In both categories of sale the appellants utilised various business promotion schemes in which the end-user received motor insurance from an insurance company for no additional payment, the insurance company being paid by the appellants. The appellants considered that they were acting as insurance suppliers and/or were making arrangements for the supply of insurance with the result that the part of the price of the car constituting the value of the insurance supply should be exempted from VAT… The tribunal held that, so far as direct sales were concerned, the taxable amount should be reduced by the cost to the Appellants of providing the customer with motor insurance, but that, in respect of indirect sales, no such reduction fell to be made. The appellants appealed against the second part of the tribunal's decision and the commissioners cross-appealed against the first. The commissioners contended inter alia: (i) that the cars were marketed to customers on the footing that free insurance was available and that therefore no part of the price paid by the end-user, or, in the case of indirect sales, by the independent dealer (or finance house) was referable to the insurance company so that, if there was such a supply, it was a supply for no consideration in that the price was paid for the car alone; and (ii) if there was such a supply and it was for consideration, the supply was ancillary to the supply of the car and therefore assumed the same treatment as the car, namely standard-rated."

43. Again quoting from the headnote the Court (Blackburn J) held as follows:

"(1) The appellants did make an insurance-related supply in respect of both direct and in-direct dales. It was unnecessary to decide whether the nature of that supply was itself an insurance transaction or was no more than the making of arrangements for a contract of insurance to come into being. However, of the two, the latter was to be preferred. That left for decision the question whether the insurance supply was free and, even if it was not, whether it was ancillary to the supply of the car.

(2) The test for deciding whether a disposal was free of charge was to determine whether there was a legal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods or services supplied. If there was such a relationship, the goods or services were not supplied free of charge. Accordingly, a factual investigation had to be undertaken to determine what both sides of the relevant transaction in which the issue of a disposal free of charge arose thought they were agreeing to. In the instant case, there was insufficient material before the court for that determination to be made. Accordingly, the question whether any part of that consideration paid to the appellants was referable, for VAT purposes, to the insurance supply fell to be determined by the tribunal. Kuwait Petroleum (GB) Ltd v Customs and Excise Comrs )Case C-48/97) [1999] STC 488, para 26 and Kuwait Petroleum (GB) Ltd v Customs and Excise Comrs [2001] STC 62 applied. [hereinafter referred to as Kuwait Petroleum ECJ and Kuwait Petroleum HL respectively]

3. However, a decision could be reached on the issue of single or multiple supplies as the necessary factual context has been established. The question was whether what the appellants supplied to end-users (in the case of direct sales) and to independent dealers and/or finance houses in other cases was a single supply comprising (a) the provision of a new car and (b) the provision of the insurance promise (ie to procure insurance for the end-user) or whether it constituted quite separate supplies and, if the latter, whether the insurance element was ancillary to the provision of the new car. A service must be regarded as ancillary to a principal service if it did not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied. There was nothing to suggest that, when the appellants sold cars (whether to end-users direct or to independent dealers and finance houses in other case), insurance was dealt with as a wholly separate and distinct matter. The insurance 'promise' was clearly part and parcel of the overall sale transaction. It was reasonably obvious, first, that a single supply was involved and, second, the insurance element of the supply (i.e. the provision of the promise to procure insurance for the end-user at no further cost to him) was ancillary to the supply of the car. It was wholly unreal to suppose in the context of that transaction that the insurance promise could have a real existence independent of the supply of the car, or that it was an 'aim in itself' rather than 'a means of better enjoying the principal service supplied' namely the supply of the new car. It followed that, even if some element of the price paid to the appellants by the end-users (in the case of direct sales) or by independent dealers or finance houses in other cases) was referable to the provision of an insurance-related service the sum in question fell to be treated for VAT purposes in the same manner as the principal element of the supply (the new car), namely at the standard rate of 17.5%"

Accordingly, the appellants' appeal was dismissed and the commissioners' cross-appeal allowed.

The tribunal decision in Lindsay Cars Limited v CCE [2—3] VATDR 21 [Lindsay Cars]

44. This was a case involving a Ford main dealer called Lindsay Cars selling new and used cars in Northern Ireland where insurance cover was more costly than in the rest of the United Kingdom and particularly so for drivers under 25 for whom the costs could be prohibitive. [Therefore, there were similarities with the current appeals]

As in the present appeals, Ford cars in certain models were advertised and sold in the United Kingdom generally with one year's free insurance cover from Norwich Union provided under the 1998 Agreement with Ford and funded by Ford.

However, the main difference between the current appeals and that in Lindsay Cars is quoted in the head note in VAT and Duties Tribunals reports 205 Part 1 at page 21 as follows :

"In a sales promotion for September 1999 Ford Fiestas were offered for sale by dealers in Northern Ireland with an additional year of cover from Norwich Union negotiated by Ford and within the general framework of its agreement with the insurer and the binding authority. The advertised on-the-road price of the car was increased by £500. But on the vehicle order Form the price was broken down into individual elements one of which was £564 for the additional year's insurance. In the Customer Declaration, that the customer had to sign, the dealer undertook to submit the declaration to Norwich Union and attach a cheque for £564 to the original declaration form. Unlike the position in the case of the free first year's insurance where there was no reimbursement on cancellation, a customer canceling the additional year's cover was entitled to a refund of the premium (less a handling charge) sent direct from Norwich Union.

The Appellant claimed repayment from the Commissioners of output tax that it had accounted for in respect of what it maintained was the provision of exempt supplies of insurance to customers buying its cars…

The case for the Commissioners was that VAT was payable on the full price of the car. The customer paid a fixed sum for the car and not different

amounts for the car and for the insurance, the latter being refunded by the

Appellant. If the Appellant did make a separate insurance -related supply to the customer it was ancillary to and fell to be treated as part of the single VAT supply of the car, sharing its tax treatment. If there were two supplies, the insurance-related supply was neither an insurance transaction nor "related services performed by insurance brokers and insurance agents" within Article 1313(a) of the Sixth Directive."

45. The tribunal held as follows (quoting again from the head note on page 22) :

"(1) that the relevant supply made by the Appellant to the customer was its provision of access to the additional insurance cover provided by Norwich Union under its undertaking with Ford for which the customer provided consideration of £564, as that was what the parties "thought they were agreeing to" …

(2) that it followed from the essential features of the transaction that the supply of the additional insurance was separate and distinct from the supply of the car and, since for the whole range of customers the additional insurance stood as a benefit in its own right as distinct from being a means of better enjoying the Fiesta, it was not ancillary to the supply of the car to be subsumed for VAT purposes into that supply (paragraphs 46 to 52) …

(3) that as the Appellant, although not itself an insurer, was able to procure the additional insurance cover for its customers by making use of the open offer by Norwich Union to provide cover to all of the Appellant's customers meeting the eligibility criteria and to assume the risks insured, its supplies were within the wider meaning of "insurance transactions" for the purposes of Article 13B(a) of the Sixth Directive …

(4) that, if relevant, the Appellant would have qualified as being an insurance agent for the purposes of the Article, as it has the benefit of Norwich Union's undertaking to insure its customers, its relationship with the particular customer was legal because it was legally committed by the advertisement to provide the customer with additional insurance, and its role was structural because of the arrangements by which insured and insurer were brought together…"

46. We now consider separately each of the issues for determination in the appeals and will refer to the arguments of the parties separately under each heading. Issue (1) is dealt with first since if the appeals succeed in whole or part then it is necessary to consider Issues (2) and (3). In order to be successful overall, in our view the Appellants have to prevail in all three Issues but pass Issue (1) first. The parties requested a decision in principle on the appeals, leaving the amounts of the applicable assessments to be determined at a later date.
47. Reasons for decision – Issue (1) –"was something done for a consideration in addition to the basic cost of the car ?

The arguments

48. For the Appellant Mr Peacock argued that Ford provided the benefit of motor insurance underwritten by the RAC and Norwich Union to its customers. Although in each case the insurance was described as "free", he maintained this was not on analysis the correct treatment for VAT purposes. Instead, he submitted what must be identified is whether the car purchaser and Ford had expressly, or by objective implication, agreed that some part of the price paid by the purchaser was attributable to the insurance.
49. He relied upon two judgments to give weight to his assertion. First Kuwait Petroleum ECJ and Kuwait Petroleum HL and secondly Peugeot paragraphs 84 to 95 of the judgment of Blackburn J where the two Kuwait Petroleum judgments were quoted.
50. In the appeals there were three primary factors to be taken into account. First, the particular value of the insurance to a young driver of a Ford car who might has difficulty in obtaining insurance cover elsewhere; secondly, it was the customer who bore the cost of the insurance; and thirdly the price of the car varied accordingly to whether "free" insurance was offered on the model covered. Mr Peacock maintained it was inconceivable that the purchaser could have thought the insurance was indeed "free" and not supplied for some part of the price paid for the car.
51. It was therefore argued that Ford made the insurance available to its customers in return for a payment made by the customer. He quoted from the judgment of Chadwick LJ at paragraphs 8 to 18 in the case of Littlewoods Organisation Plc v CCE [2001] SC 1568 and the cases cited there to support that there was a supply for VAT purposes.
52. On behalf of Customs, Mr Anderson contended that no part of the price paid for the car was consideration for the supply of any additional service. He pointed out that the insurance and breakdown coverage was advertised as free. Further, the same amount is payable for the car, regardless of whether the insurance or breakdown cover was taken up. The customer did not have a choice to pay less in total in return for not receiving the insurance or breakdown cover.
53. The price paid for the car did not, therefore, include a component representing the value of the free insurance. He pointed out that it was also relevant to note that the cash value of the insurance or breakdown coverage offered was minimal in comparison to the value of the car. Its value was clearly not part of the bargain struck by the end-user or finance provider. It was quite clear that when agreeing to pay a certain amount to the Appellant's dealers, customers did not intend to pay any amount at all for insurance or breakdown cover.
54. In the event that the customer decided to take up the offer of free motor insurance, for example, he or she was required to complete a "Customer Declaration" which is headed "Ford Free Insurance Programme (UK) – 1 year". The fact that this is headed "free insurance" and no reference is made to insurance in the contractual documents relating to the purchase of the car indicated that no part of the consideration was attributable to insurance at all.

Conclusion on the first issue

55. We consider it is necessary to divide the chronology of the facts relating to the motor insurance into two periods. The first period related to the circumstances of the free insurance offered up to 23 January 2004 and the second thereafter. We will refer to each in turn.

The period up to 23 January 2004

56. The position with reference to the provision of insurance was the same under both the arrangements with Guardian Direct and Norwich Union. Sales of motor cars with within Ford VAT group or through franchised independent dealers in certain car lines included motor insurance supplied by the above insurers for no additional payment by the purchasers. Ford paid the insurers under the 1998 Agreement and subsequent amending documents by way of a lump sum on a regular basis.

After 23 January 2004

57. The position changed. We accepted the evidence of Mr Sell who works for Norwich Union in this respect. He told us that from 1998 to the hearing (eight years) there were three main costing models involved in his company providing Ford with the right for their customers to obtain insurance at the time of the purchase of the vehicle. They were as follows :

(1) From 1998 to 2001 the insurance costs were estimated. Norwich Union used "best knowledge" of a existing portfolio of risks to estimate the cost of providing insurance for a certain model and a specified age group. Minimal customer information was collected and no "actual" premium calculated. This did not deliver the required returns for Norwich Union and was uneconomical. Indeed, Norwich Union lost money.

(2) Postcode and age mix – from 2001 until the end of 2003 this model involved Ford agreeing a volume of cars and an age and postcode matrix of the customers would be produced for a total premium. The invoice would then be produced at the end of the programme reflecting the actual age and postcode, which might possibly change the unit price. In effect, a premium was calculated on the basis of "average" customer profiles for models/postcode/age. This model again gave rise to problems and a different approach was adopted.

(3) Actual risk pricing – under this model brought into force in January 2004 each customer has to call the FordInsure (Norwich Union) call centre.

Norwich Union then assessed if the customer (and spouse) were eligible and took full insurance details from the customer on the level of cover Ford had communicated it wished to provide to customers. This generated a particular price which was later communicated to Ford, the insurance documents were sent to the customer and the amount of premium was paid to Norwich Union by Ford. With effect from April 2005 when a new Administration Agreement between Ford and Norwich Union came into effect as a result of Financial Services legislation, Ford and their dealers no longer bound Norwich Union and acted merely as introducers. From January 2004 premiums were calculated on actual price and risk. If insurance risks covered extra areas then the customer had to pay the additional premiums.

58. How, therefore, are these facts applied judicially ?
59. Guidance is given to us in the judgment of Blackburn J in Peugeot. He referred to the judgment of Laddie J in Kuwait Petroleum v CCE (High Court [2001] STC 62 at paragraph 90 as follows :

"What emerges from Laddie's decision, with which I have no reason to disagree, is that a factual investigation has to be undertaken to determine what both sides of the relevant transaction in which the issue of a disposal free of charge arises thought they were agreeing to. Further, in undertaking the enquiry 'there is a limit to the reasonable gullibility of ordinary members of the public', in that, in some promotions (such as 'buy one, get one free') reasonably-minded members of the public, giving the matter any thought, would not seriously think that half was in fact free, but would know that the price being paid was in reality apportioned over the goods as a whole, whereas, in others, the facts would justify a belief in the purchaser that the goods in question were indeed being given away free."

60. Blackburn J also stated at paragraphs 86 and 87 in Peugeot

"The test for deciding whether disposal is free of charge was discussed by the Court of Justice in Kuwait Petroleum (GB) Ltd v Custom and Excise Comrs (Case C-48/97) [1999] STC 488, [1999] ECR 1-2323. In that case, Kuwait Petroleum operated a sales promotion scheme whereby customers buying fuel at service stations were offered vouchers which they were entitled to exchange for goods listed in a catalogue, referred to in the judgment as "the redemption goods". The price of fuel was the same whether or not the customer accepted the vouchers. Kuwait Petroleum which had deducted input VAT on the redemption goods purchased by it, was assessed to output VAT on all redemption goods supplied to the customers where the cost of the item exceeded £10. The assessment was made on the ground that the redemption goods had been supplied otherwise than for a consideration and were therefore chargeable to VAT by virtue of para 5 of Sch 4 to the 1994 Act…"

In its judgment, the Court of Justice said this :

"26. Goods are supplied "for consideration" within the meaning of Art 2(1) of the Sixth Directive only if there is a legal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods supplied.

27. It is for the national court to inquire whether, at the time of purchasing the fuel, the customers and Kuwait had agreed – through the dealers, as the case may be – that part of the price paid for the fuel, whether identifiable or not, would constitute the value given in return for the Q8 vouchers or the redemption of goods. There is nothing, however, in the documents before the court to suggest that there was in fact any such reciprocal performance by the parties concerned …"

61. Applying these principles, we decide that up until 23 January 2004 as purchasers could not know what the free insurance involved it would therefore be reasonable for them to assume that the insurance element was indeed free. After the above date, the purchasers became aware there was an insurance element because of the enquiries that were made with them direct before the cover notes were issued. Therefore, the insurance element in the transaction became a separate consideration because the purchasers of the cars became aware that the price being paid was in reality apportioned over the cars as a whole applying Blackburns J's guidance.
62. For the same reason, we also find that the free RAC cover element in car sales did not form a separate consideration. Individual purchasers could not know what was involved and would believe the breakdown cover was indeed free and included in the overall price.

Reasons for decision – Issue (2)

Is the insurance-related supply exempt in VAT terms or not ?

63. As we have already found that there was no separate consideration for the insurance up until 23 January 2004, we now only have to consider this Issue (2) as it relates to the situation after that date.
64. This question was looked at in detail by the tribunal in the Lindsay decision. The Counsel in that case were the same and we found that the arguments put forward by both were along the same lines in these appeals.
65. Mr Anderson on behalf of Customs contended that even if the Appellant did make a separate supply of insurance or breakdown cover or related services, the Appellant did not supply the insurance or breakdown cover within the meaning of the Group 2 of Schedule 9 exemption. The Appellant did not, in the circumstances of this case, hold a block policy. Where there was a block policy, the Appellant might itself provide insurance as principal because it held a policy itself, part of the benefit of which it offered to customers. But in the circumstances of these appeals, the Appellant merely facilitated the provision of insurance, and did not in fact provide any insurance or breakdown cover itself. The relevant insurance and breakdown cover services were in fact supplied by Norwich Union or RAC respectively.
66. He continued by asserting that to the extent that the insurance exemption did not in fact extend to intermediaries, the Appellant was not an intermediary. Ford did not provide the services of an insurance or breakdown cover broker or agent and hence did not supply services within the meaning of Article 13B(a) of the Sixth Directive.

The Appellant offered nothing at all in relation to insurance or breakdown cover other than to pay for it, thereby avoiding the need for the end-user to pay for it. It offered no services at all in relation to the insurance or breakdown cover. It did not, as suggested by the Appellant "underwrite" the insurance or breakdown cover. It did not provide the insurance itself nor did Ford perform the services of a broker. It merely paid Norwich Union and RAC for the insurance. In no way did the Appellant perform "related services" such as those provided by insurance brokers and insurance agents.

67. For Ford, Mr Peacock argued that the Appellant supplied insurance to its customers or, at the very least, supplied insurance related services within Group 2 as interpreted in light of the proper meaning of Article 13B(a) of the Sixth Directive.

Conclusion

68. In so far as it related to the period from 23 January 2004 only, we agree with Mr Peacock for the following reasons.
69. Schedule 9, Group 2 of the 1994 Act (and see also Article 13B(a) of the Sixth Directive) covers both the supply of insurance such that any transaction whereby a promise of insurance cover is made is exempt. The exemption therefore covers the provision of insurance by Norwich Union to each customer and the promise by Ford to each customer that Norwich Union will provide insurance to them.
70. Both Counsel relied on principles found in the judgment of the Court of Justice in Card Protection Plan Ltd. Customs submission in this Issue (2) has in our view placed too much emphasis on the need for a "block policy" as featured in the facts of Card Protection Plan (see paragraphs 20, 21 and 22 of that judgment) as a precondition for supplies of a body which is not an insurer constituting insurance transactions within the exemption in Article 13B(a). As referred to in the Lindsay decision, Ford, although not itself an insurer was able to procure the additional insurance cover for its customers by making use of the of the open offer by Norwich Union to provide cover to Ford's customers meeting the eligibility criteria. We form the view that these supplies were within the wider meaning of "insurance transactions" for the purposes of Article 13B(a) of the Sixth Directive. Effectively, as we have found Ford were "introducers" as far as the insurance transactions between Norwich Union and Ford's customers were concerned.
71. Therefore, we are of the opinion that Ford does supply insurance related services within Group 2 as interpreted in light of the proper meaning of Article 13B(a). In support of this we would also refer to the analogous situations in Peugeot (at paragraphs 81-82 inclusive) and Lindsay (paragraphs 52-58 inclusive) which are equally applicable to these appeals.

Reasons for decision in Issue (3)

Is what would otherwise be an exempt supply subsumed into a standard rated supply ?

72. Again, in view of our conclusion to issue (1) we will only consider the situation with reference to what occurred from 23 January 2004 and not before.
73. In considering this final issue both Ford and Customs relied on principles found in paragraphs 28 to 31 of the judgment in Card Protection Plan but to different effect.
74. The principles were summarised in paragraph 46 of the Lindsay decision as follows :

" … In the first place regard must be had to "all the circumstances" in which the transaction takes place (paragraph 28). The "essential features of the transaction must be ascertained", looking at the supplies made by the taxable person to a "typical customer" (paragraph 29). Second, every supply of a service "must normally be regarded as distinct and independent" (paragraph 29). Third, that which comprises a "single service from an economic point of view must not be artificially split" (paragraph 29). Fourth, there is a single supply where "one or more elements are to be regarded as constituting the services which share the tax treatment of the principal service" (paragraph 30). Fifth, a service "must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a better means of enjoying the principal service provided" (paragraph 30). Last, the fact that a single price is charged is not decisive; account must be taken of the customer's intention (paragraph 31)."

We accept that guidance.

Ford's argument

75. Mr Peacock contended that there were various factors which influenced making the insurance supply a separate and distinct supply. They were :

(1) the insurance, in many circumstances, is attractive particularly to young drivers irrespective of the merits of the car because otherwise the insurance would be too expensive individually.

(2) it is the customer who is insured not the car

(3) since January 2004, the insurance covers the spouse of the customer who is not the purchaser of the car

(4) the policy can be transferred to a different car

(5) the customer is, since January 2004, required to telephone Norwich Union to take out the insurance and this is done before or after the car is purchased

(6) not all customers take up the insurance

76. He referred to paragraphs 29 and 30 of the judgment in Card Protection Plan and asserted that the correct approach when considering this issue was to look at all the essential features of the transaction and decide whether there were two separate and distinct supplies or one element which was "ancillary" to another "principal" element such that there is, on analysis, only one supply the tax treatment of which is governed by the principal element.
77. In the present case Mr Peacock argued there could only be one answer: the supply of the "free" insurance was separate and distinct from the supply of the car. This was so because the "essential features" of the transaction were that the customer was purchasing a car (for which he gets good title in perpetuity, or at least as long as the car lasts) and separately insurance (for the period of the policy only); the customer was not purchasing an insured car – i.e. a chattel that has the inherent quality of 'being insured'.
78. More over he said the treatment of the provision of the "additional" insurance as a separate supply had the effect that what would otherwise be a taxable supply was not subsumed into an exempt one and that what would otherwise be an exempt supply was not subsumed into a taxable one. That avoided a result that would distort the system of VAT: he quoted McCullough J in Leighton v CCE [1995] STC 458 at 463h-464b, 465f-466d as an authority for this argument.

Customs argument

79. Mr Anderson pointed out that the insurance promise was clearly part and parcel of the overall sale transaction.
80. He said that the Court in the Peugeot case held that it was clear that the insurance element of the supply was ancillary to the supply of the car, and it would be fanciful to regard the promise to procure insurance for the end-user at no cost to him had a real existence independent of the supply of the car, or that it was "an aim in itself" rather than "a means of better enjoying the principal service supplied", namely that of the supply of the new car.
81. Since this was the case, he stated even if some element of the price paid by the end-users or by independent dealers or finance houses was referable to the provision of an insurance related service, the amount so attributable fell to be treated for VAT purposes in the same element as the principal element of the supply in this case, at the standard rate.
82. Similarly (he argued) in this case in asking why the purchasers entered into the transactions in question and what its essential feature or dominant purpose was, the only reasonable answer can be buy a car. The acquiring of free insurance cannot sensibly be said to be an aim in itself in any respect. Further, no element of the contractual arrangements suggests that any portion of the amount paid is attributable to insurance or breakdown cover.

Conclusion

83. As in Lindsay, we place reliance of the application by Blackburn J of the Card Protection Plan in the Peugeot decision. We quote from paragraph 106 of the Peugeot decision.

"Subject to one matter, there is nothing to suggest that, when Peugeot/Citroen sold cars (whether to end-users direct or to independent dealers and finance houses in other cases), insurance was dealt with as a wholly and distinct matter, The insurance "promise" was clearly part and parcel of the overall sales transaction. In my view it is reasonably obvious, first, that a single supply was involved and second, that the insurance element of the supply (i.e. the provision of the promise to procure insurance for the end-user at no further cost to him) was ancillary to the supply of the car. It is wholly unreal to suppose in the context of this transaction that the insurance promise could have a real existence independent of the supply of the car or, to use the word of the Court of Justice in Card Protection, was "an aim in itself" rather than "a means of better enjoying the principal service supplied", namely, the supply of the new car (I should add that the principle in Card Protection applies as much to the supply of goods as to the supply of services – see Hartwell [2003] STC 396 at [30] – and, I would add to a mixed supply of both goods and services)"

84. We distinguish the appeals from the decision in the case of Lindsay where the tribunal expressly relied on (i) the absence of any description of the insurance at issue in that case as "free" (paragraph 47); (ii) the additional insurance was separately identified in the contractual documentation (paragraph 50); and (ii) the dealer was accountable to the insurance company for the premium (paragraph 50), as features which rendered the supply of extended insurance as a supply separate to the car.

None of those features exist in the present case. The only reason why the Lindsay appeal was successful was because of these factors.

85. Applying the principles laid down in paragraphs 28 to 31 of the Card Protection Plan judgment we have had regard to "all the circumstances" in which the transactions between Ford and its customers took place; the "essential features of the transaction must be ascertained", looking at the supplies made by the taxable person to a "typical customer". Finally, that which comprises a "single service from an economic point of view must not be artificially split".
86. We therefore agree with Mr Anderson that the supply of free insurance to customers cannot be in the circumstances of this case separate and distinct from the supply of the Ford cars. Since January 2004, the insurance exempt supply is subsumed into the standard rated supply for the reasons given. Ford fails at the last hurdle.

Decision

87. Our decision on the issues for determination in the appeals are:

(1) that the appeals lodged on 14 November 1997 and 23 November 2001 are dismissed. The assessment on 26 October 2001 is confirmed.

(2) that the claims by Ford for output tax refunds for RAC breakdown services extended for periods up to 1 July 2005 are dismissed.

(3) that the claims by Ford for output tax refund for car insurance (through Norwich Union) not specifically under appeal up to 1 July 2005 are dismissed.

Costs

88. Both parties asked for their costs in the event that they were successful.
89. In the light of our conclusions, we think Customs are entitled to their costs and we award costs in their favour. If the amount cannot be agreed, the question of costs should be referred back to the tribunal for a further direction.

Rodney P Huggins

Chairman

Release Date: 31 August 2006

Release Date: 13 March 2007

(on correction)

LON/1997/1559

LON/2001/1228