United Kingdom VAT & Duties Tribunals Decisions

20824

EXEMPT SUPPLIES – Exempt agreement between the Bank and the Post Office to provide insurance via a panel – Whether subsequent agreement between the Bank and Norwich Union to 'skew' the panel also exempt – Whether intermediation – Article 13(B)(a) of 6th EC Directive – VAT Act 1994 Item 4 Group 2 Schedule 9 – Appeal allowed

LONDON TRIBUNAL CENTRE

THE GOVERNOR & COMPANY OF THE BANK OF IRELAND Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: MISS J C GORT (Chairman)

MR K S GODDARD MBE

Sitting in public in London on 9, 12, 13 and 16-18 June 2008

Mr Roderick Cordara QC and Mr Edmund King of counsel, instructed by Herbert Smith LLP, for the Appellant

Mr Matthew Barnes of counsel, instructed by the Solicitor's Office, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

1. The appeal is against a decision of the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") contained in a letter dated 19 July 2006 ruling that the supplies made by the Appellant under the terms of a contract with Norwich Union Insurance Ltd ("Norwich") are standard rated services for the purposes of VAT.
2. The grounds of appeal are that the supply of services by the Appellant ("the Bank") under its contract with Norwich ("the Norwich Union contract") constitutes exempt services of an insurance intermediary under Item 4 of Group 2, Schedule 9 of the Value Added Tax Act 1994 ("the Act") and/or Article 13B(a) of the VAT Sixth Directive.

The Background

3. At all material times the Bank was a banking organisation based at 36 Queen Street, London. It was incorporated on 5 January 1972 and was registered for VAT on 1 April 1973. In 2003/2004, the Bank and the Post Office agreed to form a venture for the manufacture, among other things, of Post Office branded private car insurance, and insurance related products, which would be manufactured or procured by the Bank and sold to Post Office customers.
4. In pursuance of this venture a company called Midasgrange Ltd (also known as Post Office Financial Services which will be referred to as "POFS" throughout this decision) was established: it was owned by the Bank (through Bank of Ireland UK Holdings Plc) as to 50.01% and by the Post Office as to 49.99%. On 23 December 2003 the Bank, the Post Office, Bank of Ireland UK Holdings Plc and POFS entered into an agreement (the "Shareholders Agreement") regulating the management of POFS, their relationship with each other and certain aspects of the affairs of, and their dealings with, POFS along with several other contracts regulating the terms of the venture.
5. On 21 May 2004 the Bank and Bristol & West Plc (which, for the purposes of this appeal, will not in future be referred to separately) entered into an agreement with an unconnected company called BISL Ltd (which is referred to as "Junction") in connection with the provision of insurance intermediary services by the Bank to Junction (the "Bank-Junction contract"), which was amended on 31 March 2006. This contract was for the purpose of the referral by Bank to Junction of Post Office customers seeking insurance, in return for sales-based commission.
6. By various agreements, Junction supplied intermediary services to a panel of insurers ("the panel"), who competed with each other in quoting for the business provided by the Post Office customers: one member of the panel was Norwich. It was at all times accepted by the Commissioners that the intermediary services provided by Bank to Junction under the Bank-Junction contract are exempt from VAT as the services of insurance intermediaries pursuant to Item 4, Group 2, Schedule 9 of the VAT Act 1994.
7. The purpose for the Post Office of the arrangement was to expand its customer base through the provision of financial services products and the associated provision of intermediary services. It had an established customer base and network of branches, and the Bank agreed to pay commission to the Post Office via POFS in return for the Post Office and POFS introducing customers to the Bank. Under the terms of the contract, the Post Office was to act as an intermediary by providing access to, and introducing its customers to, POFS in consideration for commission from POFS (as set out in an agreement called the "Intermediary Agreement"). POFS in turn agreed to introduce the Post Office customers to the Bank, POFS acting as an intermediary between the Post Office and the Bank (documented in the "Manufacturing Support and Intermediation Agreement" ("MSIA")). The Bank agreed to provide Post Office customers with a full range of financial services products. As the Bank is not a regulated insurer, it agreed to source insurance through Junction who acted as an intermediary between the panel and the Bank.
8. Initially the arrangement did not prove profitable for either Bank or POFS, the average premiums and volume of sales achieved under the arrangement with Junction were much lower than Junction had predicted during the tender process resulting in lower commission rates than had been anticipated. Junction's costs, which were being paid by the Bank, exceeded the amount of commission Junction was due to pay to the Bank under the Bank-Junction contract and by August 2005 the Bank was losing money on every policy sold through Junction. It was therefore decided that the Bank-Junction contract should be renegotiated and ways of improving the arrangement had to be found.
9. It was decided that, in order to increase sales of motor policies, a "primary insurer" should be selected which would be the panel's main recipient of intermediary services. Details of this arrangement and its consequences will be set out below. An arrangement was made whereby Norwich was selected (again the reason for this choice will be set out below) to have the opportunity, where it did not originally provide the lowest quote, to undercut the lowest quote offered by another panel member (a process known as "flexing"). There was an advantage conferred on Norwich by means of the arrangement which became known as a "skewed" panel, and it is believed that this was the first example of such a skewed panel (see the evidence of Mr Blundell referred to at paragraph 39 below).
10. The issue for the Tribunal is whether the arrangement entered into between Bank and Norwich whereby Norwich received an enhanced opportunity to quote for the motor insurance business is exempt from VAT, or whether, as the Commissioners say, Norwich's enhanced opportunity to capture business is outside the proper scope of intermediation, and therefore is a standard rated service for the purposes of VAT.

The law

11. Article 13B(a) of the Sixth VAT Directive provides that the following shall be exempted from VAT by Member States under conditions which they shall lay down: "insurance and re-insurance transactions, including related services performed by insurance brokers and insurance agents."
12. The Act at Item 4, Group 2, Schedule 9 provides that the following supplies are exempt from VAT:

"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 re-insurance is finally concluded) to an insurance transaction or a re-insurance transaction; and

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

13. The notes in relation to Item 4 set out:

"(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 re-insurance of risks, of –

(i) persons who are or may be seeking insurance or re-insurance, and

(ii) persons who provide insurance or re-insurance;

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

(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 re-insurance, and

(b) a person who is or may be seeking insurance or re-insurance or is an insured person.

(7) Item 4 does not include –

(a) the supply of any market research, product design, advertising, promotional or similar activities."

14. It was not disputed that Article 13B(a) is properly implemented by Item 4, Group 2, Schedule 9 of the Act, nor that, to the extent that it is possible, the wording of the domestic legislation should be interpreted by the Tribunal so as to accord with the interpretation of the Directive as laid down by the ECJ, unless that would require distortion of the domestic legislation (as per Mummery LJ in Customs and Excise Commissioners v Civil Service Motoring Association Ltd [1998] STC 11). It was also not in dispute that the terms used to specify the exemptions provided for by Article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person.
15. The Tribunal was referred to the following authorities:-

JCM Beheer BV v Staatssecretaris van Financien (C-124/07)

Volker Ludwig v Finanzamt Luckenwalde (C-453/05)

Assurandør-Societetet, t/a Taksatorringen v Skatteministeriet [2006] STC 1842

Staatssecretaris van Financien v Arthur Anderson & Co (C-472/03) [2005] STC 508

Card Protection Plan v Customs and Excise Commissioners (C-349/96) [1999] STC 270

CSC Financial Services v Customs and Excise Commissioners (C-235/00) [2002] STC 57

Re Forsakfingsaktiebolaget Skandia (C-240/99)

College of Estate Management v Customs and Excise Commissioners [2005] STC 1597

Lister and Others v Forth Dry Dock Engineering Company [1990] 1 AC 546

WHA Ltd v Customs and Excise Commissioners [2004] STC 1081

Customs and Excise Commissioners v BAA Plc [2003] STC 35

Expert Witness Institute v Customs and Excise Commissioners [2002] STC 42

Century Life v Commissioners of HM Customs and Excise [2001] STC 38

Commissioners of HM Customs and Excise v Civil Service Motoring Association [1998] STC 111

Insurancewide.com v HMRC (20394)

Royal Incorporation of Architects in Scotland v HMRC (20252)

Morganash Ltd [19777]

Smarter Money v The Commissioners for HMRC [19632]

Teletech UK Ltd v The Commissioners of HM Customs and Excise (17572)

C&V (Advice Line) Services Ltd v The Commissioners of HM Customs and Excise (17310)

Curtis Edington & Say Ltd v The Commissioners of HM Customs and Excise (11699)

Countrywide Insurance Marketing Ltd v The Commissioners of HM Customs and Excise (11443)

Barclays Bank Plc v The Commissioners of HM Customs and Excise (6469)

Appropriate Technology Ltd v Commissioners of HM Customs and Excise (5696)

Donald Ford (Financial Services) v The Commissioners of HM Customs and Excise (2432)

Commissioners of Customs and Excise v Pippa-Dee Parties Ltd [1981] STC 495

Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588

Auto Lease Holland BV v Bundesamt fur Finanzen (C-185/01) [2005] STC 598 ECJ (5^th Chamber)

Lex Services plc v Customs and Excise Commissioners [2004] STC 73

HMRC VAT Manual VATINS5000-VATINS5900

Trader Media Group Ltd v The Commissioners for Her Majesty's Revenue and Customs LON 2006/0937 (unapproved version)

Ford Motor Company Ltd v HMRC [2007] EWCA Civ 1370

Lubbock Fine & Co v Customs and Excise Commissioners [1994] STC 101

MacGillivray on Insurance Law Chapter 36-70

Commissioners of Customs and Excise v Redrow Group plc [1999] WLR 408

Commissioners of Customs and Excise v Robert Gordon's College [1995] STC 1093

The facts

16. A large number of agreed bundles were provided by the parties and three witnesses were called on behalf of the Bank: Mr Robert Andrew Proudman of R3 Holdings Limited, Mr Gordon Steven Willins, Director of Finance of Norwich, and Mr John Giles Blundell, Managing Director of Sterling Insurance Group.

The agreements

17. The agreement between Norwich (which, in the agreement itself is referred to as "NUI") and the Bank (the "Norwich Union contract") was drawn up and dated 31 March 2006. Norwich Union Insurance Services Ltd ("NUIS") and Bristol & West Plc ("B&W") were also parties but will not be separately referred to in this decision other than where they occur in quoted passages of the agreement. The agreement was amended and it is the amended agreement dated 12 May 2006 which is cited here. In the preamble reference is made to the Shareholders' Agreement, to the establishment of POFS and to the Junction Agreement.
18. The purpose of the Norwich Union contract is stated to be: "The Bank wishes on the terms and conditions contained in this Agreement to appoint NUI as the primary insurer and/or provider of Motor Insurance and NUIS to provide, or procure the provision of, Add-On Products … marketed, offered and distributed by or on behalf of PO (the Post Office)". Norwich is described as an authorised insurance company which is agreed to be the primary insurer of motor insurance marketed, offered and distributed by or on behalf of the Post Office and Norwich Union Insurance Services Ltd is described as an authorised insurance intermediary.
19. The preamble further states that Bank have agreed to procure that Junction will provide the Junction Support and have further agreed to work with Junction in the creation and refinement of the panel. The agreement continues:

"NUI and NUIS understand and are entering into this Agreement on the basis that the Bank and B&W have carried out all necessary steps to ensure that this Agreement can be entered into without breach of, or interference with, any existing contract that B&W, the Bank, Midasgrange, PO, or any of their Associated Bodies, have with Junction.

"NUI and NUIS are entering into this Agreement on the understanding that the Bank Companies will procure the management and operation of the Panel by Junction pursuant to the Existing Junction Agreement and the Conversion Rate in Schedule 2 is predicated on the Panel being managed and operated on this basis."

By Clause 3 the agreement provides inter alia that no motor insurance shall be marketed or offered or sold by any insurers other than Norwich or a panel insurer. NUIS is given exclusive right to provide or procure the provision by a third party of breakdown cover and legal expenses cover as may be marketed, offered or sold alongside a policy of motor insurance under the agreement. It is given exclusive right to procure the provision by a third party of any additional products which would compete with the breakdown cover. Clause 3 is a lengthy clause, and under its terms the Bank agrees to procure that each party in the chain of supply, namely the Post Office, POFS and Junction, shall in effect comply with the terms of the agreement, the Bank having separate contractual arrangements with all the parties. The only agreement to which the Bank is not party is the agreement between Norwich and Junction.

20. Clause 5 relates to underwriting and provides inter alia that:

"5.1 Subject to Clause 3.5, the Bank Companies shall procure during the currency of this Agreement that the Panel is established and operated by Junction in accordance with inter alia the NUI Net Premium Flexibility Rules, in terms of which, where a risk is quoted for by NUI and a Panel Insurer, NUI may at its option flex NUI Net Premium downwards to become the cheapest quote so as to ensure that such risk is offered to the potential Policyholder by NUI rather than the Panel Insurer."

Also by Clause 5 Norwich express an intention that, where it is offered the opportunity to quote for a risk pursuant to the agreement, it shall offer the cheapest Net Premium quoted for that risk by Norwich and the panel on not less than x% and not more than y% of the total number of occasions where it is so offered the opportunity to quote.

21. Clause 7 is headed 'Panel Management'. By that Clause the Bank agrees that a new Panel Insurer may only be admitted to the Panel with the prior written consent of Norwich other than where the number of Panel Insurers falls below five.
22. By Clause 7.1 the Bank agrees to procure that Junction shall operate the Panel in such a manner as shall invite competing net premiums for each person seeking a motor product. Clause 7.1.6 of the Norwich Union contract provides as follows:

"Subject to Clause 3.5, where NUI Net Premium offered by NUI in respect of a risk (whether or not that NUI Net Premium has been flexed downwards through the application of the NUI Net Premium flexibility rules) is cheaper than the Net Premium of all other Panel Insurance for that risk, Junction shall offer the NUI Net Premium to the potential policyholder."

This is an important clause because by it, although the contract is between Norwich and the Bank, it is Junction who are bound to offer the NUI Premium to the potential policyholder. Junction is the Bank's sub-contractor, and when a policy is offered to the customer by Junction, Junction is acting on behalf of the Bank, but the source of authority is from Norwich to Junction. Under Clause 7.3 it is provided that the Bank shall procure that Junction shall at all times exercise due skill, care and attention in performing its obligation under the Existing Junction Agreement, it being the Bank who pays Junction.

23. By Clause 8, headed 'Support', the Bank agrees to procure that Junction performs the Junction Support in accordance with the Junction Performance Level.
24. Clause 13 is headed 'Financial Arrangements' and provides that:

"… the parties agree that, in consideration (i) of the Bank Companies exercising in favour of NUI the Bank Companies' discretion, under the Existing Junction Agreement, concerning the choice of Panel member to be nominated as primary insurer with the objective of maximising the number of Motor Policies issued to PO customers that are underwritten by NUI (rather than by other Panel Insurers) and (ii) of the performance by the Bank Companies of the several activities required to be undertaken by the Bank Companies under this Agreement in furtherance of that objective, the Bank Companies shall be entitled to receive (commission) in the circumstances set out in Schedule 2, the various commissions expressed to be payable to the Bank Companies in Schedule 2, and the Parties accordingly agree to the provisions contained in that Schedule 2 concerned with the computation and payment of the aforementioned commission …"

It is not necessary to set out the details of Schedule 2, which is extensive, but it provides inter alia that the Bank has an absolute discretion to determine the price paid by the policyholder. Also, under paragraph 3 the amounts payable to Norwich are expressed to be that, in respect of each Norwich motor policy sold, Norwich shall be paid the 'NUI net premium' and all Insurance Premium Tax payable in respect of that motor policy. These amounts shall be remitted directly to Norwich by Junction under the terms of the Junction Support Agreement.

25. Paragraph 7 of Schedule 2 refers to basic commission, and states: "The Basic Commission for Motor Policies written in each of the first two Contract Years shall be £x per motor policy for twelve months of cover under such Motor Policy." It was Norwich's agreement to these payments which helped secure its position on the skewed panel. Paragraph 8, "Enhanced Sales Commission", provides:

"NUI has paid pursuant to Paragraph 8.1, and shall further pay pursuant to paragraph 8.2, an Enhanced Sales Commission to B&W as follows:

8.1 £Y on or before 7 April 2006; and

8.2 £Z following agreement being reached between NUI and the Bank Companies on the Marketing Plan with such £Z being payable in such tranches and at such times as B&W shall notify NUI in writing provided that not more than £½Z thereof shall be payable before 31 December 2006."

9. Incentive Commission"

On or before 7 April 2006 NUI paid to B&W a non-refundable Incentive Commission of £Y+Z. This was paid pursuant to the initial agreement between Bank and Norwich. The Schedule provides for a further commission payment to be paid to the Bank by Norwich which is called an "Aggregate Initial Further Commission", and is calculated according to a table set out in the agreement. The final commission is a Profit Commission, which Bank is entitled to, subject to various calculations set out in the Schedule.

26. The agreement provides for its termination by Norwich or NUIS on service of written notice subject to various preconditions, including the termination of the Junction Support Agreement, again subject to certain preconditions, including, at Clause 19.4, that the Bank Companies agree to consult with Norwich and NUIS in relation to any amendment proposed to be made to the Existing Junction Agreement, and various conditions relevant to any such proposed amendments. Clause 19.9 provides that NUI and NUIS shall have no right to terminate the agreement on the basis of the termination of the Junction Support Agreement if a replacement service provider is agreed or determined. Clause 26 provides transition provisions in the event that the Existing Junction Agreement is terminated.
27. By Clause 28.9 POFS, the Post Office and any associated body of Norwich or the Bank are entitled to enforce any provisions of the agreement which are expressed to be for its benefit.
28. The next relevant part of this agreement is to be found in Schedule 4 which is headed 'Junction Support'. This provides inter alia that Junction shall provide a United Kingdom based call centre, that it shall handle applications for motor products made by telephone or via the internet, and that it shall provide a first notification of loss service in the event of a policyholder having to report a claim under a motor product. The relevance of this particular Schedule is that it shows that the Bank exercises a degree of control over Junction, as it does over the Post Office and POFS.
29. It is relevant that what the Bank is bound to do, namely to use all reasonable endeavours to procure that Junction shall collect the retail motor product price in respect of all motor products in specific ways, is, in fact, the same as that which Junction is obliged to do under the terms of its contract with Bank, which is treated by the Commissioners as exempt.
30. There had been an agreement between the Bank and Junction made on 21 May 2004 which was amended and restated on 31 March 2006; this renegotiated agreement was fundamental to the setting up of the skewed panel arrangement with Norwich. The preamble provides that Junction has entered into agreements with insurers for the purpose of providing to them insurance intermediary services under the terms of such agreements with "the intention of facilitating the arrangement and administration of policies of insurance underwritten by insurers in order that such policies of insurance may be sold to customers." It refers to the arrangement between the Bank and the Post Office through POFS and to the fact that the Bank wishes to be able to offer a policy of private car insurance and insurance related products to customers of the Post Office pursuant to the arrangements between Bank and the Post Office by providing intermediary services to Junction.
31. Under the definition section the "primary insurer" is expressed to mean an insurance company on the Junction Panel which is nominated by the Bank to be the 'Primary Insurer'. It was this provision for there being a Primary Insurer which was the principal change to this contract and by which the agreement between Bank and Norwich was incorporated into the arrangements between Bank and Junction. In addition to the incorporation of this term, the commission paid to Junction was renegotiated. It is relevant to note that, under Clause 32.1, of this agreement third party rights refer to clauses which confer a benefit on the Post Office, and which are intended to be enforceable by the Post Office. By Clause 32.3 there is reference to clauses which confer a benefit on POFS and are intended to be enforceable by POFS. This is an extensive contract but we do not propose to set out its specific terms. This agreement was varied again in 2007, but those variations are not relevant.
32. When the Bank and the Post Office first entered into an agreement there was a series of agreements between the other parties. One such was the Shareholders' Agreement which was initially entered into on 23 December 2003, but which was subject to various amendments and the version we saw was dated 30 July 2004. This agreement was between the Post Office, the Bank, the Bank of Ireland UK Holdings Plc and POFS. There was the Intermediary Agreement drawn up between the Post Office, POFS, the Bank, Bristol & West PLC and Bank of Ireland Personal Finance Limited and there was also the MSIA which was drawn up between POFS, the Post Office, the Bank, Bristol & West PLC and Bank of Ireland Personal Finance Limited. This latter agreement was dated 19 March 2004 and it governs the supply by POFS to the Bank. By this agreement the Bank contracts to support the Post Office products, a function which was later sub-contracted to Junction in respect of motor insurance. This contract by Schedule 2 also envisages the possibility of a third party provider. It is in effect a pre-cursor of the Bank-Junction contract. This is an extensive contract but it is not necessary to set out the terms.
33. An agreement between Norwich and Junction was drawn up dated 31 March 2006, which was amended on 22 May 2006. By it Norwich agreed to grant a delegated authority to Junction to act as its agent in the sale of motor products to the customers of the Post Office. The agreement refers to the "Existing Junction Agreement" and the "Existing Scheme Agreement", the latter being the original agreement between Norwich and Junction relating to the panel. The Post Office Agreement is also referred to. By Schedule 2 of this agreement Junction is authorised by Norwich to provide it with quotations for motor policies and to bind Norwich Union to its motor policies. It is also authorised to draw up, issue and despatch Norwich motor policies and associated documentation. By paragraph 2 of Schedule 3 it is provided that Norwich pays no remuneration to Junction in consideration of Junction performing its obligations under the agreement, but nothing in that clause shall limit any right Junction has as against the Bank to the payment of any sum under the existing Junction Agreement. By paragraph 6 of Schedule 3 Junction is responsible as agent for Norwich for the collection and receipt of the price for cover under the policies. Paragraph 7.1 provides: "Prior to the Collect Basis Date, Junction shall pay the Net Motor Premium and IPT in respect of NUI motor policies to NUI in accordance with the terms of the Existing Scheme Agreement as if such NUI motor policies remained within the scope of the Existing Scheme Agreement, but for that purpose only." This paragraph reflects paragraph 3 of Schedule 2 of the Norwich Union Contract.
34. A letter dated 22 May 2006 written by the Bank to the Post Office, POFS, to Bristol and West Plc and to the Bank of Ireland Personal Finance Ltd sets out the terms of an agreement between the various parties, and refers to the Norwich Union contract. It is noted in the letter that the Post Office, POFS and the Bank Companies have held a number of discussions relating to various contractual obligations of the Bank Companies on the basis of the Norwich Union contract and also under the MSIA. The letter continues:

"We confirm that following these discussions, the Parties wish to record their understanding of the matters agreed on the terms of this letter. Accordingly, in consideration of the mutual promises contained in this letter and the payment of each party of £1 to each other party … the parties hereby agree …"

There then follow various matters which the parties agree in respect of each of the above, the purpose being to ensure the compliance of the various parties.

The evidence

35. Andrew Proudman is the company secretary and a director of a company R3 Holdings Ltd which is part of a group of companies that provide consultancy services in the financial services sector. He has particular involvement in the insurance and banking areas. Mr Proudman provided consultancy services to POFS and was involved in negotiation on behalf of the Bank and POFS of the Norwich Union contract. When it was realised that the existing scheme was running at a loss, Mr Proudman was consulted. He had not been involved at the time the original arrangements were put in place.
36. At the hearing both parties described the original arrangement as being a chain running from the customer to the Post Office, to POFS, to the Bank and to Junction. We doubt whether this is properly described as a chain, albeit there are links between those parties, they are not linear. This may however be of no significance. Mr Proudman described Junction's role as being that of an intermediary broker who is used to manage the panel and to improve the customer's experience when obtaining an insurance quote. It achieved its function through discussing with the customer his/her insurance requirements and collecting the best deal from the panel of insurers. The panel arrangement is beneficial for customers in that having a number of insurers is more likely to result in a more competitive quote. Under the original arrangement the fixed costs of Junction were passed on to the Bank. In the event, Junction's costs exceeded the amount of commission Junction was due to pay to the Bank under the Bank-Junction contract, and this situation clearly could not continue.
37. The aim of renegotiating the contract with Junction and choosing a primary insurer was not only to reverse the losses being made, but also to increase the sale of motor policies by improving premium quotes and insurance terms offered to customers by the panel, and consequently increase the commission generated by the Bank. It was believed (and subsequently turned out to be the case) that the primary insurer itself would achieve more introductions than it otherwise would have done, and it would be able to offer better terms, and would therefore underwrite more policies, than any other panel member. By being given the opportunity effectively to "undercut" quotes offered by other panel members (the flexing referred to in the Norwich Union contract) it would provide lower quotes and a better deal for customers, and would also foster competition amongst panel members. The arrangement became known as the provision of a "skewed" panel.
38. Mr Blundell was put forward as an expert witness in matters of insurance. With regard to skewed insurance panels his evidence was that the particular panel in this case was the first example of a skewed panel, but that they have become increasingly used by non-insurance businesses and retailers. This is because such businesses want to have more say in what their customers receive in terms of the types of products offered by the insurers on their panels and the pricing of those products. In a straightforward panel arrangement there is typically no direct relationship between the panel and the business when a broker is used to manage the panel. The absence of a direct relationship between the business and the panel means that if the business wanted to make even a small change to the products it offers for sale, such as extending the validity period of quotes, this would be a lengthy process involving the broker consulting each member of the panel, with no certainty of outcome. In a skewed panel there is a direct relationship, and therefore direct communication, between the primary insurer and the business. In the present case it is the bank that has a direct contractual relationship implementing the skewed panel with Junction who is the panel manager. It was Mr Blundell's opinion that under a skewed panel arrangement, the business (in this case, the Bank) is providing exactly the same service as in the previous type of arrangement: the intermediary process does not change but there is now an opportunity for one panel member to undercut the others; each insurance provider is still given the opportunity to quote to the customer, and the customer is still offered the best quote and has a choice whether to accept that quote or not. The mechanics of offering that quote are varied so that there is a primary insurer on the panel, but in all other respects they are the same, save that the terms offered to the customer have generally improved.
39. The way the system operated previously was that when a customer had provided his details and requirements to Junction, all the panel members would submit a quote (if they wished to tender for the particular business), the lowest of those quotes would appear on the computer and that insurer would then underwrite the particular business. The arrangement with Norwich entailed Norwich setting out for Junction the types of motor policy it was willing to underwrite and the price parameters within which it would offer those types of insurance (this was called the 'Norwich Union footprint'.) It was anticipated that Norwich would be covering up to z% of all the motor insurance business acquired by Post Office customers. The effect of the skewed panel was that once Junction received an application from a Post Office customer, where the lowest price drawn up by the computer was not that given by Norwich, then, if Norwich's parameters allowed, it would automatically undercut the price offered by an agreed margin. Those at Junction would not know at this stage whether Norwich was getting the business as a consequence of price management, or whether it had simply made the lowest offer as a member of the panel, nor at this stage would that be known to Norwich itself or the other panel members. Norwich was only entitled to change its parameters every month. Norwich has a right of audit to ensure that the rules that they had preset have been followed. They do not know who the insurer is that they have undercut. Other panel members will eventually know what the lowest price for the business quoted was, but they will not know which company won the business. Under the arrangements between Junction and Norwich, Norwich get no more information than any other insurer, and there is no change in the information given to other panel members. However the Bank accounts to Norwich for policies sold in that Norwich are informed that so many thousand policies have been sold by insurer A, B, C or D in order to enable correct calculation of the additional commission payments due to Norwich under policies provided by the panel. It was not accepted by Mr Willins that the new system represented an opportunity to research its competitors' market, as had been suggested to him by Mr Barnes. He did not accept that the information gained could be used in a way akin to market research whose aim was to anticipate what the market would do in the future. In addition the benefits provided by the flexing arrangement could never be achieved by market research because of the multiplicity of factors which go to making up the price offered.
40. Norwich was chosen to be the primary insurer for a variety of reasons, in particular it was able to offer insurance policies at competitive prices, but more particularly, from the Bank's point of view, it offered the most attractive financial package. It agreed to front-load the commission payments it paid to the Bank in the sense that the payments would be higher in the earlier years of the contract and lower in later years. A five-year agreement was reached. Having an agreement that ran for five years enabled Norwich to offer more competitive quotes and a better deal for its customers, whilst the upfront payments enabled the Bank to recoup some of its earlier losses.
41. Prior to the Norwich Union contract, which was effective as from 10 January 2006, there had been 22 members of the panel. As at the date of the hearing there were some 17 members on the panel. Following the inception of the Norwich Union contract, and the effect appears to have taken place very shortly after 10 January, enquiries for motor policies almost doubled, and there was a 25% increase in the conversion rate from enquiries to policies sold. The new arrangement negotiated with Junction, whose main cost was the cost of the salaries of the people operating the call centre, was that the saving from any increased conversion rate would be reflected in a lower charge by them. This itself had the consequence that instead of a significant loss being made on each contract of insurance sold, a significant profit was made. The new arrangement also had the effect that not only Norwich wrote far more business, but so did all the other panel members.
42. It was not accepted by any of the witnesses that the driving force for the Bank in making the payment and other arrangements with Norwich that it did was to make more money simpliciter. Whilst this was a consequence of the new arrangement, all the witnesses agreed that the driving force was to sell more policies of insurance, because that brought the costs down, and it was only by offering policies at a more competitive price that business would increase and thereby profits increase. It is a feature of the Norwich Union contract that the Bank may terminate the contract if the conversion rate drops below x%; in 2005 the conversion rate had been less than y%. Some 70,000 policies were sold in 2005. The aim of the new arrangement was to sell between 750,000 and 1m motor policies within five years; at the time of the hearing some 530,000 policies had been sold. It was considered possible that the initial surge in enquiries after the introduction of the skewed panel was caused by advertising done by the Post Office at that time and the offer of cash back of £50 in respect of each policy sold. It was Mr Proudman's evidence that, because of the loss being made on each policy sold, and because people were aware that some restructuring was taking place, there had been a very hard effort made to sell the policies in the lead up to January 2006. However, graphs supplied in the course of his evidence by Mr Proudman showed that in April, June and December 2006 enquiries (that is call centre enquiries) dropped to almost the same level as 2005. In February 2008 there was a very steep rise in enquiries again dipping back in April, but not to the low level of 2005-6. The graph shows that the average level of enquiries in 2007 continued to be approximately double those in 2005. A further graph showed a significant increase in the volume of business from the internet during 2007. This was caused by two factors: an increase in the number of customers who purchased on-line, but also the Post Office had rolled out its in-branch sales programme whereby Post Office staff encouraged customers to buy on the spot. Sales from terminals sited in the branches were counted as internet sales.
43. Mr Proudman rejected the suggestion that it might have been possible for the Bank to have renegotiated its contract with Junction, since it was Junction's costs which had made the selling of policies unprofitable. His evidence was that there would have been a considerable penalty for terminating the Bank-Junction contract, although this had initially been thought of as the best way to proceed. Junction recognised the seriousness of the situation and were therefore willing to renegotiate the contract, it being in their interest as well as the Bank's because they were getting a charge per policy sold, so any increase in the number of sales, and particularly the increase of the conversion rate meant Junction could in fact make more money. Mr Proudman attributed 80% of the improvement which was made in the first two years since the implementation of the Norwich Union contract to that agreement and 20% to the reduction in the cost of Junction. Prior to the introduction of the skewed panel Norwich were writing about £2 to £3m worth of business, and, in the two years since, that amount had risen to £70m. Both Mr Willins and Mr Proudman described how price-sensitive motor insurance policies were, and how the fact that a more competitive price was offered was translated into an improved conversion rate, which was considered to be a consequence of the skewed panel. It was not accepted that the overwhelming driver of increased conversion rates was to be attributed to better advertising. Whilst these factors were not dismissed, the price was believed to be the overwhelming driver.

The Respondents' case

44. Mr Barnes' primary submission was that what was supplied by Bank to Norwich under the contract was essentially an advantage against other members of the panel in quoting to most of its customers for insurance related business in return for further commissions payable by Norwich to the Bank. The contract did not effectively change the intermediary process by which Post Office customers seeking insurance were introduced to a panel of insurers. He pointed to the fact that prior to the contract, a pool of Post Office customers received quotes from a panel of insurers, including Norwich Union. Following the contract a pool of Post Office customers received quotes from a panel of insurers, including Norwich Union. Therefore, the supply by the Bank to Norwich Union must be regarded as a supply fundamentally different to, and separate from, the supply made by the Bank to Junction under the chain.
45. In support of this proposition Mr Barnes pointed to the fact that under the Norwich Union contract the supplies are made under a separate contract, to different legal entities, and for a different commission. The supply made in the chain by the Bank is to Junction under a contract with Junction for one lot of commissions, whereas the supply made by the Bank under the Norwich Union contract is to Norwich under a further contract with Norwich Union for a further lot of commission. He pointed to the role performed by the Bank in relation to the two agreements as being entirely different. Under the initial chain the supply is of the introduction of Post Office customers seeking insurance to a panel of insurers, where the Bank can be described as fulfilling an intermediary insurance broker role, introducing Post Office customers to a panel of insurers. However the supply pursuant to the Norwich Union contract is the payment of commission by Norwich to the Bank in return for the supply of advantages conferred on Norwich by the Bank, which is not an insurance intermediary role, but one in which there are essentially two parties, namely the Bank and Norwich, reaching an agreement which does not serve to introduce Post Office customers to a panel of insurers, but simply serves to increase the Bank's profit. Mr Barnes' third argument on this point is that the supply made pursuant to the Norwich Union contract has no real or significant effect on what is taking place under the chain, namely the introduction of Post Office customers to a panel of insurers.
46. From the above Mr Barnes concluded that the supply made under the Norwich Union contract cannot be treated as either part of the supply made under the chain, nor a change to the contractual relationship between the Bank and Norwich such that the change to the contractual relationship would also fall within the exemption, as no such prior contractual relationship existed.
47. Whilst the Commissioners accepted that there may have been a number of valid commercial reasons that required the Bank to enter into the Norwich Union contract rather than amending the existing contractual structure of the chain, it was submitted that the Tribunal was required to look at that which was supplied, and not the commercial reason for that supply. Further, the fact that transactions have the same economic or business effect does not require that they be treated alike for VAT purposes in order to satisfy the principle of fiscal neutrality – the Tribunal was referred to the House of Lords decision in the case of Lex Services Plc v Customs and Excise Commissioners for this proposition.
48. The Commissioners regarded the effects of the Norwich Union contract, such as benefits to the Post Office customers in getting cheaper quotes for insurance packages, or there being more take up of insurance, as incidental benefits which were not part of the supply made pursuant to the contract and which should be disregarded. It was submitted that the matter had to be looked at from the position of the taxpayer – the Tribunal was referred to the speech of Lord Hope in Customs and Excise Commissioners v Redrow Group Plc), where at page 412 he said:

"The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax? The fact that someone else – in this case the prospective purchaser – who also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of deduction."

Mr Barnes pointed to the fact that the benefit to the Post Office customer was not automatic, being dependent on the Bank exercising its discretion on pricing in the customers' favour. Furthermore the benefit of more Post Office customers taking up insurance could be the result of a number of other factors such as streamlining the process, advertising, promotional and market research. Those services which may increase the number of Post Office customers taking up insurance, are not exempt under either the provisions of Item 4, Group 2, Schedule 9 of the Act, or Article 13B(a) of the Sixth Directive.

49. Mr Barnes also pointed to the difference between the moneys paid under the original scheme and those paid under the Norwich Union contract: any tax imposed on the chain from the insured to the insurer would be paid by the consumer, whereas under the Norwich Union contract tax is not directly payable by the consumer, it comes from Norwich's funds. The upfront payment by Norwich bore no relation to sales, whereas the payment by Norwich to the Bank in respect of each sale of insurance by any member of the panel was dependent on all sales. This is significant because of the necessity to prevent double taxation on supplies of insurance (see the cases of Taksatorringen and Arthur Andersen). From the above Mr Barnes concluded that what was not being supplied to Norwich under the Norwich Union contract was the introduction of new customers to it, that process taking place under a separate arrangement with Norwich as part of a panel in contractual arrangements with Junction, which arrangements were unaffected by the Norwich Union contract.
50. It was the Commissioners' case that none of the three criteria which must be met in order for the requirements of Item 4, Group 2, Schedule 9 of the Act to be satisfied were fulfilled. The supplies by the Bank to Norwich were not the supply of new customers to Norwich, and therefore the supplies were not the intermediary services of an insurance agent or broker, as defined by Note 1 to Group 2, and in particular they did not (i) bring together the insurer and customer; (ii) amount to work carried out preparatory to the conclusion of a contract of insurance; or, (iii) amount to work administering a contract of insurance, including claims handling and collecting premiums. Secondly the supply was not related to an insurance transaction on a strict interpretation of the wording as was required by Item 4(a) of Group 2. There was insufficient nexus between the supply under the contract and the introduction of Post Office customers to the panel of insurers. Thirdly, the Bank was not acting in an intermediary capacity as defined by Note 2 to Group 2. That intermediary capacity had been fulfilled by the role of the Bank in the chain. The Norwich Union contract does not change that process but confers certain advantages on Norwich in respect of the chain.
51. We were referred to the case of Card Protection Plan Ltd v Customs and Excise Commissioners at paragraph 22 where the Court said:

"Such a supply of services by CPP constitutes an insurance transaction within the meaning of Article 13B(a). It is true that the exemptions provided for by Article 13 of the Sixth Directive are to be construed strictly … However, the expression 'insurance transactions' is broad enough in principle to include the provision of insurance cover by a taxable person who is not himself an insurer but in the context of a block policy procures such cover for his customers by making use of the supplies of an insurer who assumes the risk insured."

It was accepted that Card Protection Plan was authority for those parties in the middle of a chain being able to benefit from the exemption. Mr Barnes did not go so far as to submit that this case was authority for his next proposition which was that when you had a spur to a chain (as he suggested was the situation here), a provision of supplies by someone in the spur is generally not exempt, but we were referred to paragraph 23 of Card Protection Plan where the Court stated:

"That interpretation is supported by the purpose of the Sixth Directive, which exempts insurance transactions but gives Member States in Article 33 the possibility of maintaining or introducing a tax on insurance contracts. Consequently, if 'insurance transactions' refers solely to transactions performed by insurers themselves, the final consumer might have to pay not only that tax but also VAT in the case of block policies. Such a result would be contrary to the purpose of the exemption provided for by Article 13B(a)."

52. Mr Barnes submitted that a relevant consideration when considering whether something fell within the exemption or not is the purpose of the Sixth Directive which exempts insurance transactions, but gives Member States the possibility of introducing a tax on insurance contracts so that one does not have a situation that arises where the final consumer is paying not only VAT but is also paying that insurance tax. Where there is a spur in which a third party is making a supply to one of the parties in the chain there is no need for that to be exempt because that tax is not ultimately passed on to the end consumer.
53. On the same point we were referred to the case of Skandia. In that case the Advocate General said inter alia that the recipient of the service is of decisive importance for the purposes of defining the service. Skandia was relied on for the proposition that where someone who is outside the chain is making a supply to a member in the chain, those supplies are not exempt for the purposes of the directive.
54. The case of Taksatorringen was cited to us at paragraph 44 of the judgment of the ECJ which reads:

"As to whether such services are related services performed by insurance brokers and insurance agents, it must be stated … that this expression refers only to services provided by professionals who have a relationship with both the insurer and the insured party, it being stressed that the broker is no more than an intermediary."

We were referred at length to the case of Arthur Andersen and to the opinion of the Advocate General in that case. The passages referred to dealt with the activity of an insurance agent and we will return to this case in our conclusions. The final case we were referred to on this point was the case of CSC Financial Services Ltd which was relied on for supporting Mr Barnes' submission that most services are provided for the purposes of the insurer's own management services, and, quite apart from the making of an insurance transaction, those type of cases are not exempt under the directive or UK law. The Commissioners did not take the point that it was necessary for the Bank to establish for the purposes of this case that they were an insurance agent or broker.

55. It was not accepted on behalf of the Commissioners that the Norwich Union contract is the essential contract in these arrangements. If it were the central contract, the Commissioners would expect to see either determination clauses or alterations to the other contracts so that if the Norwich Union contract went, so did everything else, but that was not the case here. The supply by the Bank to Norwich was to be regarded as a supply that is fundamentally different to, and separate from, the supply made by the Bank to Junction under the chain which is the opportunity to quote to Post Office customers for insurance. The supplies are made under separate contracts to different legal entities for different commissions. We were again referred to the opinion of the Advocate General in Taksatorringen at paragraph 70 where he said:

"Lastly, the argument that as Taksatorringen provides services ancillary to insurance transactions it should be subject to the same fiscal régime as those transactions also falls to be rejected. Even though the CPP judgment held that, where ancillary services are provided, they should receive the same tax treatment as the principal supply, it was envisaging the services that were in each case provided to the end customer by the same provider."

It was acknowledged that the position was different here, but it was submitted that what the Bank was doing was making two separate supplies. Under the original arrangement the Bank was acting as an introducer of Post Office customers to a panel of insurers, whereas under the Norwich Union contract it was being paid to supply certain advantages to Norwich in relation to bidding for contracts. The supply made pursuant to the Norwich Union contract has no real or significant effect on what is taking place under the chain, namely the introduction of Post Office customers to a panel of insurers and the provision of insurance. In those circumstances the Bank-Norwich Union contract cannot be treated as one part of the supply made under the chain. The present case was not to be regarded as an artificial separation of two supplies that are really one; here there was a real separation of supplies made to two different parties and therefore the case of Pippa Dee relied on by the Appellant must be distinguished.

56. Equally it was submitted that the case of Lubbock Fine, also relied on by the Appellant, was not of help, because in that case there was an exempt supply which was terminated, and the termination of an exempt supply is also exempt, according to the ruling of the court in that case. The Bank, under the Norwich Union contract was not amending its existing contractual relationship, as was the case in Lubbock Fine. It is artificial to look at the Bank for the purpose of this contract as being part of the chain, and the proper analysis is that they are making a separate supply which is not properly connected with the supply of intermediation.
57. The Commissioners made no distinction between the sum paid by Norwich up front, and those that were to be paid on a commission basis as a consequence of the number of policies sold either directly by it or by other members of the panel. In the Commissioners' view all payments under the Norwich Union contract were taxable.

The Appellant's case

58. Mr Cordara's principal argument is that, when analysed in its full context, the supply made by the Bank to Norwich pursuant to the Norwich Union contract is a straightforward intermediary supply. He submitted that in this case what mattered was what in fact the parties did, and in order to decide that, one had to look at the entirety of the context – the Tribunal was referred to the case of Pippa Dee, and also to the cases of Reed Personnel and Autolease. He analysed the factual situation here as being that Norwich was appointed by the Bank in its on-going intermediary role to act as the most favoured of the recipients of the introductions produced via the Bank as it takes part in the pre-existing chain. Norwich was thereby getting an enhanced supply of introductions. He analysed the effect of the Norwich Union contract as follows:

(i) It gives members of the panel an incentive to make their prices as low as possible, and lower than they might otherwise be, because they know that Norwich will have the chance to undercut their price;

(ii) It means that Norwich is likely to get the lion's share of contracts, as it can undercut any rival quote if it is able to do so profitably;

(iii) Many more customers end up buying insurance via the Post Office because the prices over all are lower;

(iv) There is a "virtuous circle" effect: as Norwich can predict that it will sell a lot more policies, it can afford to make less money on each policy, i.e. it can quote even lower price than it otherwise would;

(v) As Norwich can predict it will write substantially more business, it is willing to pay an enhanced commission;

(vi) In effect the terms of the insurance offered to the public were significantly altered as a result of the change, as much as if a negotiation of better terms had been formally undertaken.

(vii) The Bank was able through Junction to procure that policies are written on different price terms, with the result that more policies get written.

59. The Tribunal was asked to find that the Bank at all times was working as an intermediary, having no interest in doing anything else, given its wish to see Post Office customers buying as many insurance products as possible. It was submitted that whether the money is paid directly to the Bank or routed via Junction, the service being provided by the Bank ultimately to Norwich is the same, and it does not matter that an element of payment comes direct from the ultimate insurance principal to the Bank rather than via Junction, what matters is what is done, not from whom the consideration comes.
60. Whilst Mr Cordara accepted that the Tribunal has to look at the tax status of the Norwich Union contract, nonetheless it was the Bank's case that you cannot do that without looking at its interaction with the Bank-Junction contract, whose tax status is exempt. The Commissioners, in their letter of 19 July 2006 which is the decision letter, refer to the case of Arthur Andersen and set out the two tests from the Andersen case, namely:

1. An intermediary is prospecting for customers and bringing together persons seeking insurance with persons providing insurance.

2. An intermediary, as a third party, provides an intermediation service between the parties to assist with bringing about the contract of insurance.

With regard to this, Mr Cordara accepted that the Bank under the Norwich Union contract is not directly bringing together the customer and the insurer which is done under the contract with Junction. However he submitted that "bringing together" includes, or can include, introduction, but it also includes the process of persuasion that thereafter takes place in order to turn an introduction into a concluded contract. Furthermore he submitted that the Norwich Union contract alters the behaviour under the Bank-Junction contract and it is common ground that that contract involves intermediation. There is therefore an intimate connection between the Norwich Union contract and what has been accepted to be an intermediation process. With regard to the second Andersen test, he submitted that it is descriptive of what the Bank is doing: it is providing an intermediation service to assist with bringing about a contract of insurance. Mr Cordara posed the question of whether an agreement to alter conduct under an already exempt supply agreement which will in turn cause an alteration of conduct by someone else under a further exempt agreement is itself ipso facto an exempt supply? Mr Cordara referred us to the case of Card Protection Plan in which the European Court of Justice said of the company that it had procured an insurance transaction, and therefore it had supplied an insurance transaction. The Tribunal was asked to apply parity of reasoning with the European Court in that case. Mr Cordara also posed the question whether the correct VAT analysis of the facts required you to say that you can make a supply of making an altered supply, or whether you are making an altered supply?

61. It was the Commissioners' case that the Norwich Union contract did not amend an existing contractual relationship between two parties. Mr Cordara submitted that the whole purpose of the Norwich Union contract was to amend an existing contractual relationship between two parties, the main deliverable under the Norwich Union contract being an altered Bank-Junction contract and thereby an alteration of the Junction-Norwich Union intermediation profile. He relied on the case of Lubbock Fine, in which the question was whether a tenant who made a supply by surrendering a lease was making a taxable supply of surrendering or an exempt supply of surrendering. The European Court held that if the acquisition of the leasehold interest historically had been an exempt supply, then the surrendering was exempt; if it had been taxable, then the surrendering was taxable. Whilst it was accepted that there was a fresh contract between Norwich Union and the Bank, its whole focus was the amendment of an existing (exempt) contractual relationship, and therefore should be exempt.
62. It was the Bank's case that the Norwich Union contract was the master agreement, and it was unarguable that that contract was related to the provision of insurance. The factual situation was analysed as follows. Under the contract the Bank promised to deliver compliance from all the other parties in the chain. The promise to funnel intermediation services to Norwich under this agreement represents the dominant supply for Card Protection Plan purposes. Junction is the Bank's subcontractor, being paid by Bank, so when a policy is offered to a customer by Junction it is acting on behalf of the Bank; in the contract the Bank promises to deliver compliance from everybody else in the chain, namely Junction, the Post Office, POFS and their agents. This represented a root and branch change to the chain and to the intermediation agreement.
63. Mr Cordara referred us to Clause 3.12 where the following sentence appears:

"The Bank company limit shall be adjusted to reflect increases or decreases in business written under the terms of this agreement."

It was submitted that this clearly shows that it is an intermediary agreement, because business is being written under it. The fact that at the end of Clause 3.12 it states: "Provided, however, at no time shall a Bank company limit exceed £20m or be less than £10m" shows that the agreement concerned providing a stream of business. Clause 5 of the Norwich Union contract is a clause by which Norwich makes promises about how it is going to operate its contract with Junction. By Clause 7.1.6 Junction is obliged to offer the Norwich Union net premium to the potential policyholder when it is cheaper than the net premium of all other panel insurers for that risk, whether or not flexing has occurred. This provision itself is said to be indicative that the contract is one of intermediation, and taken together with Clause 3, it gives the true VAT nature of the agreement, namely that Norwich receives a service of intermediation. Junction is paid by the Bank for running all the customer-facing processes. When Junction offers a package to the potential policyholder it is acting as the Bank's subcontractor and it has delegated authority from Norwich under the terms of the Junction-Norwich contract. Junction is actually acting as a subcontractor to the Bank which pays it to collect the premiums. Everyone in the chain is paid out of the premiums, the Bank has to ensure the premiums are collected and it is therefore an agent for the insurance companies in collecting the premiums.

64. Mr Cordara's second principal argument was based on the underlying principle which he asked us to derive from the case of Lubbock Fine, namely that, if there is an alteration of what is already well established as an exempt stream of supplies, then there is, at the very least a presumption that the alteration supply will itself be exempt. He did not accept Mr Barnes' attempt to distinguish it on the basis that in that case there were only two parties involved, whereas in the present case there was a chain.
65. With regard to the case of Redrow Group, cited by the Commissioners, it was submitted that that case dealt with input tax, whereas Card Protection Plan is concerned with output tax; Card Protection Plan, which appears not to have been cited in Redrow, is to be preferred. It is relied on by Mr Cordara in support of his argument that what a supply is, is defined by the aim of the customer, in this case, Norwich. We were referred to the judgment of the European Court at page 293, paragraph 29 to 32:

"29. In this respect, taking into account, first, that it follows from Art.2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of a transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

"30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied …

"31. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances … indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this (see, to that effect, Madgett and Baldwin).

"32. The answer to the first two questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by CPP are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is an ancillary, so that it receives the same tax treatment as the principal supply."

Mr Cordara submitted that what Norwich was buying from the Bank was an intermediary, intermediation service, and everything else is ancillary to that.

66. Card Protection Plan is also the principal authority relied on by Mr Cordara in support of his further argument that Norwich Union is procuring an amendment of a contract which is therefore exempt in accordance with the principle in Lubbock Fine (see para 61 above). Mr Cordara referred us to paragraph 19 to 23 of that case, and whilst he recognised that the argument there was about the first four words before the comma in Article 13B(a), and the present case concerned the words after the comma, namely "including related services performed by insurance brokers and insurance agents", he submitted that the reasoning applied equally to those words. In the present case the Bank had been paid by Norwich directly to procure work by Junction which is exempt and, since no policy of the Directive is offended, the procurement too should be exempt.

Reasons for decision

67. Both parties referred us to the case of Expert Witness Institute for the decision at the Court of Appeal in that case that exemptions to the general principles of value added tax are to be construed strictly, following the ECJ's decision in the case of Stichting Uitvoering Financiele Acties. However, Mr Cordara also referred us to paragraph 17 of the judgment of Chadwick LJ in which he says that a `strict' construction is not to be equated with a restricted construction. We bear this in mind.
68. Although we were referred to numerous authorities, in essence this is mainly a factual matter, although the interpretation of the facts depends on the law as to what constitutes intermediary services, to which we will return. We found the following passage from Mr Barnes' closing submissions very clearly stated the issue before us. He said in essence that if we were to find that what is being supplied here is a supply as part of the existing chain, then the Bank succeeds. He further said that if we found that really what was happening was the provision of intermediary services for the purpose of insurance in that what is being provided is the alteration of existing intermediary services, then again the Bank succeeds. He suggested that the question for the Tribunal was whether or not the supply is sufficiently connected to the supply of insurance and is sufficiently connected to intermediary services made in the supply of insurance, that the Bank satisfies the terms of the exemption, or whether what is really being supplied is an advantage in the bidding process to one of the panel of insurers, which is entirely separate from the intermediary services supplied in the chain, and therefore is not exempt.
69. Dealing with Mr Barnes' first proposition above that we have to decide whether what is being supplied is a supply as part of the existing chain, the chain which existed prior to the Norwich Union contract is, in our view, no longer extant. The whole basis for its existence, namely a panel of insurers each of whom has an equal chance to quote for the insurance business, is changed by the Norwich Union contract. Whether one regards the appropriate analogy as being that of a chain, or a web as proposed at one stage by Mr Cordara, the relationships between the various parties are altered by the skewing of the panel. This is despite the words in the preamble to the Norwich Union contract (cited at paragraph 19 above) which at first sight appear to indicate that there will be no alteration to the status quo, but when those words are examined carefully it emerges that this is not the situation. The definition section defines "Existing Junction Agreement" as the agreement entered into dated 21 May 2004 as amended from time to time (our underlining). It was so amended on 31 March 2006, and by this amended agreement the skewed panel was set up. Given that Norwich has the opportunity to undercut all the other panel members, it cannot be said that those other insurers are competing for business on the same terms as they were prior to the existence of the Norwich Union contract, a matter which we regard as fundamental. We therefore conclude that the chain of agreements originally set up can no longer be said to exist, and, that being so, we have to analyse what the new situation is.
70. We accept Mr Cordara's analysis of the factual situation as set out in paragraph 62 above, and also his conclusion at the end of that paragraph. In our judgment, what the Bank is doing, both before and after the Norwich Union contract, is bringing about the writing of contracts of insurance, albeit with Norwich being given an advantage after the introduction of the Norwich Union contract. We also accept Mr Cordara's submission that the Norwich Union contract alters the behaviour under the Bank-Junction contract, a contract which itself involves intermediation, and that one of the purposes of that alteration is to bring about the writing of more insurance business.
71. The Commissioners have not in terms said that any aspects of the Norwich Union contract are severable, yet their position with regard to the basic commissions paid by Norwich, that is the commissions paid in respect of both those policies it writes as a result of being the lowest bidder on the panel and also the policies it wrote as a result of being allowed to undercut the lowest bid made by the other panel members and also the commission it pays in respect of all other motor policies written by other members of the panel, is that they are exempt. Since the ability for Norwich to write the business generated by undercutting only arises as a consequence of the Norwich Union contract, it appears to us that the position of the Commissioners is inconsistent. They cannot say that on the one hand all the commissions payable by Norwich as a consequence of the Norwich Union contract are taxable, and yet on the other hand allow that these particular commissions, because they are payable directly out of the monies paid by the purchaser of the insurance contract, are exempt, given that they arise directly out of the Norwich Union contract itself. It is this very difficulty for the Commissioners that indicates to us that it is not possible to regard the supplies made under the Norwich Union contract in isolation from the original contract, however superficially attractive that argument appears. We do not think it is open to the Commissioners to isolate one aspect of the Norwich Union contract in this way. Paragraph 7 of Schedule 2, where the basic commission appears, makes no differentiation between business written as a result of price management and business not written as a result of price management. There is also no differentiation between business written by Norwich and business not written by Norwich. There is therefore a commission payable by Norwich in respect of policies written by the other members of the panel. Those panel members will also be paying a commission which will be recognised as exempt in respect of those policies. This is a further example of the interconnectedness between the way the former panel operated and the way the new panel operates. This points to the fact that what Norwich are buying is the continued existence of the whole intermediary structure that is the panel, albeit in a refigured form.
72. It was accepted in this case that the Bank is to be deemed an insurance broker for the purposes of item 4 of Group 2 of Schedule 9 of the Act, we have to decide whether the Bank is acting in an intermediary capacity. In Arthur Andersen, in which the European Court of Justice analysed the exemption provided for insurance transactions in the Sixth Directive it was decided that: (1) an intermediary is prospecting for customers and bringing together persons seeking insurance with persons providing insurance, and (2) an intermediary, as a third party, provides an intermediation service between the parties to assist with bringing about the contract of insurance. Whilst the Bank does not directly bring together the purchaser of insurance with the insurer, all the Bank's actions under the Norwich Union contract are designed in order that there should be a bringing together of an insurer and a person wishing to be insured, concluding in a contract. The effect of the Norwich Union contract is to alter the way that the intermediation services provided under the Bank-Junction contract are provided. The wording of the test in the Sixth Directive is more specific than that in the United Kingdom legislation, which only requires that the services "are related to" an insurance transaction. The notes to Item 4 set out four separate instances of acts which are to be considered the services of an insurance intermediary, and it is only necessary for a party to meet any one of those to be regarded as an intermediary. In our judgment there is sufficient nexus between the Bank and the ultimate customer via Junction to satisfy the requirement under item 4 Note (1)(a) which reflects the requirement of the Sixth Directive of bringing together with a view to insurance, persons who are seeking insurance and persons who provide insurance.
73. With regard to the second part of the test in Arthur Andersen, we have no hesitation in finding that in all the circumstances what the Bank is doing is assisting in bringing about a contract of insurance. In the version of the Norwich Union contract dated 31 March 2006 paragraph 7 of Schedule 3 (which later became Schedule 2 of the May 2006 version) under the heading `incentive commission' it is stated: "Within five Business Days of this Agreement being signed by all the Parties, NUI will pay to B&W a non-refundable Incentive Commission of £Xm in consideration of the anticipated introduction of customers by the Bank Companies to NUI through Junction" (our underlining). This clause was erroneously omitted in the later form of the contract because that sum of money had already been paid by the time the later version was drafted. It is clear evidence of the intention of the parties in entering into the Norwich Union contract being to perform an act of intermediation within the terms of the Act, and we so find.
74. Mr Barnes posed the question "to what extent is this so tied up with intermediation that it is intermediation itself?" In our judgment for the reasons given above it is not possible to look at the Norwich Union contract in isolation from the pre-existing contracts, since the purpose of both parties was to enable the pre-existing arrangement to continue in principle, but with modifications. If we are wrong to find that the Norwich Union contract is part and parcel of a single principal service, then we consider that it is ancillary to the principal service of the provision of an exempt supply of intermediation and as such is also exempt. Finally, we reject Mr Barnes' submission that the supply falls foul of Note 7 to Item 4 of the Act as it is akin to market research or promotional or similar activities. The evidence did not support that assertion.
75. For the above reasons we find that the supply of services by the Bank under its contract with Norwich constitutes exempt services of an insurance intermediary under the Act and also within the terms of the Sixth Directive and this appeal is allowed.
76. The Respondents to pay the Appellant's costs. In the absence of agreement, the matter to be referred to the Costs Judge of the High Court.

MISS J C GORT

CHAIRMAN

RELEASED: 3 October 2008

LON 2006/0861