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United Kingdom VAT & Duties Tribunals (Insurance Premium Tax) Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> United Kingdom VAT & Duties Tribunals (Insurance Premium Tax) Decisions >> DSG International Insurance Services Ltd v Revenue & Customs [2007] UKVAT(IPT) IPT00013 (25 October 2007)
URL: http://www.bailii.org/uk/cases/UKVAT/IPT/2007/IPT00013.html
Cite as: [2007] UKVAT(IPT) IPT13, [2007] UKVAT(IPT) IPT00013

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DSG International Insurance Services Ltd v Revenue & Customs [2007] UKSPC (25 October 2007)

IPT0013

INSURANCE PREMIUM TAX –- whether Appellant liable to register from 30 May 1997 - whether insurance contract was a taxable insurance contract –whether risk situated outside the United Kingdom – whether the establishment of the policyholder to which the policy related was outside the United Kingdom - yes –appeal allowed – FA 1994 s 49 and Sch 7A para 8; Insurance Companies Act 1982 S 96A; Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2001 SI 2001 No. 2635 Art. 2

LONDON TRIBUNAL CENTRE

DSG INTERNATIONAL INSURANCE SERVICES LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

TRIBUNAL: DR A N BRICE (Chairman)

MRS S EDMONDSON FCA

MR K S GODDARD MBE

Sitting in London on 25– 27 July 2007

Jonathan Peacock QC with Francis Fitzpatrick, Counsel, instructed by Barlow Lyde & Gilbert LLP, for the Appellant

Peter Mantle, Counsel, with Fiona Banks, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The appeal

DSG International Insurance Services Limited is the Appellant in this appeal. Before 3 October 2005 the Appellant was known as Dixons Insurance Services Limited.

The Appellant appeals against a review decision and a deemed decision on review. Both decisions were made by the Commissioners for Her Majesty's Revenue and Customs (Customs). The review decision was dated 26 July 2006 and upheld an original decision dated 15 May 2006. The original decision was that the risk insured under a contract (the contract of insurance) dated 6 May 1997 and made between the Appellant as insurer of the one part and Appliance Serviceplan Limited (Appliance) as policyholder of the other part was situated in the United Kingdom. From that it followed that the contract of insurance was a taxable insurance contract and so the Appellant was liable to register for insurance premium tax from the time when it began to receive premiums. The deemed decision on review was that the Appellant was registered for insurance premium tax from 30 May 1997.

The Appellant appealed because it was of the view that the risk insured under the contract of insurance was not situated in the United Kingdom and so the contract of insurance was not a taxable insurance contract and the Appellant was not liable to register for insurance premium tax.

The legislation

The legislative provisions about insurance premium tax are contained in sections 48 to 74 and schedules 6A, 7 and 7A of the Finance Act 1994 (the 1994 Act). Section 49 provides that tax is charged on the receipt of a premium by an insurer if the premium is received under a taxable insurance contract. Section 70 provides that any contract of insurance is a taxable insurance contract unless it falls within one or more of the paragraphs of Part I of schedule 7A. Schedule 7A describes contracts that are not taxable. Part I includes paragraphs 1 and 8. Paragraph 1 provides that a contract falls within that paragraph if it is a contract of reinsurance. Paragraph 8 provides that a contract falls within that paragraph if it relates only to a risk which is situated outside the United Kingdom. Thus contracts of reinsurance, and contracts relating only to risks situated outside the United Kingdom, are not taxable insurance contracts. Other provisions (which we consider in more detail later) provide that the risk covered by a contract of insurance is situated in the member state where the establishment of the policyholder to which the policy relates is situated at the date when the contract of insurance is entered into.

Section 53 of the 1994 Act provides that a person who receives, as insurer, premiums in the course of a taxable business is liable to be registered.

The issues

The Appellant argued that the risk under the contract of insurance was situated in the Isle of Man. Its first argument was that, at the date when the contract of insurance was entered into, the policyholder (Appliance) had only one establishment and that was in the Isle of Man. The Appellant accepted that, after the date of the insurance contract, the policyholder had an agent, and therefore an establishment, in the United Kingdom but argued that the establishment to which the policy related was the head office of Appliance in the Isle of Man. Customs argued that the risk under the contract of insurance was situated in the United Kingdom. They argued that the contract of insurance had to be considered together with a number of other contracts all of which were entered into on the same date as the contract of insurance and all of which, like the contract of insurance, commenced five days later. Two of those other contracts had the effect of appointing agents of the policyholder in the United Kingdom and the policy related to the establishment of at least one of those agents in the United Kingdom.

Thus the main issue for determination in the appeal was whether the risk under the contract of insurance was situated in the Isle of Man (as argued by the Appellant) or in the United Kingdom (as argued by Customs). In turn that gave rise to two questions, namely:

(1) whether, on the date that the contract of insurance was entered into, the policyholder had only one establishment which was its head office in the Isle of Man; and

(2) if not (and if, on the date that the contract of insurance was entered into, the policyholder had establishments through agents in the United Kingdom) whether the establishment of the policyholder to which the policy related was the head office of the policyholder in the Isle of Man or the establishment of an agent in the United Kingdom.

The evidence

Oral evidence was given on behalf of the Appellant by Mr Stephen Christopher Carroll the former Group Development Director of DSG International plc and Mrs Dorothy Ann Winrow a director of the Appellant. Oral evidence was given on behalf of Customs by Mr Stephen Geoffrey Edwards, a tax avoidance investigator with HM Revenue and Customs. A witness statement made by Mr Graham John Sheppard, containing evidence on behalf of Customs, was also produced. For the Appellant Mr Peacock made it clear that he did not accept all the statements of Mr Edwards and Mr Sheppard which related to matters not at issue in this appeal.

The facts

From the evidence before us we find the following facts.

The companies mentioned in this Decision

The Appellant has its head office in the Isle of Man and is a member of what was the Dixons' corporate group and is now known as the DSG group. We refer to both as Group. The Appellant provides insurance and reinsurance in connection with extended warranties and repair contracts. It has three directors and board meetings are held in the Isle of Man. It has three other employees.

Group contains other companies of which three are relevant in this appeal. One is DSG Retail (Retail) which sells domestic appliances to customers in its stores. The other two are Mastercare Coverplan Services Agreements Limited (Coverplan) and Mastercare Service and Distribution Limited (Distribution). These three companies have establishments in the United Kingdom.

Appliance is not a member of the DSG group. It is 40 per cent owned by Willis Group, formerly Willis Corroon, insurance brokers. The remaining 60% is owned equally by two unconnected and independent individual shareholders. The head office of Appliance is in the Isle of Man.

Before 1994 – the extended warranties

In 1984 Group acquired Currys. Currys sold domestic appliances and also extended warranties. (An extended warranty is an agreement for the repair or replacement of mechanical goods in the event of breakdown after the expiry of the manufacturer's warranty). On acquiring Currys, Group reviewed the possibility of developing the sale of extended warranties and looked for an independent third party to supply the extended warranties to its customers. This proved difficult for a number of reasons. Cornhill Insurance plc (Cornhill) was interested but would only take 5% of the risk. In order to obtain Cornhill's participation, Group agreed to arrange reinsurance for the remaining 95%.

Accordingly, the Appellant obtained an insurance licence in the Isle of Man (as it appeared that the regulatory requirements there were easier to satisfy in the time available). The Appellant then entered into a treaty of reinsurance with Cornhill on 25 July 1986. Under the treaty the Appellant reinsured 95% of Cornhill's risk of costs arising under the extended warranties and Cornhill ceded to the Appellant 95% of the premiums paid to it by customers. At that time the intention was that Cornhill would obtain more extended warranty business from other retailers and that the Appellant would provide reinsurance cover in respect of that new business as well.

Cornhill entered into a sales contract with Dixons' Finance plc (later known as Coverplan Insurance Services plc) which undertook to sell, as Cornhill's agent, extended warranties to customers of Retail. Repairs under the warranties were carried out by, or arranged through, Distribution. Cornhill also entered into an administration contract for the management of the extended warranty business; initially this was with an independent company but after one year it was transferred to a Group company. The Appellant as reinsurer re-imbursed Cornhill for 95% of the losses it incurred under the extended warranties.

Thus when, before 1994, Retail sold a domestic appliance to a customer it also offered an extended warranty. The purchase of a warranty did not alter the price of the domestic appliance and a customer who wanted a warranty had to pay a separate price for it. The warranties were insured with Cornhill (who reinsured 95% of the risk with the Appellant). The warranties were insurance contracts and so were exempt from value added tax but, of course, input tax was irrecoverable.

1994 – the introduction of insurance premium tax

When insurance premium tax was introduced by the 1994 Act the standard rate was 2.5%. As the extended warranties were then taxable insurance contracts they attracted insurance premium tax at that rate. There was no tax on the reinsurance of 95% of the risk by Cornhill with the Appellant as contracts of reinsurance are not taxable insurance contracts.

1996 – the proposals for a higher rate

On 26 November 1996 an announcement was made that insurance premium tax was to rise to 4% on most general insurance and that a higher rate of 17.5% would be introduced for a limited range of insurance, including breakdown insurance on domestic appliances. The rate changes were to come into effect on 1 April 1997.

This announcement led Group to review the sale of the extended warranties. An alternative possibility would be to offer customers non-insured repair contracts instead. A repair contract (sometimes called a service contract) is also an agreement for the repair or replacement of mechanical goods in the event of breakdown after the expiry of the manufacturer's warranty. However, a repair contract is not a contract of insurance and so the sums due under it are not premiums and insurance premium tax is not charged on them. It was appreciated that repair contracts would be subject to value added tax of 17.5% but there would be an entitlement to recover input tax.

Thus there would be a charge to tax irrespective of whether Group decided to continue to offer extended warranties or to offer repair contracts instead. If it continued with the extended warranties then insurance premium tax at the rate of 17.5% would be payable in respect of each. If it changed to repair contracts then value added tax at the rate of 17.5% would have to be added to each but there would be an entitlement to input tax credit.

The decision to move to repair contracts

After consideration Group decided to replace the extended warranties with repair contracts. Initially it was envisaged that the repair contracts would, like the extended warranties, be sold by Cornhill to the customers of Retail and that there would be as few changes as possible to the existing arrangements so that the changes could be made quickly. It was desirable for any changes to be in place before 1 April 1997. However, in February 1997 Cornhill decided that it did not want to be involved with a product which was not insurance.

At that time Willis Group (Willis) was Group's primary insurance broker. Willis had a presence in the Isle of Man and was familiar with the developments about the repair contracts. Discussions with Willis took place and initially these were on the basis that Willis (like Cornhill under the extended warranties) would take on the whole risk of the repair contracts but would reinsure 95% of that risk with the Appellant. However, Willis was concerned at the uncertainties surrounding the move to repair contracts and wanted to make sure that it would make a limited but certain return. It would only become involved if it was not exposed to any risk of the costs under the repair contracts. It was therefore agreed that the Appellant would insure all the risk under the repair contracts.

The formation of Appliance

For the purpose of offering the repair contracts Willis established a company of which it owned 40% of the shares; two other unconnected and independent shareholders owned 30% each. That company is Appliance. After the formation of Appliance the discussions between Group and Willis continued.

On 25 April 1997 the Appellant wrote to the income tax authorities in the Isle of Man asking for confirmation that the Appellant would retain its income tax exempt status if it insured the risks of Appliance. The letter contained the following paragraphs:

"[Appliance] has established itself on the Isle of Man to sell service contracts on electrical products to customers of Dixons. [Appliance] has been granted income tax exempt status. [The Appellant] has negotiated to provide insurance to [Appliance] in relation to the risks involved in selling service contracts to customers of Dixons in the UK. These negotiations are subject to [the Appellant] retaining its tax exempt status.

The underlying risk of [the Appellant's] business, that of paying the cost of repairs on the breakdown of electrical products sold by Dixons, will remain the same, both where [the Appellant] continues to reinsure existing extended warranty insurance policies from Cornhill and where [the Appellant] insures extended warranty service contracts with [Appliance]."

A summary of the 1997 arrangements

In order to give effect to the agreed arrangements a number of contracts were signed on 6 May 1997 to take effect from 11 May 1997. Four of these were: a sales agreement, an administration and repair agreement, an insurance contract and a trust deed. We describe each of these in more detail below but here summarise their overall effect.

Under the sales agreement Appliance appointed Coverplan its exclusive agent to sell repair contracts to customers who bought appliances from Retail. The repair contracts were between Appliance and the customer. Under the repair contracts Appliance was under an obligation to repair or replace goods purchased by the customer from Retail in the event of breakdown. Under the administration and repair agreement Appliance sub-contracted to Distribution the administration and implementation of Appliance's obligations to customers under the repair contracts. Under the insurance contract the Appellant insured the risk of Appliance having to pay Distribution for repairs and replacements under the repair contracts. Under the trust deed Appliance undertook to pay all the money payable to the Appellant under the insurance contract into a trust bank account. The purpose of this arrangement was to ring-fence the premiums paid by Appliance to the Appellant so as to ensure that money would always be available to meet any claims by Appliance under the insurance contract.

The 1997 arrangements in more detail

On 6 May 1997 a meeting of the board of directors of the Appellant was held at which it was reported that the company had converted its Class 11 reinsurance licence to a Class 6 insurance licence. Class 6 relates to pecuniary loss. The solvency requirements are more onerous for Class 6 business than for acting as a reinsurer.

The sales agreementt

On 6 May 1997 Appliance entered into a sales agreement with Coverplan and Retail. This recited that Retail wanted Appliance to offer repair contracts to Retail's customers and had agreed to allow Coverplan to sell the contracts as agent for Appliance. The sales agreement was to come into force on 11 May.

Under the sales agreement Appliance appointed Coverplan as its agent for the sale of repair contracts and Appliance undertook to appoint no other agent. The agreement declared that neither Coverplan nor Retail was responsible for dealing with requests by customers under the repair contracts. Appliance determined the price that the customer had to pay Coverplan for the repair contract and the price that Coverplan had to pass on to Appliance. The price that the customer had to pay Coverplan was called the gross contract price and in setting this price Appliance took into account advice from Coverplan and also the premium to be charged to Appliance by the Appellant under the insurance contract.

The price that Coverplan had to pass on to Appliance was called the net contract price. This was set by taking the premium that the Appellant would charge Appliance and adding the administration fee under the administration agreement together with a margin of 0.68% of the premium paid to the Appellant by Appliance. The difference between the gross selling price and the net selling price was the commission to which Coverplan was entitled for selling the repair contract. (In addition Coverplan became entitled to a further commission which meant that virtually all of the rebate of premium paid by the Appellant to Appliance under the insurance contract was paid on to Coverplan.) The sales agreement was governed by the law of England and Wales.

The administration and repair agreement

Also on 6 May 1997 Appliance entered into an administration and repair agreement with Distribution. This recited that Appliance provided repair services under repair contracts and that Distribution had agreed to provide Appliance with administrative and repair services in connection with the repair contracts. Under the agreement Appliance appointed Distribution as administrator and Distribution accepted such appointment as subcontractor of Appliance in relation to the administration and implementation of the obligations owed by Appliance to customers under the repair contracts.

Specifically, Appliance appointed Distribution to perform the fulfilment of Appliance's obligations to customers under the repair contracts either itself or via subcontractors. Distribution also agreed to provide Appliance with management information and to provide a customer complaints handling service in relation to complaints made against Appliance or its agents or subcontractors in connection with the business of selling or fulfilling repair contracts. Distribution was given authority on behalf of Appliance to deal with all requests or demands for service under the repair contracts and to make appropriate arrangements itself or through subcontractors to discharge such requests. Distribution was to decide if a product costing more than £100 would be repaired or replaced. If it were replaced that would mean the termination of the repair contract. Distribution was to decide whether one of the exclusions in the repair contract applied. However, it was specifically provided that neither party should have power to bind the other party save as contemplated by the agreement.

Distribution agreed to indemnify Appliance against any liability that Appliance might incur for repairs which were negligent or which gave rise to a product liability claim. Proposed subcontracts had to be approved by Appliance. Appliance agreed that during the course of the agreement it would use Distribution exclusively to discharge its obligations to customers under the repair contracts. Appliance agreed to pay Distribution for all parts and labour in accordance with a schedule setting out labour and call-out charges, and a small administration fee for each repair contract each year. Distribution agreed to send to Appliance each week a VAT invoice for all its charges for performing its obligations under the agreement. Appliance was to open a bank account in the Isle of Man which was to be the only account used for settlement of sums due under the agreement including sums due to Distribution. The agreement was covered by the law of England and Wales.

The insurance contract

Also on 6 May 1997 the Appellant as insurer and Appliance as insured entered into a contract. This is the contract of insurance at issue in the appeal. The contract recited that Appliance provided repair services to customers of companies in Group and that the Appellant had agreed to indemnify Appliance on the basis that Distribution would have sole responsibility for administering and procuring repairs. Clause 2.1 provided that the Appellant agreed to indemnify Appliance in respect of its liability for costs which were defined as all sums paid by Appliance to Distribution for repairs and replacements under the repair contracts issued by Appliance to customers of Retail. The contract also provided that Appliance should notify the Appellant of all contracts with repairers and also all subcontracts entered into by Distribution (insofar as Appliance was informed of them). The insurance contract provided that the commencement day was 11 May 1997 and that the policy should be governed by, and construed in accordance with, the laws of the Isle of Man.

The premium payable under the contract of insurance by Appliance to the Appellant was calculated according to a formula which took account of the number of products in each relevant category, a stated rating factor, the number of years the cover was to run and a stated sum insured for the year. A schedule to the policy gave the rating factors for all the different types of goods. The rating factors, and thus the premiums, were based on the most recent information available to the Appellant arising out of Cornhill's experience with the extended warranties.

The insurance contract also contained a provision for a rebate of premiums. The provision was that the Appellant as insurer would pay to Appliance as insured a rebate of the premiums in any year of an amount equal to 85% of the aggregate premiums paid to the insurer less the aggregate of all sums paid by the insurer to the insured in that year. As mentioned above, Coverplan became entitled to a further commission under the sales agreement which meant that virtually all of the rebate of premium paid by the Appellant to Appliance under the insurance contract was paid on to Coverplan.

The insurance contract was amended on 24 September 2003 by letter from the Appellant to Appliance. The letter stated that the definition of costs (for which the Appellant agreed to indemnify Appliance) was, for the avoidance of doubt, to include "all reasonable additional costs of the insured relating to the administration of the repair contracts and the provision of repairs caused by the failure or inability, for whatever reason, of the Administrator [Distribution] and/or the insured's repairers to provide administration and/or repairs normally provided by them to the insured."

The trust deed

Also on 6 May 1997 the Appellant, Appliance and a bank as trustee entered into a trust deed designed to ensure that there would always be sums available to meet the Appellant's obligations to pay Appliance who needed the funds to pay Distribution for the repairs done under the repair contracts. Under the trust deed the premiums payable by Appliance to the Appellant under the contract of insurance were paid into a trust account. The trustees were to pay the income to the Appellant, then were to discharge the Appellant's obligations to Appliance under the contract of insurance, and to hold the balance for the Appellant. However, the Appellant became absolutely entitled to any amount by which the aggregate value of the trust fund exceeded 120% of the value of the Appellant's liabilities to Appliance (not including any rebate of premium payable by the Appellant under the contract of insurance). The trust deed was governed by the law of the Isle of Man.

The effect of all the payments

The net effect of all the payments made under the four contracts was that, after the premium, the premium rebate, the commission and the further commission had been paid, Appliance received a very small percentage (0.68%) of the premium it paid to the Appellant. This accorded with the commercial agreement between the parties that Appliance would receive a small but certain return.

The commencement date

As mentioned the four contracts were each dated 6 May 1997 but were stated to commence on 11 May 1997. 6 May 1997 was a Tuesday and 11 May was a Sunday. We accept the evidence of Mr Carroll that retailers in the United Kingdom make up accounts, and produce comparable information, by reference to weeks and not to months. This is because a week shows a comparative cycle of trading whereas a month may contain more or less Saturdays or Sundays. So for reasons of comparability accounts are made up by reference to individual weeks which are then bundled into sets of four weeks which are bundled into years of fifty-two weeks (or sometimes fifty-three.) The four contracts were stated as commencing on 11 May, which was the beginning of a week, because of reasons relating to accounting and the management of the information flows from all the many transactions which would take place under the contracts.

The practical arrangements after 1997

Thus the practical arrangements after 11 May 1997 were that a customer who purchased a domestic appliance from Retail could also purchase a repair contract with Appliance. Until April 2001 the customer purchased the repair contract through Retail who sold it as agent for Coverplan who in turn sold it as agent for Appliance. After April 2001 Coverplan ceased to be an agent and the customer purchased the repair contract through Retail who acted as agent for Appliance. However, it was not argued that this change affected the arguments in the appeal and so, for reasons of simplicity, we refer in this Decision to the arrangements with Coverplan as including the later arrangements with Retail.

The repair contracts

The repair contracts were called service agreements and stated that they were with Appliance of the Isle of Man. They stated what was covered and what was not covered. They gave the customer details of what to do if the product failed with telephone numbers to call. Breakdowns which occurred outside the United Kingdom were included and instructions were given about how to arrange a repair. They stated that there was an instant replacement service for most products under £100; products costing over £100 would be repaired but, if they could not be repaired, they would be replaced. If a product was replaced it became the property of Appliance and the repair contract terminated. A number of matters were excluded from the repair contracts such as product failure through negligence, or damage or breakdown due to lightning, floods, wind or weather.

If a customer with a repair contract required a product to be repaired the liability was that of Appliance under the repair contract. Appliance sub-contracted the work of administering the service and doing the repairs to Distribution. Because Appliance was thus at risk of having to pay sums to Distribution for administration and repair it insured that risk with the Appellant. It is that insurance which is the subject of this appeal. These arrangements came to an end in March 2005.

Appliance accounted for value added tax on the repair contracts in the Isle of Man on the basis that the correct place of supply of services was where the supplier was situated; Appliance was the supplier and was situated in the Isle of Man.

The arguments in outline

The Appellant argued that the risk under the contract of insurance was situated in the Isle of Man because that was where the policyholder (Appliance) had its establishment. At the date of the contract of insurance (that is, 6 May 1997) there was only one establishment and that was in the Isle of Man; the other contracts did not commence until 11 May. However, if one considered the situation on 11 May, then the Appellant accepted that Coverplan was an agent for Appliance and that Coverplan was established in the United Kingdom. Distribution was a subcontractor and thus not an agent for Appliance and so the fact that Distribution had an establishment in the United Kingdom was not relevant. However, even if Appliance had establishments in the United Kingdom through the agency of Coverplan or Distribution, the establishment to which the policy related was Appliance's head office in the Isle of Man.

Customs argued that the insurance contract, the sales agreement and the administration and repair agreement were all dated on the same day and all came into effect on the same day. They all had inter-locking obligations and it was not possible therefore to consider the insurance contract on its own. They argued that Appliance had establishments in the United Kingdom because both Coverplan and Distribution acted as agents for Appliance. It was therefore necessary to identify the place where the activity which created the risk was exercised. It was the repair contracts which gave rise to the risk and the relevant activity was the entering into the repair contracts. That was done by Coverplan and so it was the establishment of Coverplan to which the contract of insurance related and that was in the United Kingdom.

Reasons for decision

Before considering the arguments of the parties we discuss the legislative provisions in more detail so as to identify the context of the issue we have to determine. We then consider the judgment of the Court of Justice in Kvaerner plc v Staatsecretaris van Financiën Case C-191/99 [2001] ECR I-4447 which casts some light on these provisions. We then apply the legal principles we have identified to the facts of this appeal.

The legislative framework

We first identify the meaning of the United Kingdom. We then summarise the relevant provisions of the Second Council Directive 88/357/EEC relating to direct insurance other than life insurance (the second non-life directive) as this explains a number of the provisions subsequently enacted in the context of insurance premium tax. After that we consider our national legislation relating to insurance premium tax.

The meaning of the United Kingdom

Schedule 1 of the Interpretation Act 1978 provides that "British Islands" means the United Kingdom, the Channel Islands and the Isle of Man and "United Kingdom" means Great Britain and Northern Ireland. Thus the Isle of Man is not part of the United Kingdom.

The second non-life directive

The purpose of the second non-life directive was to make it easier for insurance undertakings having their head office in the Community to provide services in other member states thus making it possible for policy-holders to have recourse to insurers established in other member states. It dealt with both supervisory and taxing provisions.

Article 12 provided that where an insurer, through an establishment in a member state, covered a risk situated in another member state, the latter was to be the member state of provision of the services. Article 25 provided that every insurance contract was to be subject exclusively to the indirect taxes of the member state where the risk was situated. Thus the situation of the risk determined where the insurance was regulated and taxed.

Article 2(d) of the directive defined the member state where the risk was situated and gave different tests for buildings, vehicles, travel and other risks. As this appeal does not concern buildings, vehicles or travel we do not refer to any of the legislation relevant to those categories of insurance. As far as the other risks are concerned, the directive provided that the risk was situated in the member state where the policyholder had his habitual residence or, if the policy holder was a legal person, the member state where the policyholder's establishment to which the contract related was situated.

The meaning of the word establishment was clarified in Articles 2(c) and 3. Article 2(c) stated that establishment meant the head office, agency or branch of an undertaking, account being taken of Article 3. Article 3 provided that any permanent presence of an undertaking was treated in the same way as a branch or agency if it consisted of an office managed by the undertaking's own staff or by an independent person who had permanent authority to act for the undertaking as an agency would. It is clear from other provisions of the directive that the word "undertaking" in Article 2(c) and 3 referred to the insurer (the undertaking) and not to the policy holder.

Thus the directive provided that the member state for the purposes of supervision and tax was the member state where the risk was situated and that was in the state of the policyholder's establishment to which the insurance contract related.

We add that Article 7(1)(b) of the directive provided:

"7(1)(b) Where a policy-holder does not have his habitual residence or central administration in the member state in which the risk is situated, the parties to the contract of insurance may choose to apply either the law of the member state in which the risk is situated or the law of the country in which the policy holder has his habitual residence or central administration."

Insurance premium tax

With the provisions of the second non-life directive in mind we now turn to consider our national legislation relating to insurance premium tax.

We have summarised the main provision relating to insurance premium tax in paragraph 4 of this Decision and we added that other provisions provided that the risk is situated in the member state where the establishment of the policyholder to which the policy relates is situated at the date when the contract of insurance is entered into. We now summarise those other provisions.

The situation of the risk - before December 2001

Before 1 December 2001 paragraph 8 of schedule 7A of the 1994 Act also provided that section 96A(3) of the Insurance Companies Act 1982 (the 1982 Act) should apply to determine whether a risk was situated in the United Kingdom but with some changes which related only to buildings. Section 96A was enacted in order to implement the second non-life directive. Section 96A (3) provided:

"96A(3) References in this Act to the member state where the risk is situated are: …

(d) in a case not covered by paragraphs (a) to (c)-

(i) where the policy holder is an individual the member state where he has his habitual residence at the date when the contract was entered into;

(ii) otherwise to the member state where the establishment of the policy holder to which the policy relates is situated at that date."

Section 96A(2) defined the meaning of the word establishment in relation to insurance companies and provided;

"96A(2) In this Act, in relation to an insurance company, "establishment" means the head office or a branch of the company; and references to a company being established in a State mean that the company has its head office or a branch there.

Any permanent presence of an insurance company in a State other than that in which it has its head office shall be regarded as a single branch, whether that presence consists of a single office which, or two or more offices each of which-

(a) ia managed by the company's own staff;

(b) is an agency of the company; or

(c) is managed by a person who is independent but has permanent authority to act for the company in the same way as an agency. "

There was no separate provision about the meaning of the word establishment in relation to a policy holder. However, in this appeal the Appellant accepted that the same meaning could be given to the establishment of the policyholder.

Thus section 96A(3) provided that the risk was situated in the member state where the establishment of the policy holder to which the policy related was situated at that date. Section 96A(2) contained a definition of establishment as including head office, branch, or permanent presence which included an agency or other office managed by an independent person with permanent authority to act in the same way as an agency.

The situation of the risk - after December 2001

After 1 December 2001 paragraph 8 of schedule 7A provided that the question of whether a risk is situated in the United Kingdom should be determined in accordance with regulations made under section 424(3) of the Financial Services and Markets Act 2000. The relevant regulations are the Financial Services and Markets Act 2000 (Law applicable to Contracts of Insurance) Regulations 2001 SI 2001 No. 2635 (the 2001 regulations). The regulations set out the applicable law for contracts of insurance. Article 2 is the interpretation Article. Article 2(2) provided:

"2(2) References to the EEA state where the risk covered by a contract of insurance is situated are to: …

(d) in any other case -

(i) if the policy holder is an individual, the EEA state in which he resides on the date the contract is entered into,

(ii) otherwise the EEA state in which the establishment of the policy holder to which the policy relates is situated on that date."

Article 2(1) of the 2001 regulations defined establishment in the following way:

"(1) "establishment" in relation to a person ("A") means-

(a) A's head office;

(b) any of A's agencies;

(c) any of A's branches ;or

(d) any permanent presence of A in an EEA state, which need not take the form of a branch or agency and which may consist of an office managed by A's staff or by a person who is independent of A but has permanent authority to act for A as if he were an agency."

Thus the meaning of establishment in Article 2(1) applies to any person which includes an insurance company and a policy holder.

Thus the effect of the legislation, both before and after December 2001, was that the risk under a contract of insurance was situated in the state where the establishment of the policy holder to which the policy related was situated at the date that the contract of insurance was entered into. The Appellant accepted that both before and after December 2001 the word establishment in relation to the policy holder meant head office, branch, agency or permanent presence.

Kvaerner

Kvaerner was a judgment of the Court of Justice given in 2001 and concerned the meaning of the policyholder's establishment in the second non-life insurance directive. Kvaerner plc was a policyholder and was incorporated in England. It held (through an English subsidiary) all the shares in a Dutch company, John Brown Engineers and Constructors BV (referred to as JB BV). Kvaerner plc took out a worldwide insurance policy with a United Kingdom insurer covering the business risks of all its subsidiaries, including the business risks in Holland of JB BV (without being instructed to do so by JB BV). The business risks included professional indemnity insurance, umbrella insurance and catastrophe insurance. Kvaerner plc paid the premiums and invoiced JB BV for part of the premiums. The Dutch tax authorities imposed a charge to insurance tax on the part of the premium paid by JB BV to Kvaerner plc on the basis that that part of the premium related to the risks linked to the business operations of JB BV and those risks were situated in the Netherlands. Kvaerner plc argued that it was the policy holder and that JB BV was a sub-subsidiary and not an establishment of Kvaerner plc. The Dutch High Court asked the Court of Justice whether the Netherlands could charge insurance tax on a policy between an English company and an English insurer.

The Court of Justice held that the definition of establishment was not the same for the insurer and the policyholder; for the insurer an establishment did not include a subsidiary but for the policyholder it could and, in deciding that point, it was necessary to consider the context and objectives of the directive. At paragraph 44 the Court said;

"44. It is clear from Article 2(d) … of the Directive that the Community legislature intended to propose, for all types of risk insured, a solution enabling the State where the risk is situated to be determined on the basis of concrete and physical, rather than legal criteria. The purpose was that there should be a concrete factor corresponding to each risk which would allow it to be localised in a specific Member State."

In paragraph 45 the Court considered the provisions of the directive relating to buildings (the risk is where the building is), vehicles (the risk is where the vehicle is registered) and travel risks (the risk is where the policy is taken out) and continued in paragraph 46:

"46. Article 2(d), final indent, of the Directive was intended to enable the Member State where the risk is situated to be determined in all cases not provided for in the previous indents. So, the objective of Article 2(d), final indent, is in particular to lay down a residual rule for the determination of the place where a business risk is situated when that risk is not specifically linked to a building, a vehicle or travel. To that end, emphasis is placed on the place where the activity whose risk is covered by the contract is exercised. For that purpose, the legislature had recourse to the criterion of the policy-holder's habitual residence where he is a natural person and to the criterion of the establishment to which the contract relates where the policy holder is a legal person."

The Court went on in paragraph 47 to conclude that where a parent company in one member state took out insurance to cover risks linked to the activity of a sub-subsidiary established in another member state the establishment of the sub-subsidiary was the place where the risk was situated. In paragraph 52 the Court said that the aim of the directive was to ensure that the power to tax "should be recognised on the basis of a concrete and objective criterion, ignoring the legal situation of the policy-holder and concentrating on the location of the activities the risks of which are covered." It followed that that part of the premium paid by the parent company which was attributable to JB BV was a Dutch risk which should attract insurance premium tax in the Netherlands.

Thus Kvaerner is authority for the principle that the definition of establishment in the second non-life directive refers to insurance companies only and not policyholders. A subsidiary, or a sub-subsidiary, cannot be an establishment of an insurance company but can be an establishment of a policyholder. In considering the establishment of the policy holder to which the insurance contract relates it is necessary to ascertain the location of the activities the risks of which are covered by the policy; if that location is the sub-subsidiary then the sub-subsidiary is the establishment of the policy holder to which the risk relates.

The application of the legal principles to the facts of this appeal

With that legal background in mind we now turn to consider the questions arising from the arguments of the parties which are:

(1) whether, on the date that the contract of insurance was entered into, the policyholder (Appliance) had only one establishment which was its head office in the Isle of Man; and

(2) if not (and if, on the date that the contract of insurance was entered into, Appliance had establishments through agents in the United Kingdom) the establishment of Appliance to which the policy related was situated in the Isle of Man or in the United Kingdom.

Question (1) – Did the policyholder have only one establishment?

The first question is whether, on the date that the contract of insurance was entered into, the policyholder (Appliance) had only one establishment which was its head office in the Isle of Man.

The Appellant argued that the legislation referred to the date the contract was entered into not the date of commencement. The date that the contact of insurance was entered into was the date it was signed, that is 6 May 1997. On that date Appliance only had one establishment and that was its head office in the Isle of Man. The sales agreement and the administration and repair agreement did not come into effect until 11 May 1997. The Appellant accepted that the sales agreement appointed Coverplan to be an agent of Appliance but argued that Distribution was not an agent. Even if Distribution were an agent of Appliance, neither Coverplan nor Distribution were agents of Appliance on 6 May 1997 and so the establishments of those agents in the United Kingdom were not establishments of Appliance on 6 May 1997.

Customs argued that the insurance contract, the sales agreement and the administration and repair agreement were all signed on the same day (6 May 1997) and all commenced on the same day (11 May 1997). On 6 May contractual relations existed between the parties to all three agreements who were then bound by the obligations in the agreements. Until the sales agreement came into effect no repair contracts would be sold; the premiums under the contract of insurance were calculated by reference to the goods the subject of the repair contracts and the risk under the contract of insurance only arose after the repair contracts had been sold. Customs' first argument was that the "date the contract was entered into" was the date that the contract was signed (6 May 1997) and on that date the sales agreement and the administration and repair agreement had also been entered into. On that date Appliance had appointed Coverplan and Distribution to be its agents and both had establishments in the United Kingdom. Alternatively, Customs argued that the words "on the date that the contract is entered into" was the date that the contract of insurance commenced and on that day the other contracts commenced also.

In considering the arguments of the parties we recall that section 96A(3)(d) of the 1982 Act and Article 2(2)(d)(i) of the 2001 regulations both provide that the member state where the risk is situated is the member state where the establishment of the policy holder to which the policy relates is situated "at the date when the contract was entered into". In this appeal the contract of insurance was signed on 6 May 1997 and commenced on 11 May. However, the contract of insurance was signed on the same date (6 May 1997) as the sales agreement and the administration and repair agreement and all three commenced on the same date (11 May 1997). We accept the evidence of Mr Carroll that the date of commencement was fixed for commercial reasons.

All three contracts (the contract of insurance, the sales agreement and the administration and repair agreement) were of an interlocking nature and were interdependent. For example, clause 2.1 of the contract of insurance provided that the Appellant agreed to indemnify Appliance in respect of its liability for costs which were defined as all sums paid by Appliance to Distribution for repairs and replacements under the repair contracts issued by Appliance to customers of Retail. Of course the repair contracts were sold under the sales agreement by Appliance to the customers of Retail through the agency of Coverplan. The contract of insurance also provided that Appliance should notify the Appellant of all contracts with repairers and also all subcontracts entered into by Distribution (insofar as Appliance was informed of them). These facts indicate to us that we should be cautious in adopting an approach to the contract of insurance which we do not also adopt to the sales agreement and the administration and repair agreement.

We are also mindful of the guidance of the Court of Justice in Kvaerner that when interpreting the words of the second non-life directive it is necessary to have regard to the context and objectives of the directive. We note that the words "at the date when the contract was entered into" do not appear in the directive but appear only in our national legislation. This indicates to us that we should not give a narrow meaning to those words if to do so would be to ignore the context and objective of the directive which requires us to ascertain the location of the activities the risks of which are covered by the contract of insurance.

For these reasons we conclude that "the date when the contract was entered into" was the same for all three agreements. The agency arrangements established under the sales agreement and/or the administration and repair agreement were effective from the same date as the contract of insurance. That leads on to a consideration of whether, on that date, Appliance had more than one establishment.

The Appellant accepted that Coverplan was an agent for Appliance as it sold repair contracts for Appliance and had the ability to bind Appliance. However, the Appellant argued that Distribution was not an establishment of Appliance as it was always a sub-contractor and not an agent as it did not have power to accept or create new obligations on behalf of Appliance; in performing the administration and repair service Distribution was merely providing a service to its customer, Appliance, and a mere provision of services did not render the provider an establishment of the customer. Customs argued that Appliance had establishments in the United Kingdom through both Distribution and Coverplan. Distribution was a permanent presence of Appliance managed by a person who had permanent authority to act for Appliance in the same way as an agency. They accepted that a mere sub-contractor would not be an establishment of the main contractor as normally there would be no permanent presence and a subcontractor could not alter the legal relations between his principal and another as an agent could. However, under the repair and administration agreement, Distribution had authority from Appliance.

In considering these arguments we remind ourselves that the definition of an establishment of Appliance includes head office, agency, branch, or permanent presence being an office managed by a person independent of Appliance but with permanent authority to act for Appliance in the same way as an agency. Under the administration and repair agreement Distribution was appointed as subcontractor of Appliance but was also given authority to deal with all requests or demands for service under the repair contracts and to make all appropriate arrangements itself or through subcontractors to discharge those requests. It would be Distribution who would decide if a product costing more than £100 would be repaired or replaced. If it were replaced that would mean the termination of the repair contract. It would be Distribution who would decide whether one of the exclusions in the repair contract applied. However, the administration and repair agreement specifically provided that neither party should have power to bind the other party save as contemplated by the agreement.

What Distribution could not do, however, was to alter the contractual arrangements which already existed between Appliance and the customer; neither could Distribution create new obligations binding on the Appliance. Although, therefore, Distribution had some authority to act for Appliance we do not consider that Distribution had a permanent authority to act for Appliance as if it were an agency within the meaning of the second non-life directive. We are therefore of the view that Distribution was not an agent of, or an establishment of, Appliance in the United Kingdom. (However, in case we are wrong about that we have also considered Question (2) on the basis that Distribution was an establishment of Appliance in the United Kingdom.)

We therefore conclude that, on the date that the contract of insurance was entered into, the policyholder (Appliance) had more than one establishment, namely its head office in the Isle of Man and the establishment of its agent Coverplan in the United Kingdom.

Question (2) – To which establishment of the policyholder did the policy relate?

The second question is if, on the date that the contract of insurance was entered into, Appliance had establishments through agents in the United Kingdom, whether the establishment of Appliance to which the policy related was situated in the Isle of Man or in the United Kingdom.

The Appellant argued that, even if Distribution were an establishment of Appliance, as Coverplan was, nevertheless the establishment of Appliance to which the contract related was its head office in the Isle of Man. The effect of the contract of insurance was to indemnify Appliance for the amount of repair costs it had to pay to Distribution under the repair contracts. Distribution was paid by Appliance in the Isle of Man. The risk insured was the possibility that payments would have to be made by Appliance for the repair of a product. The Appellant's licence was in respect of pecuniary loss and not in respect of product liability.

Customs argued that as Appliance had an establishment in the Isle of Man (its head office) and in the United Kingdom it was necessary to ascertain the location of the activities the risks of which were covered by the policy. Appliance was insured in respect of the amounts it had to pay to Distribution arising out of the repair contracts and it was impossible to divorce that payment from the repair contracts. The Appellant insured the risk of costs that Appliance was exposed to because it had entered into obligations under the repair contracts. The activities of Appliance which gave rise to the risk were carried out by Coverplan on behalf of Appliance. The risk arose on the sale of the repair contracts as under the repair contracts Appliance assumed obligations and was then at risk of having to make a payment to repair the product if there were a breakdown. If no repair contracts were sold then no risk was covered under the policy. It was necessary to identify the place where the activity which created the risk was exercised. It was the repair contracts that gave rise to the risk and the relevant activity was the entering into the repair contracts. Customs also referred to the premium under the insurance contract where the rating factors were related to the likelihood that a particular product would require repair.

In case we are wrong in our view that Distribution was not an establishment of Appliance in the United Kingdom we ask if the establishment of Distribution, or the establishment of Coverplan, was the establishment to which the policy related. Kvaerner is authority for the principle that in deciding the establishment of the policyholder to which the insurance contract relates it is necessary to ascertain the location of the activities the risks of which are covered by the policy. In that case the risks covered by the policy were the business risks in Holland of JB BV and the cover included professional indemnity insurance, umbrella insurance and catastrophe insurance. It followed that the location of the activities the risks of which were covered was the establishment of JB BV in Holland.

We thus turn to identify the risks covered by the contract of insurance. The risk insured was pecuniary loss and was described in clause 2.1 of the contract of insurance which provided that the Appellant agreed to indemnify Appliance in respect of Appliance's liability for costs. Costs were defined as all sums paid by Appliance to Distribution for repairs and replacements under the repair contracts issued by Appliance to customers of Retail. Thus the insured risks were the contingency that a product covered by a repair contract would break down, that a demand for repair or replacement would be made, that the repair or replacement would be undertaken by Distribution, and that the costs of Distribution would become payable by Appliance. The risks were accurately summarised in the letter dated 27 April 1997, sent by the Appellant to the income tax authorities in the Isle of Man, as "that of paying the cost of repairs on the breakdown of electrical products sold by Dixons".

It is relevant that a customer, who was the holder of a repair contract could not look to either Coverplan or Distribution for performance of Appliance's obligations under the repair contract. Further, only Appliance had an interest in the insurance policy. If the Appellant (as insurer) failed to meet the claims under the insurance

policy then Appliance, and only Appliance, remained liable to the customer who held a repair contract.

Bearing in mind the insured risks we now turn to ascertain the location of the activities the risks of which were covered by the policy. Those activities were the obligation to pay for repairs. That obligation was the obligation of Appliance and was not an obligation of Coverplan or Distribution. The only location of Appliance's obligation was at its establishment in the Isle of Man.

The activities of Coverplan and the activities of Distribution were not covered by the contract of insurance. So, if Coverplan mis-sold a repair contract, or suffered a business loss from the activity of selling a repair contract, or caused personal injury when selling a repair contract, that risk was not covered by the contract of insurance. No activity of Coverplan was covered by the contract of insurance. Cover under the contract of insurance only arose after the repair contracts had been entered into at which stage Coverplan had no further involvement. Similarly, if Distribution carried out a repair negligently, or caused personal injury while carrying out a repair, or suffered a business loss while carrying out a repair, that risk was not covered by the contract of insurance. Nor was the risk related to the transferring of the money from Appliance to Distribution insured. No activity of Distribution was covered by the contract of insurance. The contract of insurance only related to the obligation of Appliance to pay sums to Distribution after a repair had been carried out at which stage the activities of Distribution had ceased. Thus the activities of Coverplan and Distribution were not activities the risk of which was covered by the contract of insurance and so the establishments at which those activities were located were not the place where the risk under the contract of insurance was situated.. .

We conclude that the establishment of Appliance to which the policy related was the head office of Appliance in the Isle of Man.

Decision

Our answers to the questions arising from the arguments of the parties are:

(1) that, on the date that the contract of insurance was entered into, the policyholder (Appliance) had more than one establishment, namely its head office in the Isle of Man and the establishment of its agent Coverplan in the United Kingdom; and

(2) that the establishment of Appliance to which the policy related was the head office of Appliance in the Isle of Man.

Thus the risk under the contract of insurance was situated in the Isle of Man That means that the appeal is allowed. This is a unanimous decision. The Appellant may make an application for costs.

This Decision was originally released to the parties on 16 October 2007.

This version corrects clerical mistakes under rule 30(6).

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 25 October 2007

LON/2006/9003

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