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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, reports a selection of recent VAT cases.

Tribunal decides taxpayer’s insurance-related services
Were exempt from VAT

The Appellant supplies outsourced services to the insurance industry. Its main activity is the collection of information from potential customers of insurance companies wishing to obtain life or health insurance.

An individual will contact an insurance company and apply for life or health insurance. The insurance company passes the details to the Appellant, and one of its consultants (a qualified nurse) will contact the applicant by telephone and interview them. They then obtain details of the applicant’s medical history, and complete a form with the relevant information. In addition to this, they may also arrange for a medical examination and take swabs and blood samples for testing.

Once this information has been obtained, the Appellant normally passes it to the insurance company with a recommendation as to the suitability of the applicant for insurance cover. In some cases, the Appellant offers the service of processing the application and making the decision on behalf the insurance company whether to insure the applicant.

It was argued that these services were essential to the conclusion of the supply of insurance, and were the services of an insurance intermediary within Item 4, Group 2, Schedule 9 of the VAT Act 1994.

It was accepted that following the Arthur Andersen [C-472/03] decision, the services supplied in this sector are treated as taxable under the Sixth Directive. However, the relevant UK legislation is drawn more widely and will not be amended until the EU Commission has completed its review of the legislation in this area.

After initial correspondence, an officer from HMRC visited the Appellant and initially agreed that they were acting as an insurance intermediary and were covered by the exemption. However, later HMRC verbally ruled that the Appellant was acting as an “expert” and was excluded from exemption. It was pointed out that although they employed qualified staff who were experts in their field, they were acting in an intermediary capacity. HMRC then gave a written ruling in September 2005 that made no reference to them being experts, but merely stated that they were not covered by the exemption and quoted paragraph 9.2 of Notice 701/36/02 in support of this. As competitors supplying virtually identical services had obtained rulings from HMRC confirming that their services were exempt from VAT, the Appellant appealed the decision to the VAT Tribunal.

The Appellant argued that the insurance exemption contained in Group 2 of Schedule 9 to the VAT Act 1994 is extended to insurance brokers and agents acting in an intermediary capacity by Item 4. The point is clarified by Notes 1 and 2, Note 1(b) states that the exemption extends to “the carrying out of work preparatory to the conclusion of contracts of insurance”. The extent of the exemption is also dealt with by Notice 701/36/02 paragraph 9.

Although not a ‘traditional’ insurance broker or agent, the Appellant argued that it was clearly an intermediary making supplies of “related services”, which also fall within the exemption. It further argued that Note 1(b) – the carrying out of work preparatory to the conclusion of contracts of insurance - precisely defines the work carried out by them.

HMRC argued that the Appellant was:

• not an insurance broker;

• that it was not in the chain of supply starting with the client and ending with the insurance company; and

• that its services were not directly involved in the contract of insurance but was more of a general overhead similar to the purchase of telecommunications services and computer equipment

The Tribunal chairman rejected the Commissioners’ arguments and found in favour of the taxpayer. The case confirms the right of UK businesses to rely on the wider interpretation of the UK legislation in the insurance exemption until such time as the legislation is amended following the review being undertaken by the EC Commission.

MorganAsh Limited (VTD 19,777)

VAT tribunal says sale of personal items on E-bay was not registerable turnover

To our knowledge, this is the first appeal where HMRC have alleged that the volume of sales effected on e-Bay was indicative of a business being conducted at a level above the VAT registration limits.

The Appellant argued that all the sales (which had been made because he and his wife had illnesses preventing them from continuing in salaried employment), were of items such as a collection of ceramic toast racks, which they had built up over the years from antiques and other collectors fairs, and which, crucially, were not purchased at the time with a view to resale.

HMRC took the simple view that the annual registration limit had been exceeded in the twelve months ending 29 February 2004, and required registration from 1 April 2004.

The position was complicated by the fact that the Appellant, having acquired a taste for selling through e-Bay, and having recognised that he would not return to salaried employment, decided to move into the business of buying and selling collectables from his home address, and accepted that VAT registration was required from 1 July 2004, the date when he believed a business to have been started and VAT registration to be required on the basis of anticipated future turnover. This enabled HMRC to argue that there was no material

difference in the Appellant's operations pre and post 1 July 2004. The Chairman therefore had to decide if there was indeed a material difference, primarily based on the provenance of the items being sold, which would mean that the VAT registration should take effect from 1 July 2004 and not 1 April 2004.

The Chairman rejected the HMRC assertions that the level of activity and other circumstantial factors were indicative that it was not merely a case of certain personal items being sold in 2003/early-2004, and accepted that the sales in that period were of goods not purchased at the time with any intention of resale. It probably helped that the Brogdens' collection of ceramic toast racks was expressly mentioned in a 2001 publication on such items (i.e. a couple of years before personal circumstances obliged the Brogdens to start selling them), and that Mrs Brogden is described in the decision as 'a very decisive woman'. The appeal was allowed.

Marcel Brogden (VTD 19,827)

Tribunal issues guidance on what supply chain knowledge a business should reasonbly have re ‘MTIC’ fraud checks

Ongoing litigation concerning the withholding by HMRC of input tax on mobile phones and other electronic equipment on the grounds that the sales were part of the facilitation of MTIC fraud by another party.

This is a further preliminary hearing, the original substantive hearing having been deferred pending the judgment of the ECJ in the Bond House and Optigen cases.

Following the ECJ judgment, aspects of the original substantive appeal were settled between the parties but other aspects remained under dispute. The further preliminary hearing was convened to resolve three outstanding points of law.

The main point of law related to the 'means of knowing' test suggested by the ECJ and the Tribunal summarised the questions thus:

‘What is the legal test that must be satisfied by the parties in the light of the decisions of the European Court of Justice in the conjoined cases of Bond House Systems Limited and others, Case C-484/03, of 12 January 2006, and the conjoined cases of Axel Kittel and Recolta Recycling SPRL v Belgium, Case 439/04 and any other relevant judgments and opinions, and in particular:

(a) what is meant by the expressions “of which that taxable person had … no means of knowledge” (Bond House judgment paragraphs 51, 53, 57) and “without that taxable person having any means of knowing” (Bond House judgment, paragraphs 52, 55, 57)?

(b) is the applicable test objective or subjective?

The parties have sharply different approaches to the answer to subquestion (a). But it is common ground that the answer to subquestion (b) is that the applicable test must be objective. As put by Mr Patchett-Joyce succinctly: means are objective.

The tribunal agrees.'

The Chairman’s conclusion was as follows:

Summarising, the Tribunal’s view is that the “means of knowing” are to be tested objectively by the following criteria:

(1) The taxable person must be judged by both the level of actual knowledge and the actions taken, or not taken, to acquire knowledge at the time of entry into the commitment that gives rise to the input tax. Hindsight cannot be used. There may be questions in individual cases about the time of entry into the commitment. The tax point of a transaction may depend on how the transaction is carried out (eg, where payment precedes delivery).

(2) The taxable person must make a proportionate response to information actually known that indicates fraud. That knowledge is not restricted to the immediate context of the supplier or purchaser of relevant goods to or from the taxable person. It includes knowledge of fraud “in the market” for the goods in question, as well as knowledge in the public domain, or otherwise actually known of fraud by a specific trader. It includes information about all known counterparties in the web of transactions of which the contract forms part, and counterparties that can be identified on proportionate enquiry made within the limits imposed by market confidentiality.

(3) The taxable person must take proportionate steps to use all means reasonably available to increase actual knowledge. For example, in these appeals, the tribunal saw the use of: checks on the validity of value added tax registration numbers; checks on customs stamps on goods going through a customs inspection; checks with and about individual suppliers and customers, including checks with national registration institutions; checks with credit agencies and inspection agencies, including checks on the IMEI numbers of telephones; use of appropriate terms of contract. Where an initial enquiry gives rise to information suggesting the need for further enquiry, the test is reapplied to assess the need for further enquiry. What is proportionate and reasonable is a matter of fact, and involves balancing actual cost and the opportunity cost of personal effort against risk.

(4) The taxable person, in making these checks, does not have to act to a higher standard of proof than that applied to the underlying claim. If disputed facts are determined by reference to the balance of probabilities, then that is also the standard by which the steps taken by a taxable person should be judged. A taxable person cannot be expected to take steps to ensure a transaction is clear of fraud beyond all reasonable doubt. That would be disproportionate. If, on what the taxable person knows after taking into account all actual knowledge and having made all proportionate enquiries, the better view is that there is probably no fraud connected with the transaction, then the taxable person has met the required standard.

(5) Whether the steps taken by a taxable person to avoid being connected with fraud are proportionate in an individual case must be a question of fact taking all the circumstances into account. There can be no presumption that because there is fraud in a chain of transactions then that fraud is known, or should have been known, to all others in that chain.

(6) Finally, the concern requiring investigation is with fraud on the public revenue through the value added tax system, not with other forms of fraud such as fraud on a foreign trader.

The other two points of law relate to whether the burden of proof position is now different to what it was in the original substantive hearing and whether HMRC are now required to issue new decisions and new statements of case.

Dragon Futures Ltd

November 2006

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: