A court has ruled that payments for collision damage waivers made by drivers of high-speed supercars were not exempt supplies of insurance, and were subject to 20% VAT.
Supercar Drive Days Ltd (TC06311) supplied exciting driving experiences in expensive high-powered vehicles to both corporate customers and members of the public. The rides were always accompanied by a qualified instructor (Association of Racing Driver Schools) and the vehicles all had dual control pedals.
However, if a customer caused damage to the vehicle that was their fault, and they would be liable to pay the first £3,000 of the repair costs (£2,500 + VAT). But this liability was removed if the customer made a payment of £25 to £30 to the appellant before the start of the hire period for a ‘collision damage waiver’.
The issue before the first tier tribunal (FTT) was whether the latter payment related to an exempt supply of insurance by the appellant, or a standard rated payment for a waiver benefit.
The company’s terms and conditions agreed in advance with drivers referred to a “collision damage insurance waiver fee.” However, the tribunal noted that until April 2016, there was no involvement of an insurance company, and although that changed after this date the new arrangement did not create a specific link between the customer’s payment and any insurance cover.
The description of “insurance waiver fee” in the T&Cs was not conclusive in its own right as evidence of a supply of insurance. If a driver caused damage as a result of “reckless, negligent or deliberate action”, the waiver fee was irrelevant anyway.
The tribunal decided that the payments were not for insurance, but were for an optional coverage that reduced the customer’s final liability in the event of damage to the vehicle. So the payments were standard rated for VAT. To quote from the report:
“Whilst the practical effect of making the CDW payment might be similar to purchasing insurance, I consider the legal nature of the transaction to be crucially different because it simply varies the potential liability of the Buyer under, and in accordance with, the original contract”.
The taxpayer’s appeal was dismissed. The reality was that the company insured its cars and risks with a registered insurer, but this insurance did not involve any supply to the drivers. So all the collision damage waiver payments were standard rated.
Many business deals give the buyer an opportunity to reduce or eliminate his exposure to a potential liability, such as the payment made for collision damage waiver in this case. But the tribunal decided that the taxpayer was acting as neither an insurance broker nor intermediary, so there could be no exempt supply of insurance.
This outcome highlights an important VAT principal that it is the nature of the supply and commercial reality that dictates the VAT liability, rather than how something is described on an invoice or in a contract.
This is a key learning point for many businesses, who are often tempted to save a bit of VAT by incorrectly describing certain extra charges to customers as ‘insurance’.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.