VAT: When insurance is not an intermediary service
The tax tribunal agreed with HMRC that Safestore Ltd supplied insurance to its customers, and not an intermediary service related to its storage business.
This case (TC07115) considered both the nature of insurance supplies made by a storage business to its customers, and whether a separate company was based in the UK or outside the EU.
Law change in 2012
From 1 October 2012 supplies of storage became standard rated rather than exempt from VAT, meaning that VAT registration was necessary for thousands of storage businesses for the first time.
But there are still exempt challenges in the equation because members of the Self-Storage Association, of which Safestore Ltd belonged, have to ensure that all customers insure their goods. Business customers usually arranged their own policy but domestic customers normally take out a policy arranged by Safestore and a Guernsey based company Assay Ltd, which was then reinsured with Royal Sun Alliance. This is where the fun started.
There was over £800,000 of VAT at stake in the Safestore ltd case, but this was not an output tax dispute, ie whether the supply of insurance was a separate supply to the standard rated storage fees charged by Safestore, or incidental to the storage and therefore standard rated. This case was all about input tax, and it all turned on the quirk in the VAT regulations which distinguishes insurance services from insurance intermediary services.
If Safestore was supplying insurance services to its UK customers, then this income would be exempt from VAT, with a partial exemption input tax restriction on related costs. This was the approach of HMRC in disallowing a voluntary disclosure made by the taxpayer to reclaim input tax totalling £793,830. HMRC also raised a separate assessment for £72,615 to recover over-declared input tax.
Insurance intermediary services
If Safestore was supplying insurance intermediary services, this income would also be exempt from VAT, but the legislation allows input tax recovery if the customer receiving the intermediary services is based outside the EU. The customer in this case was Assay Ltd which was allegedly based in Guernsey (outside the EU), so Safestore Ltd had made ‘foreign’ and ‘specified’ supplies which carry an entitlement to claim input tax. HMRC’s view was that Assay was based in the UK so there was no right of recovery (VAT Notice 706, section 9).
The FTT ruled that Safestore was providing insurance rather than intermediary services. This was a pity for the company because the court was happy that Assay was based outside the EU in the Channel Islands. If intermediary services were being supplied (which was not the case), the £800,000 input tax windfall would have been secured.
Place of belonging
A fascinating issue in this case was how the court decided that Assay was based in Guernsey. HMRC’s argument was that it was UK based, making supplies from the 80 or so storage depots used by Safestore Ltd. This argument was rejected by the court. Assay employed no staff in any of the UK depots and did not have any other technical resources capable of making and receiving supplies: “At all material times, Assay had a majority of Guernsey independent directors.” (VAT Notice 741A, section 3).
The Safestore case shows yet again that the two key issues with VAT are the contractual relationships between the parties involved in a deal, and the customer perception of who he considers he is buying goods or services from ie Safestore in this case.
To summarise the judge’s thinking: “In my judgment, therefore, Safestore arranged a master or open cover policy – the Consumer Goods Policy – with Assay. Safestore has procured for its customers the insurance services specified in the Customer Goods Policy. That is a supply of insurance”
The other learning point is to be prepared to challenge HMRC if an officer applies unacceptable logic to conclude that a business is UK based rather than based in a non-EU country. There is a natural suspicion within HMRC of structures that involve the Channel Islands but each trading situation should be considered on its merits.
I feel that the taxpayer may appeal this decision because the insurance arguments are finely balanced, so watch this space.