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Arthur Andersen
On 3 March 2005, the European Court of Justice released its judgment in the case of Arthur Andersen (C-472/03). The case concerned the VAT liability of certain 'back office' services provided by Andersen Consulting Management Consultants to a life insurance company. Andersen Consulting used qualified personnel to undertake most of the activities related to insurance on behalf of the insurer including the issuing, management and cancellation of policies, the management of claims and, in most cases, taking decisions that bound the insurer to enter into insurance contracts.
The question put to the European Court was whether such back office activities carried out for an insurance company were exempt from VAT under Article 13B(a) of the Sixth Directive as 'related services performed by insurance brokers and insurance agents'.
To fall within the VAT exemption, Andersen Consulting had to qualify as either insurance broker or insurance agent. The European Court held that the essential characteristic of insurance brokers was that they had complete freedom as to choice of insurer for their clients and that, although insurance agents were tied to a particular insurer, their essential characteristic was that they introduced prospective customers to that insurer. As Andersen Consulting did not qualify on either count, its services were taxable at the standard rate.
HMRC's view is that the judgment means the UK VAT exemption for insurance-related services in VATA 1994, Sch 9 Group 2 is currently drawn too widely and, to bring it into line with the judgment, it will need to be amended.
UK law currently provides exemption for certain insurance administration and claims handling services including, for example, the provision of claims handling services by loss adjusters under delegated authority and the administration of policies on behalf of the insurer. Following the European Court judgment, however, such services should only fall within the VAT exemption for insurance-related services where the provider had also previously introduced the policyholder to the insurer.
HMRC believe that the judgment does not preclude exemption where the provider does not itself have direct contact with the customer, provided that it sub-contracts the introductory service to a sub-agent, and there is a direct contractual link between the principal agent and the agent providing the introductory service. However, the power to bind the insurer to enter into contracts is not in itself enough to gain exemption.
Implementation of the judgment will lead to VAT becoming chargeable on many of the outsourced services currently provided to insurers. Where insurers use these outsourced services to provide exempt insurance services within the EU, this VAT will be irrecoverable.
HMRC are currently meeting insurance industry representative bodies and providers of the affected services to discuss the impact of this judgment. Following these preliminary discussions, there will be a 12 week formal consultation period on how the judgment is to be implemented in the UK, the proposed changes to UK legislation and the impact implementation will have on the affected industries. It is important to note, however, that the European Court judgment is binding on member states and the consultation will therefore focus on how and when that implementation will take place. It is intended that the consultation document should be published in July 2005.
No action will be taken to change UK law or policy until formal consultation is complete. In the meantime, businesses can rely on UK law and policy on insurance-related services as it is currently explained in HMRC guidance and notices. There will be no change in the scope of the UK VAT exemption for insurance-related services until UK law has been amended.
Businesses affected by the judgment do not have to wait for the UK law to be amended but are able to rely directly on EU law as outlined by the European Court of Justice in its decision. This means that, if they wish such businesses can apply the revised VAT liability to their services from a current date, or make an adjustment retrospectively.
HMRC Business Brief 11/2005 dated 18 May 2005.
What is a garage?
HMRC have revised their policy on what constitutes a 'garage' for the purpose of the zero ratings relating to listed buildings which are dwellings. It follows a decision of the VAT tribunal in Grange Builders (Quainton) Ltd (LON/02/982).
In the past, HMRC have considered that in order for the alteration works to a garage to qualify for zero rating, it was necessary for the garage to have been constructed as a garage. However, in the above case, the tribunal found that, for the alteration of a garage to qualify for zero rating, the building did not have to have been constructed as a garage or used as a garage since the time of the construction (or substantial reconstruction) of the dwelling. It held that a small timber-framed barn that was listed as part of the dwelling and in use as a garage was part of the listed dwelling for the purpose of the zero rating because:
- the barn had been constructed at the same time as the listed dwelling; and
- it had been used as a garage for a significant period before being altered.
HMRC now accept that, provided a garage is in use as a garage before the alteration or reconstruction takes place and continues to be used as one afterwards, it is not necessary for the garage to have been constructed as a garage, i.e. as an enclosure for the storage of motor vehicles. It can also have been constructed as something different e.g. a barn.
The other criteria for zero rating must still be met; these are:
- listing: the garage must be listed, either in its own right or through the deeming provisions of planning law;
- occupation: the garage must be occupied together with the dwelling; and
- time of construction: the garage must have been either constructed at the same time as the listed dwelling or, where the dwelling has been substantially reconstructed, at the same time as that reconstruction.
Where a supplier has accounted for VAT on past supplies, they may make a claim for the overpaid VAT, subject to the three-year statutory time limits.
HMRC Business Brief 11/2005, dated 18 May 2005.
