VAT applicable to insurance broker network membership fees Westinsure Group Ltd [2013] UKFTT 114 (TC) Networks of insurance intermediaries will need to consider their VAT position following this decision. The First Tier Tribunal (FTT) has decided that membership fees paid by insurance brokers to the organiser of a brokerage network are liable to VAT at the standard rate. Whilst the outcome is very fact-specific, it could potentially have wider application. The Appellant acts as an intermediary in the arranging of contracts of insurance. Essentially, it has relationships with insurance providers on the one hand, and with insurance brokers on the other. The brokers are fairly small businesses which would not be able to obtain the more favourable terms of business which insurers will offer to larger brokers who can bring them larger volumes of business. So the Appellant has developed relationships with about 180 of these smaller businesses and acts as intermediary on their behalf. In that way, it has been able to negotiate more favourable terms, in particular higher commissions. The Appellant described its range of activities, from the perspective of the brokers, as follows: negotiating with insurers to achieve beneficial rates of commission, superior products and service standards and lower premiums; negotiating with businesses which provide premium instalment finance to achieve better finance rates; visits and communications to brokers to provide updates and information on insurance matters and products and ideas for generating further business; a free annual insurance exhibition organised to allow brokers to meet insurers; regional meetings to meet and network and the development of online communications within the members section of its website; negotiating with the Chartered Insurance Institute for discounts on its qualifications and competence products for brokers; and organising assistance with brokers FSA compliance obligations through a third party provider. From the perspective of the insurers, the Appellant described its range of activities as:
visiting brokers to explain the insurers products so as to encourage the brokers to select the insurers' products for their clients; providing information relating to the insurers products on the members' section of its website; distributing sales literature and presentations by way of newsletters and news updates on the members' section of the website; and developing the amount of business which can be placed with insurers; e.g. by sharing current ideas or developments in the insurance industry with the brokers. The typical chain of an insurance transaction will be that the insurer will insure customers found by a broker who is a member of the Appellant's network of brokers, the broker having communicated with the insurer via the Appellant's online brokerage system which provides centralised purchasing and insurance-related support services. The insurer will pay commission to the Appellant and a separate commission to the broker. The Appellant's other source of income, apart from commissions received from the insurers, is the membership fees paid to it by the network's brokers. These fees are based on the volume of business brought to the network by each broker in the previous year, and adjusted at year end once the current year's figures are settled. In addition to the membership fee, a 250 joining fee is also payable to the Appellant. The dispute in this case concerned only the services provided by the Appellant to the brokers in return for these membership fees, and whether they constituted the services of a broker or agent providing the services of an insurance intermediary for the purposes of the exemption granted by Item 4 Grp 2 Sch 9 VAT Act 1994. The FTT noted that HMRC had rules that the commissions received by the Appellant were exempt and were not an issue in this case, although Counsel for HMRC suggested that HMRC might review its position. HMRC's view was that the Appellant was carrying on a business of providing promotional services to the insurers and aggregation services to the brokers, i.e. the benefits to the brokers were enhanced commissions and wider access to insurers' products because of the greater buying power created by the network. HMRC considered that these services did not amount to an intermediary service. In 2011, HMRC issued a ruling to that effect and compulsorily registered the Appellant for VAT with effect from 2005.
Held The FTT began by acknowledging that there was no doubt that the Appellant's supplies were services related to insurance, but the question was whether they were the services of an intermediary. It then moved on to an in-depth consideration of the case law, culminating in InsuranceWide.com [2010] EWCA Civ 422. The FTT considered that the principles set out by the Court of Appeal in that case must be applied to determine whether the Appellant's supplies were within the scope of the exemption. It had to decide whether the services could be properly described as the business of bringing together insurers and those seeking insurance, the essential characteristic of an insurance broker or an insurance agent, as opposed to providing insurance-related services which fell short of the essential characteristics that denote services provided by an insurance agent or insurance broker because they are incidental to the insurance transactions that result. In particular: there must be a relationship with both the insurer and the insured, but the relationship could be direct or indirect and did not require a contractual relationship with either; related services as used in art 135(1)(a) Principal VAT Directive 2006/112/EC were services which had a close link to insurance transactions rather than merely being ancillary to insurance transactions; the intermediary must not himself be an insurer or purchaser of insurance, but his business must have a distinct independent substance and he must be paid for his intermediary services; and insurance intermediation required the bringing together of people who want to sell insurance with people who want to buy insurance with a view to entering into insurance transactions. The FTT held that, whilst the third of these criteria was satisfied, the others were not. The Appellant was too far removed from the conduct of any individual transaction to be described as a broker or agent. The Appellant's services certainly assisted the brokers to do business with the insurers but the FTT regarded these as preparing the ground to enable others to intermediate, and were too remote from the insurance transactions to be the services of an insurance broker or insurance agent. In respect of the brokers, the core obligation was to grant access to the insurers and their products on favourable terms.
To constitute the services of an insurance broker or insurance agent, the Appellant would need to participate in the intermediary services, but the services were more akin to support services than acts of intermediation in themselves. An essential characteristic of an insurance broker or insurance agent is that he is engaged in the business of putting insurance companies in touch with potential clients. In this case, the Appellant did not participate in the chain but made arrangements which facilitated the creation of such a chain between the insured and the insurer. It was clear from InsuranceWide that merely acting as an introducer in a chain of intermediaries would also be insufficient. InsuranceWide was providing valuable services characteristic of an insurance broker such as recommending insurers for the competitiveness of their pricing and products and level of consumer service, but it was also part of the chain of supply as broker or agent, unlike the Appellant in this case. The Appellant had sought to argue that there was a chain of intermediaries but it went through two stages, firstly the Appellant set up the chain by putting the brokers and insurers together, and a second chain was created after particular clients had been introduced into the chain by the brokers to effect insurance. But the FTT did not consider that the Appellant was involved in the chain which actually led to the contract of insurance. The income received by the Appellant from the insurers might be exempt, but although the income received from the brokers was related to the premium income they generated, it was not transaction specific. The FTT therefore held that the services which the Appellant provides to the brokers were not services related to insurance transactions which are performed by an insurance broker or insurance agent within art 135(1)(a) Principal VAT Directive, and so were outside the scope of the Item 4 Grp 2 Sch 9 exemption. Comment The outcome in this case was very much dependent on the relationships between the various parties and the nature of the Appellant's activities. Any business organised in a similar manner should give careful consideration to this decision and ensure that the correct VAT treatment is being applied. Please contact 4 Eyes Ltd if you would like to discuss any of the issues arising from this decision.
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