WHA Limited -v- HMRC

The Supreme Court has handed down judgment in the case of WHA Limited -v- HMRC, another case in the line of judgments on third party consideration. The case received different judicial interpretations in the First Tier Tribunal (FTT), High Court, Court of Appeal and Supreme Court (although the decisions of the FTT and Supreme Court were quite similar). That greatly demonstrates that, 14 years after the decision in Redrow, third party consideration and tripartite supplies remains a very difficult issue.

The issue started with the perceived competitive disadvantage suffered by the taxpayer group, a provider of motor breakdown insurance. That competitive disadvantage was that the taxpayer group made exempt services of breakdown insurance, so could not recover the input tax charged by garages for repairs, but was obliged to charge insurance premium tax at a rate of 17.5 per cent. That compared unfavourably with a car dealer who sold warranties to motorists (which are not insurance), who would have to charge VAT on the warranty but would be carrying out a taxable business and so would therefore be entitled to full input tax recovery. The taxpayer group therefore put in place "Project C" to mitigate this.

Project C had the following material steps. An insurer, NIG, entered into the insurance contracts with consumers. It then reinsured 100 per cent of its risk to a group company called Crystal in Gibraltar, which in turn reinsured 85 per cent of that risk to another Gibraltan group company called Viscount. Viscount entered into a claims-handling arrangement with WHA, a group company in the UK, pursuant to which WHA agreed to handle all claims and entered into agreements with garages to provide for payment by WHA of repairs pursuant to the insurance. The contractual documentation entered into with consumers under the policies of insurance contemplated that WHA would be handling the claims and dealing with those individuals.

The planning had two strands and was designed to work as follows. Firstly, it was argued that the supplies made by WHA were claims-handling supplies made to a non-EU recipient and therefore, for VAT purposes, exempt but with a right of recovery of input tax: so WHA could recover the input tax charged to the garages, which was previously irrecoverable. Secondly, the insertion of Crystal was designed to provide a fall-back position if (as turned out to be the case) HMRC argued that the supplies made by WHA to Viscount were of parts and repairs, rather than claims-handling, in that it could then be argued that Viscount's supplies or reinsurance were made to a non-EU recipient and hence, again, outside the scope of VAT but with right of recovery of input tax (this was the so-called "Gibraltar loop").

HMRC put forward three arguments against the effectiveness of WHA's scheme. Its first contention was designed to defeat the scheme at source: HMRC argued that the garages undertaking the repairs were not making supplies to WHA. Rather, they were making supplies to the motorists. If that were the case, WHA would be denied its claim for input tax recovery as it would not have received any supply - its payments were mere third party consideration. HMRC then made arguments against each of the specific strands of Project C: firstly, that WHA's supply to Viscount was subject to VAT (as a supply of parts and repairs rather than claims-handling) and secondly that, if the first two arguments failed, Viscount was not entitled to recovery under the relevant UK legislation. The Supreme Court examined both the "paper trail" (as it had been called in the FTT's decision), that is, specimen contracts creating the arrangements in question, and also looked at the surrounding factual circumstances. Unfortunately for WHA, the contracts, and the substance of the arrangements, clearly did not create a factual matrix in which a supply of repairs was received by WHA. Rather, any such supplies were made to the motorist: WHA's obligation was merely one of payment. The argument was advanced by the taxpayer that, following the dictum of Lord Millett in Redrow, it was sufficient for WHA to receive "anything - anything at all" for the purposes of its business in order to establish its claim to input tax recovery. WHA argued that it had received something from the garage, namely the discharging of its obligations under the claims-handling contract. However, none of WHA, Viscount, Crystal or NIG were in fact obliged to have the car repaired. Rather, their obligation was one of paying for the repair. The Supreme Court held that mere payment for services that have the effect of discharging an obligation owed by the payer to a third party does not mean that the payer is receiving a supply for the purposes of VAT. In fact, payment by WHA was a supply made by WHA pursuant to the contract of claims-handling and not a supply by the garage to WHA; WHA was a mere paymaster with no taxable business to which a supply by the garages could be attributed. The interposition of the Gibraltar loop could not and did not affect this analysis as the Gibraltar loop planning was predicated on the premise that WHA was the recipient of supply from the garages. The scheme therefore failed.

There are two lessons of note from this case. The first relates to HMRC's litigation strategy which identified three possible arguments, the first of which would defeat the entire scheme and the second and third of which would defeat each strand. Clearly, HMRC's approach is, where possible, to take points that render a scheme ineffective at source without requiring them to counter the detailed steps of the planning. The second point is to do with the difficulty of the third party consideration and tripartite supplies. Fourteen years on from Redrow this still causes problems and arguably suggests that the decision in Redrow is not as clear as it might have been (although the difficulties the ECJ has had with this issue, e.g. in LMUK, suggest that tripartite contractual arrangements simply do not fit well within the VAT system). Certainly here the contractual documentation - and indeed the economic reality - did not assist the taxpayer and if one wants to draw distinctions with Redrow, one might say that in Redrow the taxpayer was organising the arrangements and had a greater degree of control over the estate agents than WHA did over the garages. Secondly, in Redrow the supplies made by the estate agents to house buyers were put in place as an inducement to help Redrow sell homes. Here, however, that was not the case as the entire point of WHA's activities was to pay for the repairs made by the garage; the payment by WHA was WHA's business. It is therefore difficult to see how WHA obtained anything for the purposes of its business as a result of the supply by the garage because WHA (and indeed NIG, Crystal and Viscount) had no other business to which the supply by the garages could be attributed. Although this was not explored in the Supreme Court's judgment, that differs from the position of a car dealer, which could attribute any input tax to its taxable business of car manufacture/sales. That therefore appears to undermine any argument of economic equivalence or distortion of competition. It is interesting to note in this regard that the Supreme Court stated that VAT is highly sensitive to minor changes in the factual circumstances. There is nothing anomalous about that, because a small change can entail a quite different commercial allocation of risk. Clearly, though, decisions in the tripartite supply scenario remain difficult for courts and taxpayers alike. The imminent ECJ judgment in the Ocean Finance case may shed further light on this area.

Please click on the links below for the other articles in the June 2013 tax newsletter.

• Partnership taxation - HMRC consultation on avoidance involving partnerships
• Bristol & West plc
• Fidex Ltd -v- HMRC
• STICS - discounts go to Hades
• General anti-abuse rule (GAAR)
• Colaingrove: composite supplies for VAT purposes
• Middle Temple -v- HMRC
• The Royal College of Paediatricians -v- HMRC
• PPG Holdings BV - AG's opinion on VAT on management advice to pension fund
• Special Italian tax regime applicable to medium-long term loans: abuse of law?
• HMRC brief on SDLT overpayment relief for TOGCs following Robinson case