Royal Bank of Scotland v Revenue And Customs

VAT exemptions must be construed properly and strictly applied, but not given an artificially narrow meaning. The claimant must establish that the relevant transaction falls within the exemption.

An insurance intermediary must perform characteristic intermediary functions. A mere mechanical referral or click-through facility is insufficient. Relevant indicators include conducting a business of bringing insurers and potential insureds together, performing services characteristic of broking, and having freedom of choice as to the insurer referred to. Fiscal neutrality cannot extend an exemption to activities that are not economically competitive with exempt brokerage services.

Royal Bank of Scotland appealed against a decision of the VAT and Duties Tribunal dated 16 September 2008. The Tribunal had held that commission payments made under arrangements transferring Prudential’s general insurance business did not qualify for VAT exemption.

The appellant relied first on Value Added Tax (Special Provisions) Order 1995, Article 5, contending that the commissions were consideration for a transfer of part of a business as a going concern. Alternatively, it relied on the insurance intermediary exemption under Article 13B(a) of the Sixth Directive and section 31 and Schedule 9 to the Value Added Tax Act 1994. The central issues were whether UK Insurance Limited was the relevant transferee and whether Prudential’s activities were those of an exempt insurance broker or agent.

1. Going-concern exemption. The appeal under Article 5 of the Value Added Tax (Special Provisions) Order 1995 failed because the relevant transferee was Winterthur Swiss, which was not a taxable person. The later novations to Winterthur Bermuda and UK Insurance Limited did not retrospectively substitute those companies as transferees of the original transfer. Article 90 of the Value Added Tax Regulations 1995 concerned the time of supply and could not alter the historical identity of the transferee. It also could not operate as suggested because Article 5 treated no services as supplied.
2. Since the condition concerning the transferee was unsatisfied, it was unnecessary to decide whether the commissions formed part of the consideration for the original transfer. The court nevertheless observed that there was much to be said for the Tribunal’s conclusion that they did not.
3. Insurance intermediary exemption. The exemption had to be construed properly and applied strictly. A broker or agent must perform services characteristic of an intermediary. A mere conduit, mechanical referral or click-through facility is insufficient. The relevant activities must involve more than passing customer details to an insurer.
4. Prudential did not act as an insurance broker. It had no freedom of choice as to the insurer, passed enquiries exclusively to UK Insurance Limited, undertook no material preparatory work for insurance contracts, and provided no relevant assistance in their administration or performance. Its additional activities concerned product development, marketing, pricing and brand protection and were characteristic of an insurer’s activities rather than broking.
5. The principle of fiscal neutrality did not assist the appellant. Prudential was not carrying out the same transactions as brokers, was not providing intermediary services and was not in relevant competition with brokers. The appeal was dismissed.

• High Court (Chancery Division): The appeal from the VAT and Duties Tribunal decision dated 16 September 2008 was dismissed.