WHA Limited and another v Her Majesty's Revenue and Customs

Whether a person receives a supply for VAT purposes depends on a realistic assessment of the transaction in its full economic context. Payment for services does not itself make the payer their recipient. Where an insurer has promised only to meet an insured person’s repair costs, payment of the garage by the insurer or its claims handler is third-party consideration for services supplied to the insured.

Interposing reinsurers and a claims handler does not convert payment of the insured loss into consideration for a supply to the claims handler. Input tax is deductible only where goods or services are supplied to the taxable person and used for its taxable transactions. A payer which merely disburses another’s funds, bears no VAT burden and receives nothing for its business from the supplier has no right to deduct the VAT.

The appellants participated in Project C, a scheme intended to recover VAT charged by garages for repairs covered by motor breakdown insurance. WHA handled and paid claims using funds supplied through a chain of Gibraltar-based reinsurers. It contended that the garages supplied repair services to it, enabling deduction of the VAT as input tax.

The Value Added Tax and Duties Tribunal rejected the claims: [2002] VATTR 202. The High Court reversed its decision on the first strand of the scheme: [2003] STC 648. The Court of Appeal initially held that garages supplied services to WHA and that Viscount could recover tax: [2004] EWCA Civ 559; [2004] STC 1081. It later reinstated the tribunal’s decision because the scheme was abusive: [2007] EWCA Civ 728; [2007] STC 1695.

The central issue was whether the garages supplied repair services to WHA for the purposes of its business, as well as or instead of supplying them to the insured vehicle owners.

1. Appeal dismissed unanimously. Lord Reed, with whom Lord Hope, Lord Walker, Lord Mance and Lord Carnwath agreed, held that the garages did not supply repair services to WHA. The Court of Appeal’s decision was affirmed, although on different grounds.

2. The taxable transaction had to be identified through a realistic appreciation of all the circumstances and the arrangements as a whole. Contractual relationships were a useful starting point but were not conclusive. The insurance policy obliged NIG to meet the cost of covered repairs. It did not oblige NIG to perform or procure the repairs. WHA’s contractual role was to negotiate, investigate, adjust, settle and pay claims, not to undertake responsibility for repairing vehicles.

3. The garage supplied the repair to the insured vehicle owner. Where an insurer pays a garage to discharge its promise to meet the insured’s repair cost, the payment is third-party consideration within article 11A(1)(a) of the Sixth Directive. The breakdown is the insured risk and the cost of repair is the cover. The cost is not consideration for a service supplied to the insurer.

4. The insertion of reinsurers and WHA into the payment chain did not alter the transaction’s economic reality. WHA acted only as paymaster for costs falling within the policy cover. The fact that payment discharged obligations arising through the contractual chain did not mean that WHA received the garage’s supply.

5. The deduction system supported that conclusion. WHA paid garages from Viscount’s float and did not bear the VAT burden. It added no value through the activity described as footing the bill. The insured was the final consumer of the repair service. Applying the realistic approach explained in Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408, WHA obtained nothing from the garage in return for payment that it used for its business. Making the payment was itself the relevant aspect of its business.

6. Fiscal neutrality did not require deduction. The Commissioners did not contend that WHA had to account for output tax in these circumstances. Since the absence of a supply to WHA disposed of the appeal, the court did not determine abuse of rights, the validity of the domestic legislation relied upon by Viscount, legitimate expectation or the Commissioners’ ability to raise that issue for the first time.

1. United Kingdom Supreme Court: Dismissed the appeal and affirmed the Court of Appeal’s final decision, although on the different ground that the garages made no supply of repair services to WHA: [2013] UKSC 24.

2. Court of Appeal: In its final judgment, held Project C abusive and reinstated the tribunal’s decision: [2007] EWCA Civ 728; [2007] STC 1695. In its interim judgment, it had held that the garages supplied services to WHA, that WHA’s onward supply was taxable and that Viscount could recover the resulting VAT: [2004] EWCA Civ 559; [2004] STC 1081.

3. High Court: Held that WHA could treat the VAT on garage bills as input tax, that its supplies to Viscount were exempt and that it could recover the input tax: [2003] STC 648.

4. Value Added Tax and Duties Tribunal: Held that the garages supplied repairs and parts to insured owners rather than WHA, and rejected the scheme’s other principal planks: [2002] VATTR 202.