In his latest monthly column for Tax Journal, Victor Cramer considers the law of unintended consequences and how it can apply to interaction with HMRC, examining the case of a taxi service trying to reclaim VAT on an insurance charge.

The VAT exemption for insurance transactions exists to prevent a simultaneous charge to VAT and insurance premium tax (IPT). GB Taxi Services Ltd v HMRC [2020] UKFTT 507 (TC) is therefore unusual in finding that the taxpayer was providing insurance but also outside the scope of IPT. It also offers a lesson about expecting the unexpected.

In that case, the taxpayer (GBS) leased a fleet of black cabs to drivers. GBS held a fleet insurance policy, under which it could extend cover to drivers. It charged for doing so.

GBS tried to reclaim VAT on the insurance charge, arguing quite reasonably that the provision of insurance is VAT exempt. HMRC rejected the claim. Correspondence ensued. GBS asserted that it made two separate supplies, being one supply of a vehicle and one supply of insurance.

Reaction of HMRC

HMRC seized on this assertion, registered GBS for IPT and issued an assessment. GBS appealed. It seems implicit in HMRC’s approach and the tribunal’s decision that the VAT exemption argument was accepted.

To be liable to register for and pay IPT, GBS had to be:

• carrying on a business that consists of or includes the provision of insurance; and
• doing so under contracts of insurance.

The Tribunal ruling

The First-tier Tribunal (FTT) concluded that GBS was carrying on a business that included the provision of insurance but that it was not doing so under a contract of insurance. GBS was supplying insurance for VAT purposes, but not for IPT purposes. The relevant charges were therefore exempt from VAT but at the same time not subject to IPT.

GBS undoubtedly paid IPT on the fleet policy, so the ‘right’ position is reached in the overall supply chain. But IPT and VAT are transactional taxes that pay little heed to the overall ‘right’ result. The taxpayer narrowly avoided swapping a VAT charge for an IPT charge. The case highlights the need to analyse the risks and consequences not only of making a claim but of the way that claim is presented.

Before making its claim, GBS was (presumably) fully taxable, charging VAT and recovering all its input VAT. At least some of its drivers may also have been VAT registered, and therefore recovering the VAT charge. Swapping VAT for IPT may well have been a bad outcome. A partial exemption method would have reduced input VAT recovery, and an additional IPT charge would have replaced much of the output VAT charge.

The FTT’s comments on the correspondence with HMRC suggest that the taxpayer’s position was more reactive than strategic. The correspondence with HMRC could have been written with the IPT issue in mind, potentially avoiding the dispute entirely. Although admittedly, this is perhaps clearest with the benefit of hindsight.

Conclusions

The case raises an interesting point about the difference between the ‘provision of insurance’ and ‘an insurance transaction’. To some extent, that is old ground, well-traversed in cases such as Minister Finansów v Aspiro SA (Case C-40/15). It does not consider whether there are gaps or the consequences of those gaps. Are there some end-to-end structures that attract neither VAT nor IPT? There aren’t supposed to be.

The real lesson in this case comes from the law of unintended consequences. Newton’s third law can also apply to interaction with HMRC. For every action, there can be an equal and opposite reaction. In an ideal world, one would anticipate and correct for that reaction in advance.

The article in the Tax Journal can be found here.

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