HMRC The Case Continues 2/3

This is the second in a three part series (see part one) on a legal case with HMRC taken up against two major comparison sites and aggregators: Autotrader and Insurancewide. This personal transcript is taken from an Insider (General Manager) at Insurancewide, Keith Sholl

In dismissing the appeal, the decision of the Tribunal, released in October of 2007, came as a complete shock not only for Insurancewide and its advisors but also for others within the industry but, even more so, for the Commissioners. Despite the dismissive attitude of the bench within paragraph 78 of their judgement, the Commissioners were clearly concerned that Insurancewide could be seen as being treated unfairly as compared to its competitors (Confused, Go Compare, Comparethemarket and Moneysupermarket to name but a few.) HMRC were effectively left with a catch twenty two situation. On the one hand they were now convinced that some of the services that were being provided by Insurancewide were VAT Exempt services but on the other hand were unable to overturn the ruling of the Tribunal.

78. Whilst in the circumstances it is not necessary to decide whether or not InsuranceWide also comes within the European concept of an intermediary given that we have found that InsuranceWide does come within the provisions of the VATA, nonetheless in the event that this matter goes further we consider it appropriate to do so. In our judgment InsuranceWide, from after the introduction of the Wizard, on the basis of the activities set out in the preceding paragraph, does sufficient to bring it within the provisions of Article 13B(a) to the extent only that it provides services related to insurance and reinsurance transactions. We have of course already determined that it at no time is an insurance agent. We must also consider Mr. Cordara’s submission that in effect there is no difference between the concept of an agent and an intermediary, for which he relies in particular on Public Notice 701/36/02. We accept that the Public Notice itself does equate the two concepts, however the VATA clearly distinguishes them and we must be guided by the legislation. A further submission made by Mr Cordara was that if InsuranceWide did not come within the exemption it would be at a competitive disadvantage vis-à-vis off-line insurance agents and brokers. Given our finding that it is not an agent, we do not consider that this is a relevant consideration.

Paragraph 78 of Tribunal Judgement

Of course we were keen to assist HRMC to overcome this dilemma since VAT exemption for IW Connect provided the opportunity to limit the potential liability going forward, which was necessary if the Company was to succeed in attracting additional investment. It so happened that as part of the ongoing development plans we were about to implement some changes to IW Connect, which whilst not materially changing the service that we supplied to the insurers (our customers) were nevertheless significant enough in the eyes of HMRC for them to grant the VAT exemption. Thus it was that HMRC provided Insurancewide with a letter bestowing VAT exemption for IW Connect with effect from 1st January 2008. In return for providing this ruling the Commissioners would have preferred Insurancewide to have withdrawn the notice of appeal that had already been submitted to the High Court in December of 2007, but that was not on the cards and, therefore, they added a proviso instead. The proviso was in the form of an undertaking required of Insurancewide, by which it was agreed that the fact that HMRC had provided this ruling could not be submitted as evidence in any future appeal to the High Court or above concerning the liability of the services prior to 1st January 2008.

This undertaking was incorporated within the letter from HMRC in which the ruling was provided, I presume so that any judge viewing it would know what had been agreed and thus be persuaded to disregard the letter should it be submitted as evidence. As it turns out it has not proved necessary for this arrangement to be revealed to the Courts, although I wonder what the Judiciary would actually have made of this seemingly rather clandestine approach by HMRC.

Then along came Trader Media

The Tribunal in Trader Media v HMRC was heard in March of 2008 and the decision, which was announced in May of that year, caused quite a stir from the point of view that the ruling was completely opposite to that in Insurancewide v HMRC, albeit that the services provided by Trader Media were in the same sphere as those being provided by Insurancewide. Moreover, it could be argued that the services provided by Trader Media were more akin to one of Insurancewide’s downstream distribution partners and indeed, along with Insuresupermarket and Confused, Insurancewide were cited in the contract between Trader Media and BISL as a competitor to Comparethemarket.

So what aspects of the Trader Media case were of significance in determining that the outcome should be so different to that of Insurancewide?

Firstly, Trader Media was a much simpler situation to look at in that the case concentrated on a relatively short period when there had been no change within the operations, governed by a single contract between the parties. This was in complete contrast to the complexity of the Insurancewide operations, with many more products involving numerous contracts between multiple parties (some of which encompassed advertising activities in addition to intermediary activities) and over a much longer period, during which time there were many changes brought about largely as a result of improvements in technology. It is interesting to note that Trader Media had been providing insurance “intermediary” services via its Autotrader website since 2001 but a prior ruling had been obtained from HMRC that those services were VAT Exempt and it was only when HMRC reviewed the operations in 2006 that questions were raised as to the correct VAT status.

Secondly, the argument in Trader Media had been more concerned with looking at Insurance Intermediation as being a VAT Exempt service, whereas in Insurancewide the emphasis was more on proving the role of Insurancewide as either an agent or broker. This difference was highlighted by Dr Kameel Khan within his summing up of the decision in Trader Media, thus:-

The InsuranceWide decision sought to look at the definition of an insurance agent in Article 2(1)(b) of Directive 77/92 (now repealed). In our case, it was necessary to look more closely at the meaning of insurance intermediary services. It is the activities of the business concerned which must be looked at to see if the bringing together or introduction of the parties led to the conclusion of an insurance contract and formed an essential part in the chain leading to the conclusion of such a contract.

Thirdly, as is evidenced by the comparison provided by the judge above, the case for the Respondent in Trader Media had relied too heavily on the decision in Insurancewide despite the fact that Counsel for the Commissioners must already have been aware that the decision in Insurancewide was flawed. It certainly would seem to be the case that Dr Kameel Khan was of this opinion.

A United Front

It was inevitable that the Commissioners would want to appeal the decision in Trader Media as it had the potential to open the floodgates to claims for VAT exemption from many different types of Companies that had previously been viewed as providing advertising and marketing services rather than intermediation services. What was not so inevitable was that they would ask for our appeal to be co-joined with their appeal in Trader Media. I think it fair to say that both Insurancewide and Trader Media had reservations about allowing this to happen and both submitted arguments as to why the cases should be heard separately, although it is perhaps fortunate that these arguments were rejected as it meant that there would now be a united front against HMRC.

The conjoined cases were heard at the High Court during March 2009 over three days, although the decision had all but been revealed in the opening session of the first day the course of which, we are told, was about as dramatic as they come in VAT cases. The drama was provided in the way that the Judge (Sir Edward Evans-Lombe) began the proceedings by addressing the court and asking some questions of the Counsel present that effectively outlined the direction of his thoughts as to the matters before him. Our Counsel later told us that what had transpired in those first few minutes could be likened to an occasion several years earlier in a case where he was acting on behalf of Lloyd’s of London and during which his opposite number, whilst proceeding with a line of questioning, in hearing the response came to the sudden realisation that he had been labouring under a misapprehension regarding the trading relationship between individual Members of Lloyd’s within a Syndicate and that the case for the Commissioners had effectively run aground at that point.

In our case, the drama of the Judge’s opening address was reflected in the actions of the Commissioner’s representative, who was witnessed seated at the back of the court room with, head in hands. However, after what had been a sensational start, it was back to the formalities and once the court had settled the remainder of that first day was spent listening to the eloquent tones of our Counsel (Roderick Cordara QC) as he delivered his well rehearsed and indeed fascinating insight into the history of VAT and cases precedent for the benefit and, at times, amusement of the Judge.

In what transpired next, it seems that the attention of the Commissioners, in part at least, was now focused on the possibility that the decision could go against them and, therefore, they were looking at how they might be able to recover the situation and in particular the course of any subsequent appeal should that prove necessary. In the recess that followed the first day there were further furtive negotiations with a view to an “out of court” settlement with Insurancewide that would have left the case against Trader Media as the determinant in creating the ground rules for the treatment of VAT in respect of insurance intermediation. However, those discussions foundered, because the Commissioners both to save face and to help their cause, would have required that Insurancewide concede defeat on the “Cox period”, whereas from our point of view that would have been not only absurd but the worst outcome for the Company financially.

Thus it was that the proceedings continued and in due course the ruling of Sir Edward Evans-Lombe, announced in May of that year, was in favour of the Taxpayers, Insurancewide and Trader Media.

However any feelings of relief and elation on the part of Insurancewide were to be short lived since, already strapped for cash, the future of the Company as a trading entity rested on the critical decision of HMRC as to whether they would concede defeat at that point or take the matter further to the Court of Appeal. Sadly, but not unexpectedly, that decision did not go the way that we had all hoped for and there followed the inevitable announcement by the Board that the Company would cease to trade with effect from 31st August 2009, contained in the press release issued on 15th July 2009.

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