Mr Justice Blackburne :
Introduction
- This appeal, which is from a decision of the VAT and Duties Tribunal (Sir Stephen Oliver QC as Chairman) released on 25 July 2008, raises a short point on the operation of Insurance Premium Tax ("IPT"). IPT is imposed by the Finance Act 1994 as amended ("the 1994 Act"). In what follows references to sections are to sections of the 1994 Act.
- By its decision, the Tribunal dismissed an appeal by Homeserve Membership Ltd ("Homeserve") brought by notice of appeal dated 11 July 2006 against the confirmation on review by HM Revenue and Customs ("HMRC") of a decision to the effect that part of a sum - described as an "arrangement and administration fee" - paid by an insured person to Homeserve as part of the arrangements whereby the insured entered into a contract of insurance with Inter Partner Assistance SA ("IPA") was to be regarded as a payment received under that contract and formed part of the premium by reference to which IPT was chargeable. IPA, which is a Belgian company, carries on business as an insurance company in the United Kingdom. The appeal is brought by Homeserve (previously known as Homeserve GB Ltd and before that as Home Service (GB) Ltd) as the party financially affected. Mr Dominic Kendrick QC and Mr James Henderson appeared for Homeserve. Mr Andrew Macnab appeared for HMRC who are the respondents to the appeal.
- Briefly stated, Homeserve acts as an insurance intermediary. It designs and administers "assistance insurance", for example plumbing and drainage assistance in the case of a domestic emergency at the house of the insured homeowner. Under the scheme, Homeserve locates an insurer, negotiates terms of cover with that insurer and then offers to the public the insurance-backed service which, if taken up, it then administers. As described in paragraph 4 of the decision:
"The cover provided by an assistance insurance contract involves the "homeowner" buying, for example, plumbing and drainage cover for a year and paying, say, £59.99. The cover gives the homeowner access in an emergency via a hotline to a local Homeserve-approved plumbing or drainage engineer who will attend to the emergency within two hours. Payment of the engineer's service is, within certain limits, met by the providers of the cover. The homeowner has the right to claim up to four times in the year of cover and permanent repairs are guaranteed for the lifetime of the cover."
- The principal questions before the Tribunal were (1) whether when signing up to the service marketed by Homeserve there came into existence a contract between Homeserve and the homeowner as well as a contract of insurance (the "taxable insurance contract" as it is described in the 1994 Act) between IPA (as insurer) and the homeowner (as the insured) and (2) if there did, whether such contract was "separate" within the meaning of section 72(1A)(b) of the 1994 Act. That provision, which was inserted into the 1994 Act by the Finance Act 1997, provides, so far as material, as follows:
"(1A) Where an amount is charged to the insured by any person in connection with a taxable insurance contract, any payment in respect of that amount is to be regarded as a payment received under that contract by the insurer unless -
…
(b) the amount is charged under a separate contract and is identified in writing to the insured as a separate amount so charged."
- The relevance of the questions considered is that in the marketing material sent to the homeowner (in the case of the plumbing and drainage cover considered by the Tribunal) in which the homeowner is invited to sign up to the assistance cover thereby offered, he (or she) is told that if the cover is taken up two contracts will be entered into, one with Homeserve for which the cost to the homeowner will be £14 (being a part of the overall payment of £59.99) and the other with the insurer. Homeserve keeps the £14 and does not account for it to the insurer. In addition to providing services to the homeowner, the Homeserve group supplies administration and claims services to the insurer as the insurer's agent. The relevant Homeserve company is paid by the insurer for these services out of the premium paid by the homeowner. IPT is therefore levied on this element of the sum paid. The question is whether the £14 fee retained by Homeserve is also subject to IPT.
- The contention of HMRC before the Tribunal was that, notwithstanding the wording in the marketing material (and similar wording in the contractual terms of the arrangements to which the homeowner is invited to sign up), in truth only one contract is entered into by the homeowner who takes up the service on offer and pays the £59.99, namely the insurance contract between that homeowner and IPA; no contract is entered into between him and Homeserve to which the £14 (part of the £59.99) relates. But, HMRC went on to contend, if there is such a contract it is not a "separate contract" within the meaning of paragraph (b) of section 72(1A). The result of this, if correct, is that the £14 ranks as a "payment received" along with the remainder of the £59.99 under the contract of insurance, as described in the opening words of section 72(1A) and, as such, is chargeable to IPT as part of the premium received by the insurer under the contract of insurance. In that event, it does not rank as an amount "charged under a separate contract" within the exception to the operation of section 72(1A) provided by paragraph (b). The contention of Homeserve, by contrast, was that the £14 is charged under a separate contract for the purpose of paragraph (b) and, as such, is outside the scope of section 72(1A) and thus not subject to IPT as part of the premium received by the insurer.
- The Tribunal found that the arrangements to which the homeowner signs up do give rise to a contract between Homeserve and the homeowner but went on to find that the contract is not a "separate contract" within the meaning of paragraph (b). Homeserve appeals against the second of those two findings; HMRC does not appeal against the first of them. The sole issue in the appeal therefore is whether the contract which the Tribunal found to exist between Homeserve and the homeowner is "a separate contract" for the purpose of paragraph (b). It is common ground that, if it is, the £14 is "identified in writing to the insured as a separate amount so charged" which is the second limb to the exception constituted by paragraph (b) and, as such, a part of what has to be shown if that exception is to apply.
- Although, as will appear, the Tribunal considered only one example of assistance insurance, involving a payment by the specimen homeowner of no more than £59.99 of which the amount claimed by Homeserve to be exempt from IPT was £14, this was on the footing that that example was representative of a much wider range of assistance insurance offered by Homeserve to domestic households. Paragraph 10 of the Tribunal decision indicates that the sum involved in the appeal is considerable. The amount assessed on IPA covers two periods: £170,544 plus interest for the period from 1 July 2003 to 31 December 2003 and £932,189 plus interest for the period 1 January 2004 to 30 June 2005. (In fact the decision, at paragraph 10, slightly misstates the second period.) These sums represent the aggregate of the arrangement and administration fees paid by homeowners during the two periods.
Background
- The promotion of the assistance insurance marketed by Homeserve and covered by IPA derives from an agreement, described as an "Agreement for Assistance Insurance (the "AI Agreement" as it is referred to in the Tribunal decision), between Homeserve (then known as Home Service (GB) Ltd) and IPA dated 21 July 2000. Under the agreement Homeserve and IPA agree to use the services of Home Hotline Ltd ("the Hotline Company") as exclusive service provider of the claims management in respect of all forms of assistance insurance cover purchased by the homeowners. Its functions include the selection and approval of service engineers. The terms of that AI Agreement were subsequently varied but not in any respects material to the issue arising on this appeal. Those terms, and their effect, were sufficiently summarised in the Tribunal decision as follows:
"16. The AI Agreement records the wish of Homeserve and IPA to develop insurance products and to provide assistance insurance to domestic households. It operates as a rolling agreement terminable on any 31 March on three months prior notice (Clause 3.2). The obligations of Homeserve under the AI Agreement are set out in Clause 5. Homeserve is to use all reasonable endeavours to facilitate the marketing and promotion of the products and to carry out promotional mailings. Homeserve is to agree in advance with IPA any new benefits, changes in the wording or new schemes to be underwritten by IPA and the net premium to be paid to IPA. Homeserve provides underwriting information to allow IPA to provide the requisite insurance. Homeserve agrees to process all applications for insurance and to accept applicants as policyholders and to complete the documentation. Homeserve is to issue any renewals of policies as and when due. Homeserve is to handle all calls relating to request for information and to refer to IPA all requests for "Assistance Services" (defined to mean emergency services and claims handling services provided by IPA and the management of claims arising under assistance insurance policies). Homeserve is to provide to IPA details of new policyholders, renewals and cancellations. Each week Homeserve is to pay any insurance premiums including IPT and VAT. Homeserve is to receive complaints about service quality and provide copies and reports to IPA. It is Homeserve's responsibility to provide IPA with customer satisfaction checks through "call-backs".
17. IPA's obligations are in Clauses 6 to 8 of the AI Agreement. These make IPA responsible for providing assistance insurance, contracting with the Hotline Company for the latter to provide specified assistance services, settling claims and subcontracting claims handling to the Hotline Company and procuring that subcontractors (the Hotline Company included) comply with complaints handling procedures and claims handling and standards of service Procedures. Homeserve bears the marketing, publicity and stationery expenses.
18. The intellectual property in the products belongs to Homeserve: see Clause 12 of the AI Agreement.
19. Clause 16 provides for the termination of the AI Agreement in certain specified events, e.g. material breach or insolvency.
20. Clause 17.1 provides for the consequences of termination of the AI Agreement "for any reason whatsoever". Subclause 1.2 provides:
"[IPA] will only remain liable to provide the Assistance Services and the Assistance Insurance and process claims in relation thereto which have been notified to it prior to the date of termination of this Agreement but shall otherwise cease to provide Assistance Services and the Assistance Insurance on the date of termination of this Agreement."
21. Subclause 1.4 provides that:
"[IPA] shall novate all of its rights and obligations under such Policies to such third party insurance providers as [Homeserve] shall nominate to be responsible for performing or procuring the performance of all of [IPA's] Obligations under such Policies from that date. In addition, [IPA] shall refund to [Homeserve] within 30 days of the date of such novation or the termination of this Agreement that proportion of the Net Premium in respect of the relevant Policies ...."
22. Clause 18 of the AI Agreement states that it does not create the relationship of principal and agent between the parties. However an amending agreement of 15 December 2004 added a new Schedule 4 to the AI Agreement. By paragraph 1 of that, IPA appoints Homeserve as its non-exclusive agent "for the purposes of marketing, selling and administering, the policies". IPA authorises Homeserve to act as its agent for the purposes of marketing and receiving quotations, processing applications for policies, underwriting of IPA and drawing up and despatching policy documents, all on behalf of IPA. It goes on to authorise Homeserve to alter, cancel, and renew policies and to hold and refund premiums. Paragraph 1.2 states that Homeserve does not have authority to settle claims for and on behalf of IPA."
- It appears that prior to the periods covered by the assessments which resulted in the appeal to the Tribunal, the total amount paid by the homeowner was treated for IPT purposes as premium and was taxed as such; Homeserve's share was treated as commission payable to IPA in return for the services which Homeserve provided to it. But, on professional advice, a change was made to the arrangements between Homeserve and homeowners taking up the service offered. It resulted in the creation of new paperwork. It was that paperwork which, in the case of the Homeserve plumbing and drainage documentation pack considered by the Tribunal, resulted in the stipulation made to the homeowner that, on taking up the cover, he would have one contract with Homeserve to arrange and administer the policy on behalf of IPA and a further contract with IPA in respect of the insurance.
- The manner in which the homeowner was approached and the resulting contracts entered into are explained in the following extracts from paragraphs 24 to 32 of the Tribunal decision:
"24. The initial marketing mailing sent to a potential insured was in the name of the utility company referred to as an "affinity partner". The specimen material was despatched in the name of Cambridge Water Plc. Cambridge Water sent out an unsolicited letter in which it recommended that its customer take out insurance, in this case "Homeserve Plumbing and Drainage Cover". The letter included the following passages:
"Re: Your plumbing and drainage responsibilities as a homeowner.
While we would prefer that our customers never experience an emergency, we know all these things can happen. That's why we're recommending that homeowners take out Homeserve Plumbing and Drainage Cover. There then follows a reference to a footnote which provides - You will have a contract to arrange and administer your policy with Homeserve and a separate contract for insurance with IPA... . References to "Plumbing and Drainage Cover" or "Cover" in all documents include services within both contracts.] In an emergency you will avoid all the hassle of finding a plumber, and the bill will be taken care of for you, within the generous cover limits. You can claim up to four times a year - up to two for internal claims and two for external claims, and permanent repairs are guaranteed for the life time of your cover,"
The letter goes on to explain how to use the service. It then contains the statement:
"All for just an annual price of £59.99".
25. The letter contains a "summary of Cover" this deals with the start date for the cover. It states that if a plumber or drainage engineer fails to attend within two hours, in the event of an emergency, the premium will be refunded in full. It provides for cancellation within 28 days. It explains how to make a complaint.
26. The letter ends with this statement:
"Plumbing and Drainage Cover is arranged and administered for you by Homeserve. The insurance policy is underwritten by IPA. You will therefore have a contract with Homeserve to arrange and administer the policy on behalf of the insurer, for which the cost to you is £14 and a separate contract with IPA. The total price of £59.99 you pay is unaffected by these arrangements. References to "Plumbing Drainage Cover" or "Cover" in all documents include services in both contracts."
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28. Where the addressee of the initial letter, the homeowner, has responded and the offer has been accepted, the homeowner will receive a letter (again in the name of the utility company) giving notification that the cover is in place together with a policy summary and the Plumbing and Drainage Terms and Conditions…
29. The homeowner receives a letter, on Cambridge Water letterhead and signed by a Cambridge Water official. This letter thanks the homeowner for choosing Homeserve Plumbing and Drainage Cover. A footnote states that - "You will have a contract to arrange and administer the policy with Homeserve and a separate contract for insurance with IPA". The letter goes on to explain the cover in general terms.
30. The standard form "Plumbing and Drainage Cover Terms and Conditions" remind the homeowner in terms that he has entered into a contract of insurance with IPA and a separate contract with Homeserve to arrange and administer the policy. The form stresses that the cost of cover "is the total amount you pay ... which consists of the arrangement and administration fee of £ 14 and the premium."
31. The Plumbing and Drainage Cover Customer Contract in the year from 2003-2005 contains seven "Administration Terms and Conditions". These state:
"1. Homeserve will arrange and administer your insurance cover and agree service standards for the delivery of the cover provided by the insurance ....
2. The minimum period for which you may hold this policy is one year. Homeserve will arrange for collection of policy premiums in accordance with your instructions. If you fail to make a payment on the due date, your policy will be suspended immediately ....
3. Homeserve reserves the right to cancel this policy by giving you at least seven days notice at your last known address.
4. Homeserve will contact you in writing before your policy expires to arrange renewal ... .
5. You are responsible for informing Homeserve of the change of your address ....
6. Homeserve reserve the right to change the underwriter (insurer) of this policy at any time, without prior notice. Homeserve will however continue to provide the cover in this policy to you for the period shown on your certificate ... Homeserve will bear the cost of any such change of underwriter.
7. If you have a complaint relating to an administration matter, please write to ... Homeserve ... ."
32. There then follow the "Insurance Terms and Conditions". These explain what is covered. Condition 12 provides:
"In the event of an uncontrollable emergency within your home, Homeserve guarantee the arrival of a plumbing or drainage engineer within two hours. If IPA fail to achieve this, Homeserve will refund your policy premium in full.""
The 1994 Act
- This brings me to the 1994 Act. The relevant provisions, which are to be found in Part III (headed Insurance Premium Tax), are as follows:
"The basic provisions
48 Insurance premium tax
(1) A tax, to be known as insurance premium tax, shall be charged in accordance with this Part.
49 Charge to tax
Tax shall be charged on the receipt of a premium by an insurer if the premium is received—
(a) under a taxable insurance contract, …
50 Chargeable amount
(1) Tax shall be charged by reference to the chargeable amount.
(2) For the purposes of this Part, the chargeable amount is such amount as, with the addition of the tax chargeable, is equal to the amount of the premium.
…
52 Liability to pay tax
(1) Tax shall be payable by the person who is the insurer in relation to the contract under which the premium is received.
…
Supplementary
70 Interpretation: taxable insurance contracts
(1) … any contract of insurance is a taxable insurance contract.
…
72 Interpretation: premium
(1) In relation to a taxable insurance contract, a premium is any payment received under the contract by the insurer, and in particular includes any payment wholly or partly referable to—
(a) any risk,
(b) costs of administration,
(c) commission,
(d) any facility for paying in instalments or making deferred payment (whether or not payment for the facility is called interest), or
(e) tax.
(1A) Where an amount is charged to the insured by any person in connection with a taxable insurance contract, any payment in respect of that amount is to be regarded as a payment received under that contract by the insurer unless—
…
(b) the amount is charged under a separate contract and is identified in writing to the insured as a separate amount so charged.
…
(7) Where anything is received by any person on behalf of the insurer—
(a) it shall be treated as received by the insurer when it is received by the other person, and
(b) the later receipt of the whole or any part of it by the insurer shall be disregarded.
…
(8) In a case where -
(a) a payment under a taxable insurance contract is made to a person (the intermediary) by or on behalf of the insured, and
(b) the whole or part of the payment is referable to commission to which the intermediary is entitled,
in determining for the purposes of subsection (7) above whether, or how much of, the payment is received by the intermediary on behalf of the insurer any of the payment that is referable to that commission shall be regarded as received by the intermediary on behalf of the insurer notwithstanding the intermediary's entitlement."
- The following can thus be stated. (1) IPT is charged on the receipt of a premium by an insurer. (2) A premium is any payment received under the insurance contract by the insurer and includes any payment wholly or partly referable to, among other matters, any risk, costs of administration and commission. (3) The entirety of the insured's payment is in principle subject to IPT even if all or part of the payment is paid to a person other than the insurer if received by that person on behalf of the insurer. This is so even if, when made to a person acting as intermediary, the payment is referable in whole or in part to commission to which the intermediary is entitled. (4) The sum chargeable to IPT includes any payment made by the insured to a third party provided that the payment in question is an amount charged to the insured by the third party "in connection with" the taxable insurance contract.
- Coming next to section 72(1A), if an amount otherwise within the scope to charge as being within that provision is to escape the charge because it is within the exception provided by paragraph (b) four conditions must be fulfilled: (i) there must be a contract between the insured and the third party, (ii) the amount sought to be excepted from the charge must be charged under that contract, (iii) that contract must be a "separate contract" from the taxable insurance contract between the insured and the insurer and (iv) the amount charged under the "separate contract" must be identified in writing to the insured as "a separate amount" charged under that separate contract.
- It is common ground that in the documentation considered by the Tribunal conditions (i) and (ii) of those four conditions are satisfied: in the case of condition (i) this is as the result of the (unchallenged) finding by the Tribunal. Before the Tribunal HMRC did not dispute that if condition (iii) was satisfied, then so also was condition (iv). No separate argument was directed to this requirement. The only question therefore was whether condition (iii) was satisfied.
The Tribunal decision
- As stated above HMRC had contended before the Tribunal that there was no contract between Homeserve and the homeowner. In reaching the conclusion that there was a contract, the Tribunal said this (at paragraph 53):
"…I am satisfied that Homeserve does not merely act as agent for IPA in these transactions. It is not simply an insurance agent… Nor is it a "cover holder" - in the sense of being the agent of insurers who "holds the underwriting pen". Homeserve gives a contractual promise to administer the homeowner's insurance cover. This is consistent with the wider scenario in which Homeserve has been instrumental in devising and improving the product and in which the intellectual property rights belong to it. Homeserve controls the exploitation of the product by retaining the right to dispense with the services of any particular insurer. But, even so, Homeserve respects [sic] its own continuing obligations to homeowners whose cover is still is [sic] extant. Whether the obligations assumed by Homeserve to the particular plumbing and drainage contract homeowner are really worth £14 is beside the point. The fact remains that Homeserve gives an identifiable consideration in return for the payment."
Given that HMRC do not challenge that conclusion and accept therefore that there was a contract between Homeserve and the homeowner under which £14 was paid for services provided by Homeserve to the homeowner, the question simply is whether the contract so found was a "separate contract" within the meaning of paragraph (b).
- The Tribunal's reasons for concluding that, although there was a contract, it was not a "separate contract" within the meaning of paragraph (b) are succinctly contained in the following paragraphs of the decision:
"59. The choice of the adjective "separate" to qualify the word "contract" in paragraph (b) leads to the question - Separate from what? A contract in its own right will in a general sense be a contract that is a separate contract from all others. To achieve that meaning, however) the draftsman might simply have used the word "another" contract. But, as I construe section 72(lA), the word "separate" was chosen as a term of emphasis to denote a contract that is separate from the taxable insurance contract referred to in the opening clause of subsection (lA). To determine whether there is separation in that respect requires an examination of the circumstances, legal and factual, in which the two contracts taken for comparison are found. That approach is, I think, in line with the evident purpose behind section 72(1A) which is, subject to the limits placed by paragraphs (a) and (b), to bring into tax amounts charged to the insured "by any person" where the charge is "in connection with the taxable insurance contract", being amounts that were found to be outside the scope of charge under section 72(1) taken alone.
60. The taxable insurance contract is, as noted, the contract to provide the plumbing and drainage cover to the homeowner. Its terms are to be found in the AI Agreement between IPA and Homeserve and in the Insurance Terms and Conditions of the Customer Contract. The contract under which "the amount is charged" (ie the £14) is contained in the Administration Terms and Conditions of the Customer Contract. It is not, and could not be, in dispute that there is a connection between the two. They both relate to the same cover; they are offered as a package and one cannot be created without the other,
61. Given therefore that the £14 is charged "in connection with" the taxable insurance contract (see the opening words of section 72(lA), is that amount also charged under a "separate" contract, namely the Customer Contract? I think not for the reasons that follow.
62. In the first place there is an overlap between the consideration given by Homeserve to IPA and the consideration given by Homeserve to the homeowner. The same consideration supports both the Customer Contract dealing with arrangement and administration and the taxable insurance contract. Homeserve's obligations under clause 5 of the AI Agreement are, as regards the arrangement and administration of the plumbing and drainage cover contracts (the Customer Contract), much the same as, and in some respects identical to, Homeserve's obligations to the homeowner under the Customer Contract. All the elements of consideration given by Homeserve under both agreements relate to the single insurance product of plumbing and drainage cover.
63. Secondly, the price quoted to the homeowner is a single price. This is unaffected by the "two contracts" arrangement. The material relating to the Customer Contract specifically makes it clear that the two contracts arrangement does not affect the description or the cover. The homeowner's right to cancel within 28 days and obtain a full refund results in repayment of both the £14 arrangement and administration fee and the balance of the £59.99 premium; and the same applies to the full refund offered in the event of non-attendance within two hours. The offer gives the homeowner no choice of insurer and no choice in regard to the terms of the cover.
64. Essentially therefore the Customer Contract, even accepting that it is a contract in its own right between Homeserve and the homeowner relating to the arrangement and administration, is at the time of its creation dependent on and inseparable from the insurance element. Without the insurance there is nothing; and even if Homeserve were to terminate the AI Agreement with IPA, financial cover would still be required under Homeserve's obligations in the Customer Contract to "administer your insurance cover".
65. All those features satisfy me that the £14 is not an amount charged under a separate contract for the purposes of the words of exclusion in section 72(1A)(b)."
- The Tribunal then referred (in paragraph 66) to a submission advanced by Homeserve in relation to multi-party contracts in the course of which mention was made of a number of authorities with a view to demonstrating how, in a contractual context at least, a multi-party contract could give rise to what might be described as "separate" contracts. The Tribunal was unpersuaded by this:
"67. I have no reason to depart from Homeserve's propositions based on those cases. They do not, however, alter my conclusion on the meaning of the expression "the amount charged under a separate contract" in section 72(1A)(b). The Customer Contract dealing with arrangement and administration may for contractual purposes be regarded as "separate" from the taxable insurance contract (the AI Agreement). But in its context as an IPT charging provision, the expression "separate contract" in section 72(1A)(b) has the special meaning that I have adopted."
- Before examining the Tribunal's reasons it is just worth pointing to what both sides accepted were incorrect statements made, and repeated, in this part of the decision. Having earlier identified three contracts: the AI Agreement (between Homeserve and IPA), the insurance contract (between IPA and the homeowner) and what the Tribunal referred to as "the Customer Contract", namely the contract between Homeserve and the homeowner, the Tribunal appeared to think, according to paragraph 60 of the decision, that the terms of the insurance contract were to be found not only in the Insurance Terms and Conditions of the Customer Contract but also in the AI Agreement. This last reference appears to be an error: they are not to be found in the AI Agreement. Mr Macnab was constrained to say that he did not know to what the Tribunal was there referring. In paragraph 62, however, where the Tribunal was considering what it described as "an overlap" between the consideration given by Homeserve to IPA and the consideration given by Homeserve to homeowner, the Tribunal - in the second sentence of that paragraph - appeared to think that the consideration moving from Homeserve in both of those contracts supported not just the Customer Contract but also the insurance contract. The reference in that sentence to the taxable insurance contract must be in error: Homeserve is not a party to it. The same error appears in the third sentence of paragraph 67.
- I prefer to think that the fact that in two and possibly three separate places the Tribunal appears to elide the AI Agreement (to which Homeserve is a party) with the contract of insurance (to which Homeserve is not a party) is simply carelessness of reference and that this has not contributed to the Tribunal's conclusion that the Customer Contract - which is the contract under consideration for the purpose of the paragraph (b) exception - is not a "separate contract", that is, separate from the contract of insurance, for the purposes of that provision. On any view the appearance of such an error in a section of the decision which is critical to the Tribunal's reasoning is unfortunate to say the least. What is clear, however, is that the Tribunal considered that the terms of the AI Agreement were relevant to whether the Customer Contract was a "separate contract" for the purposes of section 72(1A)(b).
The appellant's submissions
- Mr Kendrick submitted that the words "separate contract" in section 72(1A)(b) naturally mean no more than "another contract" or "a different contract". He submitted that the same paragraph speaks of a "separate amount" in the same natural and ordinary sense. He submitted that section 72(1A) is a simple, clarificatory provision contained within a straightforward statutory scheme. It is clarificatory in the sense that, for the majority of insurance contracts, it merely confirms the existing position as demonstrated by case law concerning section 72. Mr Kendrick referred me in particular to the Tribunal's decisions in Chubb Insurance Company of Europe SA v CCE (IPT 00001) 23 February 1998 and London General Insurance Company Ltd v CCE (IPT 00002) 11 May 1998. In those cases, decided after the insertion of section 72(1A) into section 72 but in relation to the law as it stood before that insertion was made, an issue was whether there was a "separate" contract (in the sense of another or different contract) between the insured customer and the third party (a travel agent in one case and a car dealer in the other) or whether the payment in question was made under the contract of insurance. There was no suggestion that, if it was the former, the contract had to have some particular attributes. Mr Kendrick referred me also to the Tribunal decision in Policy Administration Services Ltd v CCE (IPT 00011) 1 September 2004. By 2004 section 72(1A) was in force. There was no suggestion by counsel for the Commissioners (or by the Tribunal) in that case that some special quality was needed if the contract (if there was one) was to be a "separate contract" so as to satisfy the requirements of section 72(1A)9b). Mr Kendrick pointed out that the interpretation now placed by HMRC on the meaning of "special contract" - and accepted by the Tribunal - puts a gloss on the meaning of "separate" where the word is used in the statutory context which was not suggested when that expression was deployed in argument prior to the introduction of the statutory amendment. He submitted that by interpreting section 72(1A)(b) in the way that it did the Tribunal in this case engaged in an impermissible and unjustified exercise of "glossing" the wording used in the statute and thereby ignored the warning most recently articulated by Lawrence Collins LJ in HMRC v Bank or Ireland Britain Holdings [2008] EWCA Civ 58 at [45] against embarking upon an "unprincipled process of legislative gloss".
- Mr Kendrick reminded me that, in the field of insurance, "premium" (on the receipt of which by an insurer IPT is charged under section 49) is classically the charge for bearing risk. He pointed out that, over the years, the concept of premium has grown to encompass other matters. Thus section 72(1) defines premium as extending to "any payment received under the contract by the insurer" and as including in particular the costs of administration, commission and the cost of paying by instalments. In short, he said, all of the more peripheral components count as premium if paid under the contract of insurance. He also pointed out that where an agent receives premium on behalf of the insurer the premium is treated by section 72(7) as received by the insurer irrespective of when and to what extent the insurer should later receive it. Moreover, section 72(8) treats the commission element of any payment made to a person (described as the "intermediary") by or on behalf of the insured under an insurance contract as received on behalf of the insurer notwithstanding the intermediary's entitlement to commission. This is so even if the commission element is never in fact paid over to the insurer.
- Mr Kendrick submitted that the £14 fee paid to Homeserve under the arrangements considered by the Tribunal (1) did not arise under a contract of insurance, (2) was not part of the premium, and (3) was not received (or treated as received) by or on behalf of the insurer. He submitted therefore that the £14 would not have been subject to IPT under the 1994 Act before it was amended by the inclusion of section 72(1A). He referred me to the Explanatory Notes to the Finance Bill 1997 stating that the new clause (which became section 72(1A)) "reinforces the existing position" by stating what has to be done if an amount charged in connection with an ordinary contract of insurance is to be "treated as outside the scope of Insurance Premium Tax …". The reference in the Notes to the need for a "separate fee contract" does not suggest, he submitted, that the separate contact had to be of a particular character. Nor did the Notes support any suggestion that the clause was intended to be an anti-avoidance measure.
- He submitted therefore that the position, as "reinforced" by section 72(1A)(b), is that (1) an intermediary's fees, if part of the gross premium charged under the contract of insurance, will be subject to IPT, (2) to fall outside the scope of IPT it is not enough for the intermediary to have a separate contract with the insured: the insured must be notified in writing of the existence of that contract and the amount of the fee and (3) the requirement of written notification of the existence of the separate contract and the amount of the fee, while new to the statute, is consistent with the industry's code of practice for intermediaries. He referred me to what that code of practice was in 1997.
- Accordingly, he submitted, the effect of the inclusion of section 72(1A), when construed naturally, is that (1) IPT is payable on the gross premium due under the contract of insurance so that any money paid under the contract is treated as subject to IPT, (2) gross premium may include charges for administration, commission or the cost of paying by instalments, (3) IPT will be payable on all of these charges, whether or not the full gross premium is retained by the insurer and whether or not the gross premium is paid, in the first instance, to the insurer or to an intermediary, but (4) if the intermediary charges an amount under a separate contract with the insured, connected to the contract of insurance, and the amount of the charge is separately identified in writing to the insured, IPT is not payable on that amount. He submitted that in a case falling within (4), the amount charged is not premium, does not arise under the contract of insurance, and is not received (or treated as received) by or on behalf of the insurer. He submitted that this is precisely the position in the case considered by the Tribunal. It follows therefore that IPT was not chargeable on the £14.
- Mr Kendrick submitted that the Tribunal's conclusion, correctly made, that there was a contract between Homeserve and the insured homeowner which at least, as a matter of contract law, was separate or distinct from the contract of insurance, should have sufficed for Homeserve's appeal to succeed. He submitted that the Tribunal misdirected itself in law by considering that the word "separate" has some special meaning. He submitted that in considering whether there was a separate contract, it was legally irrelevant to consider, as the Tribunal did, the existence of the relationship, whether contractual or otherwise, between the intermediary and the insurer (the AI Agreement in the instant case). He submitted that the Tribunal's test of "overlap" in paragraph 62 of the decision was unwarranted on the proper construction of section 72(1A)(b), irrelevant to the clarificatory purpose sought to be achieved by the provision and unworkable (or at any rate unexplained) as regards the extent to which any overlap may disqualify a contract otherwise within paragraph (b) from being a "separate contract" within the paragraph.
- Likewise the Tribunal's requirement, referred to in paragraphs 63 and 64 of the decision, for the contract, if it was to be a "separate contract", to have a life independent of the contract of insurance. The fact that the price quoted to the insured was a single amount (albeit made up of two elements) is irrelevant. So also is the question whether the arrangement and administration contract - the Customer Contract - was, at the time of its creation, dependent on and therefore inseparable from the contract of insurance. In any event, the Customer Contract was not, in all respects, dependent on and therefore inseparable from the contract of insurance.
HMRC's submissions
- Mr Macnab submitted that whether a contract is "separate" requires a consideration of all of the legal and factual circumstances pertaining to the two contracts in question. It is essentially, he said, a matter of fact and degree. He gave as an example of a contract which is "separate" for the purposes of section 72(1A)(b) the contract made when a broker accepts instructions from a client to seek suitable insurance from the market. By the custom of the market, when the contract of insurance is made, the broker's commission is paid by the insurer out of the gross premium paid by the insured client in return for the cover under the policy. As such (and without more) it forms a part of the premium paid for the cover and is charged to IPT. As between broker and insurer the commission received by the broker is payment for introduction of the business. Or as it was put by Waller J in Pryke v Gibbs Hartley Cooper [1991] 1 Lloyds LR 602:
"I think that the traditional view is that brokerage is promised and paid by the insurer for the introduction of business. The …insured is content for the broker to receive that brokerage because it constitutes remuneration for the services he has performed and is performing…"
(The practice, somewhat anomalous to the equity lawyer, whereby the broker does not disclose, and is often unwilling to disclose, to his principal, the insured client, what his remuneration is for procuring the insurance cover is described by Longmore LJ in Absalom v TCRU Ltd [2006] 2 Lloyd's Rep 129 at 131.) Mr Macnab submitted that the contract between broker and insured, although it arises in connection with the contract of insurance to which performance of the broker's obligation to the insurer gives rise, is separate in the sense that it does not owe its existence to the contract of insurance: it does not spring into being merely in consequence of, and as an adjunct to, the contract of insurance. It is entirely independent of the insurance contract: it is free-standing and pre-exists the insurance contract. The fact that ordinarily the broker is dependent upon the making of the insurance contract for payment (in the sense that if there is no contract of insurance the broker receives no payment for his services to the client who is seeking the insurance) is relevant to the terms of payment under that contract rather than to the existence of the contract. HMRC recognise and accept, said Mr Macnab, that a broking arrangement of this nature can, if the disclosure requirements of paragraph (b) of section 72(1A) are satisfied, result in the brokerage escaping the charge to IPT.
- By contrast with that, he submitted, is the case considered by the Tribunal. Prior to the changes made to the paperwork in 2003 by Homeserve and IPA the whole of the insured homeowner's payment - the £59.99 in the case considered - would attract IPT. The only difference between that and the new arrangement was that Homeserve's services, which remained exactly the same, were described by the new paperwork as "arrangement and administration", and were elevated by that paperwork into a contract between Homeserve and the homeowner, and a small part (£14) of the £59.99 paid by the homeowner to the insurer was identified as the consideration for Homeserve's contractual services to the homeowner. The new contract, the Customer Contract, had been teased out of the existing arrangements. In Mr Macnab's phrase, it had been "shoe-horned", or interposed, into the arrangements which had remained essentially the same throughout. This occurred, he said, whether the insured wanted them or not. In truth, however, Homeserve's role had not changed. It acted throughout on the insurer's behalf.
- Coming to the Tribunal's reasons for concluding that there was no "separate contract", Mr Macnab submitted that the relationship between the two contracts considered by the Tribunal was such that the Customer Contact could not properly be considered to be "separate" because (1) there is an overlap between the consideration given by Homeserve to IPA and the consideration given by Homeserve to the insured, (2) the price quoted to, and paid by, the insured is a single price, for a single (and non-negotiable) insurance product/package and (3) the contract between Homeserve and the insured is dependent on and inseparable from the insurance contact. He submitted that the Tribunal reached the right conclusion and for the right reasons.
- The first point focuses on the contract between Homeserve and the insured (the Customer Contract) and contrasts it with the contract between Homeserve and IPA. The second and third points focus on the identity between the two contracts to which the insured is a party, namely the contract of insurance with the insurer and the Customer Contract. In truth, however, as Mr Macnab accepted, points 2 and 3 are different sides of the same coin.
- On the first point, concerned with "overlap", the comparison is between the consideration given by Homeserve to IPA with that given by it to the insured and, in particular, the extent to which what Homeserve does serves as consideration under both contracts. The matters urged by Mr Macnab were in substance those relied upon by HMRC for the contention, rejected by the Tribunal, that there was no contract at all between Homeserve and the homeowner (and thus no contract to which paragraph (b) of section 72(1A) can apply). Those matters, in essence, were that Homeserve does nothing by way of consideration for the payment to it of the £14 under the Customer Contract that it is not already obliged to do under the AI Agreement between itself and IPA.
- On the second and third points, concerned with the single payment for a single (and non-negotiable) insurance product/package and the inseparability of the Customer Contract from the insurance contract, Mr Macnab made the following points. To some extent they overlap. First, there is only one single package deal on offer or being "marketed": the prospective policyholder's only choice is to take it or leave it. Second, it did not follow from the Tribunal's decision on the "two contracts" issue that the two contracts are "separate". The contracts are inseparable from each other, are made at the same time and are incapable of separate acceptance by, on the one hand, IPA and, on the other, Homeserve. They are accepted jointly at the same time. Third, the total price paid by the customer is a single price, albeit split into two. That price is unaffected by the "two contracts" arrangement. Fourth, the right to cancel and obtain a full refund relates to the entirety of the cover provided. It includes the fee for the "arrangement and administration services" provided under the Customer Contract. Fifth, the product marketed is Homeserve's product. There is no choice of insurer or choice of insurance terms. The homeowner cannot enter into a contract to which only Homeserve (or IPA) is a party. He must enter into contracts both with IPA and with Homeserve.
Conclusions
- In answering the short question of statutory construction posed by this appeal I bear in mind that the approach to be adopted is, in the words of Lord Nicholls delivering the unanimous opinion of the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (inspector of Taxes) [2004] UKHL 51, [2005] 1 AC 684 at [36] "First, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and, secondly, to decide whether the transaction in question does so". Lord Nicholls then quoted with approval the following passage from the judgment of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, at [35]:
"The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
It is instructive to refer to a later passage (at [38]) from the same opinion:
"In the speech of Lord Hoffmann in MacNiven [MacNiven v Westmoreland Investments Ltd [2001] UKHL 6, [2003] 1 AC 311] it was said that if a statute laid down requirements by reference to some commercial concept such as gain or loss, it would usually follow that elements inserted into a composite transaction without any commercial purpose could be disregarded, whereas if the requirements of the statute were purely by reference to its legal nature (in MacNiven, the discharge of a debt) then an act having that legal effect would suffice, whatever its commercial purpose may have been. This is not an unreasonable generalisation, indeed perhaps something of a truism, but we do not think that it was intended to provide a substitute for a close analysis of what the statute means."
- Mindful of the cautionary words at the end of that citation, it is worth asking why an expression which, on its face, appears to set out a straightforward legal concept, that of a "separate contract", should not simply mean just that: a separate contract in the sense that it is not the same as the insurance contract to which it is being compared. For, looking at the provision purposively it is, to say the least, difficult to discern what transaction is intended to answer to the statutory description if it is not simply a contract which is different from, ie not the same as, the insurance contract.
- It seems plain, however, that the Tribunal considered that the expression "separate contract" as used in section 72(1A)(b) has a special meaning and that it is not enough that the contract in question is distinct or different from, ie not the same as, the contract of insurance. The Tribunal referred in paragraph 67 of the decision to having adopted a "special meaning" in explaining the expression "separate contract". Mr Macnab did not accept, despite that statement, that there is anything special about the meaning of "separate contract" adopted by the Tribunal. This seems to me to be something of a quibble. It is clear that the Tribunal was investing "separate" with a particular meaning. Whether it is correct to describe this quality as "special" does not matter.
- In paragraph 59 of the decision, introducing the discussion on the expression "separate contract", the Tribunal considered that the word "separate" was chosen "as a term of emphasis" to denote a contract that was separate from the taxable insurance contract and that whether it was "separate" in the sense intended required an examination of the circumstances, legal and factual, in which the two contracts taken for comparison are found. The Tribunal went on to state that this approach was "in line" with what it considered to be "the evident purpose" behind section 72(1A) which was, subject to the limits placed by paragraphs (a) and (b), "to bring into tax amounts …that were found to be outside the scope of charge under section 72(1) taken alone" (ie before section 72(1A) was introduced). In short, the Tribunal saw section 72(1A) as intended to widen the scope of the section. Its understanding that this was Parliament's intention is also referred to in paragraph 37 of the decision ("section 72(1A)… extends the definition of 'premium'…") and again at paragraph 55 ("section 72(1A)… added to the tax base by widening the definition of 'a payment received under' a particular taxable insurance contract.").
- Insofar as the Tribunal based its conclusion on the meaning of "separate contract" on this premise - Parliament's intention, when introducing section 72(1A), to widen the scope to tax - and assuming, if that was indeed Parliament's intention, that this can bear on the meaning of the expression "separate contract" (an assumption which I find questionable) - I consider that it was mistaken. In the Explanatory Notes to the Bill which became the Finance Act 1997 and which, by clause 28, introduced section 72(1A), it was stated that the clause:
"Reinforces the existing position by requiring that, in order for an amount charged in connection with a standard rate contract to be treated as outside the scope of the Insurance Premium Tax, the insured be notified in writing of the existence of a separate fee contract and the amount of that fee. This requirement is consistent with the insurance industry's Code of Practice."
It is permissible to consult the Explanatory Notes "as an aid to construction insofar as they cast light on the objective setting or contextual scene of the statute and the mischief at which it is aimed". See Lord Steyn in Regina (Westminster Council) v National Asylum Support Service [2002] UKHL 38, [2002] 1 WLR 2956 at [6]. As Mr Kendrick pointed out, however, there is no suggestion in those Notes that there is any intention of widening the tax base: on the contrary, the aim appears to set out the circumstances in which an amount charged in connection with the contract of insurance may escape the charge to tax. The broker's example, to which Mr Macnab referred, where (as HMRC accept) an intermediary can legitimately structure arrangements so that he has a separate contract with the policyholder and a separate charge under it for his commission which escapes IPT, illustrates the way in which the new provision is intended to operate. There is certainly no suggestion that the separate contract should possess some particular quality of distinctiveness when compared with the contract of insurance.
- There is nothing in the least surprising about this. For, as Mr Kendrick pointed out, IPT is levied on the premium received by an insurer under a contract of insurance. See section 49 of the 1994 Act. If therefore the payment is (a) made under a contract with an intermediary (and not under the contract of insurance), (b) disclosed to the policyholder as an amount separate from the premium, and (c) never received by the insurer, there is no reason, or at any rate no evident reason, why the payment should come within the charge to IPT as being part of the premium. None of this requires attributing a special meaning to the expression "separate contract".
- The difficulty with the Tribunal decision is that, although the Tribunal considered that the expression "separate contract" had a particular meaning, it failed to identify what that meaning is. Mr Macnab sought to defend this omission by submitting that it would be neither possible nor desirable for the Tribunal to have essayed a comprehensive definition of the expression and that it was sufficient to indicate, as the Tribunal had done in paragraph 59 of the decision, that it all depended on the legal and factual circumstances in which the two contracts (the contract of insurance and the contract said to be a "separate contract") were found. In my view, this is not good enough. If, as a matter of statutory interpretation, an ordinary expression like "separate contract" is to enjoy some meaning distinct from its ordinary meaning of "different from" (or the like), it is necessary to indicate, if only in broad terms, what that special meaning is, even if it is not possible to set out a bright line test for stating in any given case on which side of the line any particular contract falls.
- In my judgment, the expression "separate contract" means no more and no less than a contract which is distinct from (in the sense that it is not the same as) the contract of insurance. I find wholly persuasive the submissions of Mr Kendrick - as summarised above - for this conclusion. On that basis, given the finding that there was a contract between Homeserve and the homeowner and, necessarily, that this was not the same as the contract of insurance between IPA and the homeowner - the contract from which it was being distinguished - it follows that there was a "separate contract" for the purposes of section 72(1A)(b) and that the Tribunal erred in failing so to conclude.
- What then of the other two reasons, identified in paragraphs 62 to 65 of the decision, for concluding that the Customer Contract - the contract between Homeserve and the homeowner which was found to exist - was not a "separate contract" for the purpose of section 72(1A)(b)?
- The first reason, set out in paragraph 62, that there was what the Tribunal described as "an overlap between the consideration given by Homeserve to IPA and the consideration given by Homeserve to the homeowner" does not withstand examination. As Mr Kendrick submitted, there is nothing in the 1994 Act (or in any other statutory provision) to explain why this should be a material factor even assuming, which is at the very least questionable, that there is any such overlap. For what it is worth, my reading of the AI Agreement would suggest that the consideration given by Homeserve to IPA is quite different from the consideration, ie the services, provided by Homeserve to the homeowner under the Customer Contract; but even if there were complete identity of consideration (in the sense that the consideration given by Homeserve to the homeowner under the Customer Contract was no more than a promise to perform, or the performance of, Homeserve's pre-existing obligations to IPA) I cannot see that this would matter. The existence and terms of the contract between Homeserve and IPA are for the reasons advanced by Mr Kendrick of no relevance. In my judgment, the fact that any part of the consideration moving from Homeserve to the homeowner under the Customer Contract is no more than the promise to perform or the performance of a pre-existing obligation to IPA under the AI Agreement is irrelevant to whether or not the Customer Contract is "separate" from the contract of insurance between IPA and the homeowner. It is the contract between the intermediary and the homeowner which must be separate from the contract of insurance, not that between the intermediary and the insurer or any other person. Moreover, as Mr Kendrick further pointed out, the Tribunal does not address what degree of overlap it considers to be fatal to the existence of a "separate contract". Must there be a total absence of overlap? Or is only a substantial measure of overlap fatal? Mr Macnab submitted that it need not be total but must be more than minimal but that does not emerge from the decision, and for the reasons already stated it is not apparent why any overlap should be material.
- Nor am I persuaded that the fact that the contract to which section 72(1A)(b) refers is dependent upon the creation and subsistence of the contract of insurance and can only continue in existence for so long as that contract remains in being is of any relevance to whether, for the purpose of section 72(1A)(b), it is a "separate contract". Nor do I consider that it is relevant that the payment made by the homeowner is a single payment, albeit made up of separate parts. As Mr Kendrick pointed out, according to section 72(1A) the "separate contract" is one which is made "in connection with a taxable insurance contract". It is likely therefore to be a contract which is accessory or ancillary to the contract of insurance. Moreover, it is to be expected that the homeowner will be told that he is paying a single price with two components, rather than two separate prices, and natural that if the insurance contract is not pursued or is rescinded the ancillary contract will be affected. In short, the legislation, so far from stipulating that the "separate contract" should have an existence independent of the contract of insurance, envisages that the two will be connected. Put another way, it would be odd if, although envisaging that the two contracts be connected, the legislation is nevertheless to be understood as disqualifying from the purview of the exception in paragraph (b) any contract which is, to any degree, dependent on the existence of the connected contract of insurance.
- For these short reasons, elaborated at much greater length in Mr Kendrick's submissions, both written and oral, I consider that neither of the reasons advanced by the Tribunal for concluding that, in the instant case, the Customer Contract was not a "separate contract" is correct in law. I would only add that when one examines the particular contract terms in the Homeserve plumbing and drainage documentation pack considered by the Tribunal it is evident that, in some respects, the Customer Contract can outlive the insurance contract. Thus, to take one example (as it happens it is referred to in paragraph 49 of the decision) Homeserve has the right under the Customer Contract to terminate the insurance contract mid-term but on terms that it will continue to provide the homeowner with cover for the duration of the Customer Contract subject only to the homeowner continuing to make timely payments of any premium that is due. In effect, Homeserve is empowered to switch insurers. (This is reinforced by a term of the AI Agreement between Homeserve and IPA requiring IPA to novate its rights and obligations under all assistance insurance policies within the scope of that Agreement to a new insurer introduced by Homeserve.) Self-evidently, in the event of the cancellation of the insurance contract with IPA then, whether or not Homeserve finds and substitutes another insurer or itself assumes the risks covered by the cancelled policy, the Customer Contract will have survived the insurance contract. Mr Kendrick detailed other instances where Homeserve's obligations (and therefore the homeowner's rights) under the Customer Contract can outlive the existence of the insurance contract.
Result
- The appeal succeeds.
