The High Court held that no part of the price of cars sold under a promotional offer including free insurance and breakdown cover represented consideration for the supply of the insurance-related services alone. There was only a single standard-rated supply for VAT purposes.

Facts

The taxpayer was a major manufacturer and seller of cars. Its cars were sold to the public through a network of dealers. Another company in the group, Ford Credit, provided finance to purchasers of cars who wished to acquire the vehicles on hire purchase or other credit terms. As part of its promotional activities, from time to time the taxpayer offered, through its network of dealers, special deals or arrangements to purchasers of certain models. Such offers were communicated by the taxpayer to the dealers and then made available to customers on their purchase of the cars from the dealer or from Ford Credit.

In October 1998, the taxpayer entered into an agreement with Norwich Union to provide ‘free’ insurance to its customers. In 2002, it also made an agreement with the RAC to provide breakdown cover to customers who purchased the taxpayer's cars. On 23 January 2004, changes were made to the Norwich Union agreement whereby the personal circumstances of customers had to be taken into account before insurance cover was provided.

The taxpayer appealed against the partial refusal by Customs of three voluntary disclosures made on 30 September 1997, 23 November 2000 and 28 November 2000 claiming a total of £10,856,487 by way of overpaid output tax. The claims were initially rejected in their entirety. On 26 October 2001, they were allowed in so far as they concerned VAT paid in relation to supplies made to ultimate consumers by Ford Credit, which was a member of the taxpayer's VAT group. The balance remaining in dispute was some £5,013,911 and concerned supplies made by dealers outside the taxpayer's VAT group including ‘free’ motor insurance and ‘free’ breakdown insurance. The taxpayer contended that it was only required to account for VAT on that part of the price of the cars as was not referable to the separate supply of free car insurance and breakdown cover. Customs took the view that there was only a single standard rated supply for VAT purposes. In the alternative, they argued the supply was not by the taxpayer. Any ‘free’ insurance and insurance-related services being supplied, if at all, by the insurer Norwich Union.

The VAT tribunal dismissed the taxpayer's appeal on the grounds, inter alia, that in respect of the free insurance up to 23 January 2004 and of the breakdown cover throughout the period in question, no part of the price of the car represented consideration for the supply of insurance related services and so that there had been no supply for VAT purposes. After that date, purchasers became aware there was an insurance element because of the enquiries that were made with them direct before the cover notes were issued. Therefore, the insurance element in the transaction became a separate consideration (Decision No. 19,750).

The taxpayer appealed and Customs cross-appealed against the decision in relation to the period after 23 January 2004. The taxpayer argued that the insurance and breakdown cover were not free but formed part of the price paid to enable customers to purchase the cars with those services. Customs argued that the tribunal had erred in their treatment of the insurance after 23 January 2004 since there was a single supply of the car for the purchase price, no part of which constituted consideration for the separate supply of insurance-related services.

Issue

Whether the tribunal had erred in concluding that some part of the price paid by the customer was for the benefit of the cover provided by Norwich Union and the RAC respectively and, as such, should be treated by the taxpayer as giving rise to two separate supplies, one (being standard rated) of the car and the other (being exempt) of the insurance.

Decision

Sir Donald Rattee (sitting as a judge of the Chancery division) (dismissing the taxpayer's appeal and allowing Customs’ cross-appeal) said that, in all the circumstances, and in the light of established authority, the question to be determined was whether, at the time a car was purchased, the taxpayer had agreed with the customer, directly or indirectly, that part of the purchase price of the car whether identifiable or not, would constitute the value of the free insurance and the breakdown cover. The question was not what the customers did or did not consider to be the value of the benefits received when they purchased the cars (Kuwait Petroleum (GB) Ltd v C & E Commrs (Case C-48/97) [1999] BTC 5,203; [1999] ECR I-2323 and Kuwait Petroleum (GB) Ltd v C & E Commrs [2001] BTC 5,608 applied).

In the present case, customers had been told repeatedly that the benefits of insurance and breakdown cover were provided free to them. The price paid for the cars never changed and the sales invoice always indicated that the full price had been paid for the cars only. In all the circumstances, no part of the price paid for the cars could be regarded as constituting the cost of the insurance cover alone. Accordingly, the different treatment in respect of periods before and after 23 January 2004 could not be justified and the taxpayer had failed at the first hurdle.

Chancery Division.
Judgment delivered 15 March 2007.