20252

Exempt Supply – whether Appellant an “insurance intermediary” in actings for which it received payment in relation to insurance – whether the actings fell within the exclusion in Note 7 – VATA 1994 Schedule 9 Group 2 Item 4.

EDINBURGH TRIBUNAL CENTRE

	ROYAL INCORPORATION OF ARCHITECTS 
	IN SCOTLAND	 Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Member): 	  Mr K Pritchard, OBE., BL., WS

Sitting in Edinburgh on Wednesday 27 June 2007

for the Appellant		Mr Charles K Rumbles

for the Respondents	Mr Julian Winkley

© CROWN COPYRIGHT 2007.

DECISION

This appeal is brought against a ruling in a letter from the Respondents of 12 January 2007 that certain payments received by the Appellant in relation to the placing of Professional Indemnity Insurance were standard rated i.e. did not fall within the exemptions in Group 2 Schedule 9 VATA.  This decision reversed and contradicted a previous decision by the Respondents that the payments were exempt given by letter 15 June 2001.

The Tribunal at the appeal were provided with a body of correspondence, sample websites, brochures and the like and also heard evidence from Mrs M Goodfellow the Appellants Finance Officer who dealt with VAT and a Mr Ian McCallum an employee of Marsh Ltd.

General Factual Background
Architects may not practise unless they are registered with the Architects Registration Board.  That Board issues a code of professional conduct and also makes it a mandatory condition of practice as an architect, that professional indemnity insurance of a minimum specified amount is held.  It is not essential to carry on practice as an architect, that he or she be a member of the Appellant body, but all members of the Appellant, being architects must carry professional indemnity insurance.

The Appellant may be described as a voluntary body which provides various services to its subscribers with a view to enhancing their professional status particularly within Scotland and providing assistance and advice in the practice of the profession.  For these purposes it has a website;  it issues various brochures and newsletters, samples of all of which were produced.  

Neither the Registration Board nor the Appellant specifies any specific insurer to be used.  Professional indemnity insurance is available from several sources.

For what appeared to them, and indeed to the Tribunal, to be good and sufficient reasons a joint venture called RIAS Insurance Services Ltd was incorporated and commenced trading in 1984.  That was a joint venture between the Appellant and a company which is now called Marsh Ltd.  It was claimed in one of the booklets produced by RIAS Insurance Services for the Appellant called “Risk Management – a survival guide” that the joint venture had provided a safe secure and reliable centre of excellence for professional indemnity protection for the profession and had contributed each year to the Appellant assisting in the promotion and (sic) services to members.

With the advent of the Financial Services Authority and the subsequent imposition of regulatory requirements for the givers of insurance advice, the joint venture and limited company were replaced by an entity known as “RIAS Insurance Services a trading arm of Marsh Ltd”.  That was run by an executive committee consisting of 3 architect members and 4 members from Marsh.  They continued to run matters on the same lines as previously.  RIAS Insurance Services Ltd was dissolved and its successor body became the trading arm of Marsh.  A royalty free agreement granted Marsh the ability to use the Appellants’ logo.

The relationship between the Appellant and Marsh has in the main been reduced to writing in a contract entitled “Commission Sharing Agreement”.  That document provides, and its predecessor provided, for a payment to the Appellant based on the value of the take-up of professional indemnity insurance with Marsh by the architect members of the Appellant.

The contract also provides:
RIAS appoints and MARSH accepts such appointment to act as the exclusive advisor to RIAS and provide the Insurance Services to members of RIAS more particularly described in the Schedule hereto (“the Services”), on the terms hereafter appearing.

MARSHA is a Lloyds Broker and member of the General Insurance Standards Council (GISC).  MARSH agrees to appoint RIAS as an Introducer for General Business in accordance with the terms and conditions of this Agreement.

Those services are defined:
(i)	To provide Professional indemnity and directly related insurance broking services to Members of RIAS.
(ii)	To develop and administrate facilities and schemes for insurers for the benefit of RIAS Members.
(iii)	To use all reasonable endeavours to place and from time to time renew RIAS members’ business in accordance with their requirements (and within any limitation imposed by such requirements) on the best terms, compatible with their best interests, with Lloyd’s or members of the Association of British Insurers or other insurers licensed by the Department of Trade and Industry to carry on business in the United Kingdom.

The Appellant’s officers considered and sought advice on their VAT position.  Prudently Mr Rumbles of the RCB Partnership wrote to the Respondents on 7 June 2001 seeking written confirmation of the VAT liability of income received by the Appellant in respect of introductory services provided by the Appellant to RIAS Insurance Services Ltd.   The letter narrated that the Appellant was acting as an insurance intermediary in bringing together members of the Appellant with a view to insurance of risk of members of the Appellant with RIAS Insurance Services Ltd as broker for Marsh Ltd.  It was claimed that the service provided by the Appellant fell short of promotion or advertising for the reasons that:

1.	RIAS targets its own members
2.	RIAS is paid commission for each successful take-up of an insurance policy 
3.	the insurance product offered by RIAS Insurance Services and Marsh Ltd is endorsed by the Appellant. 

The Respondents were provided with a full text of the said “Commission Sharing Agreement” and in response the Respondents officer said “I can confirm that the services offered are that of an insurance intermediary and as such are exempt under Item 4 Group 2 Schedule 9 VATA 1994 and has effect on all supplies made on or after 19 March 1997”.

The factual situation as outlined in that letter according to Mrs Goodfellow, whom we accept, has not changed.  Thereafter the input tax which had been wrongly paid according to the then statement by the Respondent was reclaimed by way of credit and matters proceeded on that basis thereafter until a visit in 2006 by the Respondents’ Officer McMeechan.  On 12 June 2006 he wrote:

“on the facts supplied by RIAS an examination of the commission sharing agreement between Marsh Ltd and RIAS I have concluded that these transactions are liable to the standard rate of VAT”.

It appeared from the evidence before the Tribunal that at least at that stage Mr McMeechan had no idea of the existence of the letter of 2001.  

His position was affirmed in the decision under appeal made by a review officer.

In their Statement of Case the Respondents erroneously asserted that all architects in Scotland were obliged to be registered with the Appellant.  That is not correct and may have coloured the Respondents thinking.

The Relevant Legislation
The origin of the exemption is in EC Directive 77/388 Article 13B(a).

The UK sought to implement into domestic law what is much more shortly stated in the said Article.

Item 4 of Group 2 reads as follows:

“The provision by an insurance broker or insurance agent of any of the services of an insurance intermediary in a case in which those services-

(a)	are related (whether or not a contract of insurance or reinsurance is finally concluded) to an insurance transaction or a reinsurance transaction; and
(b)	are provided by that broker or agent in the course of his acting in an intermediary capacity”.

The extensive notes to Item 4 form part of the legislation.  So far as material, they read:

“(1) For the purposes of item 4 services are services of an insurance intermediary if they fall within any of the following paragraphs-

(a)	the bringing together, with a view to the insurance or reinsurance of risks, of-

(a)	persons who are or may be seeking insurance or reinsurance, and
(b)	persons who provide insurance or reinsurance,

(b)	the carrying out of work preparatory to the conclusion of contracts of insurance or reinsurance;
(c)	the provision of assistance in the administration and performance of such contracts, including the handling of claims;
(d)	the collection of premiums.

(2)	For the purposes of item 4 an insurance broker or insurance agent is acting ‘in an intermediary capacity’ wherever he is acting as an intermediary, or one of the intermediaries, between-

(a)	a person who provides insurance or reinsurance, and
(b)	a person who is or may be seeking insurance or reinsurance or is an insured person”.

It was agreed that (c) and (d) above were not relevant in the present circumstances.

By Note 7 it was stated that Item 4 does not include-

(a)	the supply of any market research, product design, advertising, promotional or similar services; or
(b)	the collection, collation and provision of information for use in connection with market research, product design, advertising, promotional or similar activities.

The Issue
The Tribunal considered that the issue between the parties was whether the Appellants services qualified for exemption because they were acting in an intermediary capacity and were not excluded by legal note 7.

By their letter of 12 June the Respondents stated that they accepted that an insurance intermediary was providing introductory services where the following 3 criteria were met:

1.	they are paid for successful take-up of an insurance policy;
2.	they are targeting their own customer base;
3.	the intermediary endorses the product or the insurer.

The evidence from Mrs Goodfellow and Mr McCallum confirmed that those 3 criteria were met and we accept that evidence.  In any event that matter so far as it went was not seriously contested, and we find that the Appellant acted as an insurance intermediary between the Appellant’s members and via Marsh, the broker, insurance providers.

Contentions for the Respondents
The services provided were entirely consistent with introductory or promotional services to Marsh and fell within Note 7.  At clause 4A of the said Commission Sharing Agreement the Appellant was to use its best endeavours to “promote and develop” the services (which were defined in the agreement itself) and to encourage those members of the Appellant to place business with Marsh.  Marsh is ultimately responsible for the resolution of any dispute with a member of the Appellant.  Properly read the services for which the Appellant receives payment are properly categorised as “promotion”.  The Respondent cited The British Horse Society Ltd (1999) no 16204.   In that case it was said that there required to be a clear nexus between the activities of the Appellant and the provision of insurance.  They contrasted the present case with Teletech UK Ltd (2003) no 18080 in which this Tribunal found far more by a way of activity in the part of the Appellant than in the present case, the Appellant providing a pro-active cold calling service.  Staatssecretaris van Financiën v Arthur Anderson [2005] STC 508 was cited to indicate that back office activities for a life assurance company did not satisfy the requirement of acting as an insurance agent.  Another case of this Tribunal Smarter Money Ltd was also cited (2006) 19632.  There the Appellant by internet provided services introducing customers to potential lenders and had no direct input into any actual contract.  They were also paid whether or not a contract was concluded.  Again it was said that the taxpayer had provided clear introductory services and was accordingly exempt.  In the present case as exemplified by the case law and on the facts the services of promotion and similar would not satisfy the test of a sufficient nexus and did therefore not fall within the exemption.

Argued for the Appellant
On the facts the Appellant organised the introduction to Marsh of its members so that a policy could be concluded.  Marsh acted only for members of the Appellant and the Appellant did not provide information about any other insurer.  Nonetheless the individual architect was not under any obligation to use Marsh.  He was persuaded to do so by the plain endorsation of the Appellant and Marsh’s track record as evidenced by the matters on the RIAS website and brochures.

In addition because of the participation of both the Appellant and Marsh by providing members to not only the executive committee but also an insurance committee mentioned in the agreement at 4(h) they were engaged in negotiation in a general way of the benefits and extent of the cover that could be obtained for their members.  Mr McCallum, the witness from Marsh, went so far as to suggest that the whole activities of Marsh with regard to the Appellant’s members was almost that of a department of the Appellant.  We accept that view.  The situation has not changed since the letter of 2001.

We agree with and find as fact the factual matters in the argument for the Appellant.

Decision
Much of the decision in the present instance is, and it is thought, requires to be, a matter of impression.  Does the Appellant do enough to be regarded as an exempt insurance intermediary bearing in mind the whole facts and circumstances?  We have concluded that they do fall within the exemption.  They are not excluded by note 7.  Their activities cannot fairly be described as market research, product design, advertising promotional or similar activities or the provision of information for use in that connection.  The Appellant does not advertise Marsh.  Marsh advertises itself in the Appellant’s literature and, indeed, pays standard rate VAT on the fee charged by the Appellant for that purpose.  We have no hesitation in finding and concluding that the 3 criteria mentioned by the Respondents, payment, targeting and endorsation are met.  The Appellant we find is therefore clearly is an insurance intermediary within the terms of the legislation and since we do not consider that they are paid for advertising promotional or similar services as such in that context they do not fall within the exempting provision of note 7.

Result
In the above circumstances the appeal succeeds.  The Tribunal was moved for expenses in the event of success by the Appellant.  The Appellant has succeeded and we find it entitled to its expenses which failing agreement will require to be taxed in terms of Rule 29(3).

T GORDON COUTTS, QC
CHAIRMAN

RELEASE:  12 JULY 2007.

EDN/07/06