IPT Legal Cases
Kvaerner
The location of risk and hence of liability for IPT was initially established by the 2nd Non-Life Insurance Directive (1988), an EU-wide set of guidance for property, vehicle, travel and holiday insurance. Precise interpretation and enforcement were patchy in practice until the 2001 Kvaerner case. Kvaerner, a Norwegian engineering and construction service group, took out a global professional indemnity insurance policy for its group companies. This covered a Dutch subsidiary of John Brown Plc which was owned by Kvaerner: that policy was taken out in the UK, and Kvaerner believed it should only pay UK IPT on all the coverage, but the Dutch tax authorities raised an IPT assessment on the Dutch element of the policy. 
The case was eventually referred to the European Court of Justice ('ECJ') which ruled that IPT was due where the risk was located and so Dutch IPT was due on the company's Netherlands subsidiary's element of the policy. The ECJ ruling stated that it was not relevant who paid the insurance, or where, and charged the insured (Kvaerner), and not the insurer. If there were any lingering doubts on the IPT liability to foreign tax authorities on risks covered in their territories by cross-border insurance, then Kvaerner case resolved them. This landmark decision firmly defined the location of liability for IPT and highlighted the case that cover taken out by parent companies out of country must nevertheless be assessed locally by the tax authorities concerned. Following Kvaerner, there seemed to be some doubt about whether the tax authorities would pursue non-compliant insurers.
DSG
The DSG case has recently underscored that the authorities are now keen to employ the ruling as one of a number of tools to bring in IPT revenues. DSG International Insurance Services was part of the old Dixons Group, a UK household electronics retailer. DSG, registered in the Isle of Man, was providing appliance breakdown cover for a company offering service cover on appliances in the UK. The UK tax authorities raised an assessment against DSG for the IPT due on the insurance cover provided in the UK. This implied that DSG should be IPT register in the UK, and charge local IPT. DSG took the case to tribunal and won on a complex technicality. Whilst the UK tax authorities did not win this case, it did show that it was now willing to employ Kvaerner to increase its IPT revenue. Similar cases can be expected. The Kvaerner and DSG cases have firmly established the responsibility of companies and their insurers to properly allocate and report on multi-jurisdictional IPT.
Homeserve v HMRC
Before this case the amount charged to an insured for arranging and administering a taxable insurance contract was not payable under a "separate" contract and so was chargeable to insurance premium tax. This tribunal case in the UK changed that. Homeserve, a UK insurance intermediary, arranged assistance insurance (such as plumbing and drainage cover) for homeowners. The insurance provided cover against repairs and an emergency response service that promised an approved engineer on site within two hours. Under its agreement with the insurer, Homeserve arranged and administered the insurance policies and dealt with the payment of premiums, renewals and complaints. The insurer provided the cover and was responsible for contracting with a separate claims handling company. All the marketing materials and insurance documents were careful to inform the homeowner that he would have a contract with the insurer and a separate contract with Homeserve ("to arrange and administer your policy"). The issue was whether this £14 administration fee was subject to IPT. The company argued that IPT should not be charged as the fee was consideration for arranging and administering the insurance contract and not a payment received by or on behalf of the insurer since it was charged under a separate contract identified in writing to the insured. But in the context of IPT, this was deemed not a "separate contract" from the taxable insurance contract. There was thus considerable overlap between the services Homeserve provided to the homeowner and those it provided to the insurer in administering the insurance contract. In addition, the price quoted to the homeowner was a single price, even though the wording of the various documents repeatedly stressed the existence of a separate contract between the homeowner and Homeserve.
The UK Government's tax authorities (Her Majesty's Customs & Revenue, HMRC) brought this to tribunal and won. In its judgment the tribunal gave the phrase "separate contract" a special meaning for IPT purposes. It did not merely mean "another" contract, but one that was completely independent of the insurance contract.
Thus, up until Homeserve vs HMRC, IPT has been a relatively straightforward tax, giving rise to few disputes. But this decision may have a significant impact in cases such as this one where insurers have gone to some lengths to attempt to separate the provision of insurance from the administration of the policy to reduce their IPT bill.
The High Court judgment
The appeal succeeded. IPT was held not to be payable on the £14 administration fee.
The judge concluded that the tribunal had been mistaken in giving a special meaning to the phrase "separate contract". The term meant no more and no less than a contract which was distinct from (in the sense that it was not the same as) the contract of insurance.
In addition, the tribunal had been wrong to consider it a requirement that a separate contract had to have a life independent of the contract of insurance.
In his view, it was irrelevant that the price was quoted to the homeowner as a single amount, albeit made up of two parts, or that there was an overlap between the services Homeserve provided to the homeowner and to the insurer. Nor did the judge think it relevant that the contract was dependent on the creation and subsistence of the insurance contract.
Far from stipulating that the separate contract should have an existence independent of the insurance contract, the legislation envisages that the two will be linked. Section 72(1A) refers to the charge made under the separate contract as being made "in connection with" a taxable insurance contract.
Since there was a contract between Homeserve and the homeowner that was not the same as the insurance contract and Homeserve had informed the homeowner in writing that the £14 was charged under this separate contract, IPT was not payable.
Commentary
The judgment makes it very clear that a special meaning cannot be applied to the term "separate contract" in the IPT legislation. So much so that HMRC may well decide not to appeal.
But although this will enable structures similar to the Homeserve arrangements to continue for the present, the end result may be a change in the law.
http://www.out-law.com/page-9371
