A tax avoidance scheme designed to avoid VAT on car repairs that could have cost the Exchequer £600 million a year has failed after a successful challenge by HM Revenue and Customs (HMRC).
The scheme involved the restructuring of a group selling car warranties so that VAT on car repair services could be recovered. The insurer’s responsibility to repair the cars was devolved to a claims handler via two Gibraltar reinsurers.
The scheme involved several members of a group of companies headed by Oriel Group plc*. WHA Ltd was a UK claims' handling company. Viscount Reinsurance Company was a Gibraltar reinsurance company. Crystal Reinsurance Company Ltd was another Gibraltar reinsurance company.
The appellants in the case were WHA and Viscount. The scheme was designed to ensure that VAT could be recovered on car repair work done under warranty. Insurers cannot normally recover VAT on car repair work, because they do not have to charge VAT on the insurance premiums they receive.
HMRC refused to repay tax to WHA and Viscount on the basis that the scheme failed. The Supreme Court agreed. The court’s approach was that in cases involving a construct of contractual relationships, the matter must be assessed as a whole to determine the economic reality.
The Supreme Court ruled unanimously against the scheme, which started in 1998.
This ruling protects £600 million per year which was potentially at risk from businesses using this kind of avoidance scheme.
The exchequer secretary to the Treasury David Gauke said: “HMRC’s success in defeating this scheme sends a clear signal – the Government will relentlessly pursue those that try to avoid their responsibilities, no matter how long it takes, and win.
“While most businesses and individuals pay the tax they owe on time, HMRC has received additional resources to make sure the minority are challenged when they attempt to avoid paying what is due.”
The Supreme Court gave its judgment in WHA Limited and another v HMRC on May 1, 2013.
Note *: NIG is a UK insurer which provides a UK front for an offshore MBI business carried on by Oriel. NIG’s policies cover the cost of repairs and replacement parts following breakdowns of second hand cars. The policies are marketed and sold by UK company Warranty, which is a member of the Oriel group. Prior to the implementation of the scheme in question, NIG reinsured the risk under the policies with a Gibraltar-based member of Oriel (Practical). Warranty was appointed by NIG to handle claims made under the policies. In the event of a breakdown, the insured contacted Warranty and was directed to a garage approved by Warranty, a garage of the insured’s choice or the dealer garage. Warranty paid for the repairs carried out by the garages. The VAT on such payments was irrecoverable.
The full decision here.