Policy Administration Services Limited

IPT00011

INSURANCE PREMIUM TAX — agent arranging insurance for purchasers of mobile telephones — contract between agent and insurer by which agent undertook all administration of policies — customer’s monthly payment composed of premium and service charge — FA 1994, s 72(1A)(b) — whether separate contract between customer and agent for administration service — no — whether payment made by customer to agent — no — entirety of customer’s payment subject to tax — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

POLICY ADMINISTRATION SERVICES LIMITED

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Manchester on 1 September 2004

Michael Conlon QC instructed by Ernst & Young LLP, chartered accountants, for the Appellant

David Gilchrist, counsel, instructed by the solicitor for Customs and Excise, for the Respondents

DECISION

1 I take the facts of this appeal, about which there was no material dispute, from the statement of agreed facts produced by the parties, the unchallenged statements of three witnesses and the various documents provided at the hearing. I heard no oral evidence.

2 Formally, the appeal is against a decision on review, dated 6 June 2003, that certain payments received, or at least collected, by the Appellant attract insurance premium tax. Although the Appellant is not an insurer and is therefore not itself liable to account for the tax (see Finance Act 1994, s 52) it is affected by the decision since, if the tax is due, it is the Appellant which will ultimately suffer it. The request for the review was made on its and the insurer’s behalf by Ernst & Young, the chartered accountants, and the Appellant is thus entitled to bring this appeal (see s 59 of the 1994 Act).

3 The Appellant is Policy Administration Services Limited (PAS), a member of a group of companies all of which, directly or indirectly, are wholly-owned subsidiaries of Caudwell Subsidiary Holdings Limited. Other members of the group are Phones 4U Limited (P4U) and 4U Insurance (Isle of Man) Limited (4UI). P4U is a high-street retailer of mobile telephones and of airtime contracts.

4 The function of PAS is to arrange insurance, for customers of P4U, of the mobile telephones which they have obtained from P4U. The policies cover the customer against loss, damage and misuse of the telephone. PAS does not itself insure the telephones but instead places the insurance with London General Insurance Company Limited (LGI), a company at arm’s length to PAS and its group. LGI is an authorised insurer permitted to underwrite business such as that placed with it by PAS. However, it reinsures the entirety of the risk with 4UI. In effect, therefore, the Appellant’s group underwrites the risk and LGI is included in the arrangements for regulatory reasons (although it would, of course, have itself to indemnify policyholders should 4UI fail).

5 A customer wishing to acquire insurance is required to pay a monthly sum. Typically, the monthly payment is £7.99 of which, PAS says, £5.99 is the premium subject to insurance premium tax (IPT) and £2.00 is its own administration fee which is exempt from tax. Whether or not that contention is correct depends upon the interpretation to be placed on s 72(1A) of the Finance Act 1994. The subsection needs, however, to be put into its context if it is to be fully understood. So far as it is relevant to this appeal, s 72 of the Act reads as follows:

“(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—

(a)the payment is chargeable to tax at the higher rate by virtue of section 52A above; or

(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.”

6 Section 73 of the Act provides that an insurer is “a person or body of persons (whether incorporated or not) carrying on insurance business”; it was common ground that LGI does, but PAS does not, answer to that description. The same section provides that the word “tax” in s 72 means insurance premium tax. The provisions of the Act relating to higher rate tax are immaterial to this appeal. The effect of s 72, as was common ground, is that the entirety of the customer’s monthly payment is in principle subject to IPT, and the amount for which the Appellant contends is brought out of the charge only if sub-s 72(1A)(b) applies.

7 There have been changes in the Appellant’s contractual arrangements over the years; as Michael Conlon QC, who represented the Appellant at the hearing, put it, the arrangements have “evolved”. It is accepted by the Appellant that before May 2002 the arrangements did not meet the requirements of section 72(1A)(b) and IPT was due on the entire payment made by the customer. Until then, the customer’s payment was treated by the relevant contracts as one made to LGI. The Commissioners accept that from 1 February 2003 onwards, the arrangements do satisfy the requirements of sub-s 72(1A)(b), and (using the example I have set out above) IPT is due on the £5.99 regarded as premium, but not on the £2 regarded as the administration charge. The parties disagree about the correct treatment of the contractual arrangements which applied from May 2002 to the end of January 2003. Despite the brevity of that period and the comparatively small amount of each payment, I was told that the aggregate amount of IPT in dispute is in the order of £500,000.

8 In broad outline, the underlying arrangements have been the same throughout. PAS has always acted as an intermediary, placing each customer’s insurance with LGI, handling the customers’ payments, and dealing with any claims as well as the overall administration of the scheme which is referred to, in the literature produced for the benefit of customers, as “Premier Plan”. Though I imagine that customers of P4U can, if they wish, arrange their own insurance, I was told that they are invited by the staff within P4U’s retail outlets to place it through PAS, and no other means of effecting insurance is available in the shops. The premium payable for the insurance varies, depending upon a number of factors such as the value of the handset insured, but PAS’s administration (or “service”) charge is a constant £2 per month, regardless of the amount of the premium. The entirety of the customer’s monthly payment is collected by PAS, by direct debit.

9 Each month, during the relevant period, PAS accounted to LGI for the premiums collected, less the value of any claims which it had met. The accounting method in use from May 2002 to January 2003 (unlike that in use before) allowed PAS to retain the £2 administration charge. The bulk of the payment due each month to LGI—that is, premiums less value of claims—was passed on to 4UI, LGI retaining for itself a “corporation fee” of a few pence per policy per month. The precise value of the corporation fee varied with the amount of the premium. From its £2 monthly charge, PAS paid as much as £1.30 to P4U as commission for its placing the insurance through PAS.

10 From the beginning of the scheme, there has been a written agreement between LGI and PAS. Although the underlying basis of the arrangement has not materially changed, there have been differences between the agreements in force from time to time. The version which came into effect on 1 November 2001 and remained in effect until 31 January 2003, after which it was superseded by the agreement now in use, provided by clause 3, entitled “Delegation of Powers”, the following:

“The Corporation hereby appoints the Administrator as its agent to promote and market the Insurance and delegates to the Administrator the authority to transact the Insurance for its customers and other insurances as may be agreed from time to time between the Corporation and the Coverholder. During the term of this Agreement, the Administrator shall use its best endeavours to promote the sale of Insurance. In consideration of the Administrator performing its obligations under this Agreement, the Corporation shall pay to the Administrator in respect of each Insurance policy the Administration Fee and Commission at the rates set out in Appendix 1.”

The Corporation is LGI, the Administrator is PAS and the Coverholder is each customer who has effected insurance.

11 The Administrator’s obligations were spelt out in more detail in clause 6 of the agreement. This clause, entitled “Duties of the Administrator”, provided (so far as material):

“6.1The Administrator will:

6.1.1at all times act in the best interests of the Corporation and will comply with any applicable laws or regulations relating to the sale of the Insurance and its duties under this Agreement.

6.1.2apply premium rates as agreed by the Corporation as detailed in Appendix 1 or from time to time as new schemes are introduced.

6.1.3issue Insurance policies in the form and manner as agreed by the Corporation.

6.1.4handle, investigate and settle all claims in accordance with the policy wordings and any claims handling procedures required by the Corporation from time to time.

6.1.5not (and will procure that its agents do not) make false or misleading claims about the Insurance or describe the Insurance or the cover provided by any Insurance policy in any manner which is inconsistent with the Insurance policy terms and conditions set out in Appendix 2.

6.1.6procure that its agents will collect the appropriate premium, insurance premium tax and application details from customers and promptly submit them to the Administrator without set off or deduction of any kind, save for any commission payable to the agent which the Administrator may authorise the agent to deduct from the amount to be submitted to the Administrator. For the avoidance of doubt, the payment of any commission to any agent shall be the sole responsibility of the Administrator and shall not be payable by the Corporation.

6.1.7act as the Corporation’s agent and administrator in relation to the reinsurance of the Insurance and perform such administrative functions as the Corporation shall assign to the Administrator from time to time.

6.1.8indemnify the Corporation and keep it indemnified from all and any liability it may incur in relation to the transfer to the Corporation of existing insurance policies administered by the Administrator and underwritten by third parties, including, but without limitation, any failure to notify any customer of the change of underwriter of such policies and any liability it may incur by reason of the wording of such insurance policies being in breach of any statutory or regulatory requirements.”

12 Clause 8 of the agreement, entitled “Accounting”, was in these terms:

“8.1The Administrator shall be responsible for the collection of premiums in full from customers or its agents. The monthly Bordereaux described in Paragraph 9 shall be sent to the Corporation within 21 days of the close of each month together with an electronic transfer of funds to a bank account designated by the Corporation representing:

8.1.1total Risk Premium (at the rates set out in Appendix 1); plus

8.1.2Insurance Premium Tax calculated at the prevailing rate;

8.1.3the Corporation Fee (at the rate set out in Appendix 1); less

8.1.4total claims paid.

and the Administrator shall retain from the amount so collected its Administration Fee and Commission for the month in question.

8.2The Administrator acknowledges and agrees that all monies it receives in relation to the Insurance (and whether in respect of Gross or Net Premiums (including unearned risk premium, claims reserves), taxes or otherwise) shall at all times be the property of the Corporation and shall not form part of the assets of the Administrator and shall be held on trust for the Corporation absolutely.”

13 It is not necessary for present purposes to set out clause 9. Appendix 1, to which clauses 3, 6 and 8 refer, was designed to provide for the allocation of the customers’ monthly payments to various purposes, which it achieved by means of a table divided into columns, one for each possible aggregate monthly payment, and rows, showing the amount appropriated from each possible monthly payment to those various purposes. The Appendix was divided into two sections: one for policies effected before 1 May 2002, but which were to be governed by the terms of the agreement, and the other for policies effected on or after 1 May 2002. Each section took the customer’s aggregate monthly payment as the starting point from which the allocation proceeded.

14 Thus the table applicable to the earlier policies had as its first line “Customer pays” after which the columns recorded the various possible amounts, one to each column. The next row was entitled “Original gross premium excluding IPT”. In the column which recorded £7.99, the example I have adopted, as the amount the “Customer pays”, this row contained the figure £7.61. The two figures are related in that £7.99 is £7.61 plus IPT on that sum. The next row down was identified as “Less Administration Fee (Administrator)” and the amount was shown as (£0.45). That row was followed by one for “Less Commission (Administrator)”, recording (£1.46). Those two sums were deducted from the “Original gross premium excluding IPT” of £7.61 to leave what appeared on the next row and was described as “Original Net Premium”, namely £5.70. The next row showed the “Corporation Fee”, in the event (£0.11); that sum was deducted so as to arrive, on the final row, at the “Risk Premium” of £5.59. The table therefore correctly reflected the Appellant’s acceptance that until May 2002 the arrangements were such that the entirety of the customer’s monthly payment attracted IPT; of PAS’s gross administration fee and commission of £2, 9p represented the appropriate tax, leaving £1.91 (45p plus £1.46) as the net fee.

15 The second table in appendix 1, applying to policies brought into effect on or after 1 May 2002, was rather different. As in the first table, “Customer pays” occupied the first row, and I again adopt the column containing the amount of £7.99. The second row was entitled “Service charge”, against which no amount appeared. Instead, the next two lines read “Administration Fee (Administrator)—(54p)” and “Commission (Administrator)—(£1.46)”.Those two sums were deducted from the “Customer pays” amount of £7.99 to leave what was described on the next row down as the “Premium” of £5.99. The following row identified IPT at 29p, which was deducted to leave, on the following row, the “Original gross premium excluding IPT”, as it was now described, of £5.70. Thereafter, as before, the “Corporation fee” of 11p was deducted, leaving the same risk premium of £5.59. By this scheme, assuming it correctly reflected the law, tax was reduced by 9p to 29p and the net sum due to the Appellant was increased by the same amount, that is from £1.91 to £2.

16 So far as I was made aware, while the Appendix was amended, the text of the agreement itself was not. However, over the period with which I am concerned there were changes in the forms which customers wishing to effect insurance were required to sign. Some of those changes were merely superficial and of no consequence here, but others were changes of substance. In each case the form consisted of a single sheet of paper, of A4 size. On the front, the P4U shop staff and the customer were required to fill in a number of details such as the customer’s name and address, the identity of the handset and the date; this side of the form also contained a direct debit authority. The reverse set out the contractual terms and conditions.

17 The first version of the form, which was in use from May to August 2002—that is, in the earlier part of the period during which the second version of the table in Appendix 1 was in use—was entitled “Insurance Registration and Certificate of Insurance”. The payment to be made by the customer was composed of two elements, a “service charge” and a “premium”, the total of which was described as the “monthly cost”. The customer was required to sign and date a “Customer Declaration” reading as follows:

“I Hereby apply for the specified cover. I understand that cover will be invalid should my direct debit, as advised by the Welcome letter I shall receive shortly, fail. I have read and accepted the terms and conditions of both the insurance policy and the agreement with Policy Administration Services Limited and that the equipment is in good working order at the time of application. I shall be liable to pay the first £ of any accepted claim.”