Appeal Number: LON/2004/0095

[2010] UKFTT 326 (TC)

TC00611

Appeal number: LON/2004/0095

SUPPLIES – Building cover – Remedial works – NHBC Buildmark policies – Cover for homeowner in respect of defects in homes constructed by builders registered with NHBC – Policy enables NHBC to engage remedial services from third party builders – Whether remedial service is used by NHBC to make taxable supplies in pursuance of performance guarantees of undertakings byregistered builders – No – Whether remedial supplies used in making exempt supplies of insurance to homeowner – Yes – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

NATIONALHOUSEBUILDING COUNCIL Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT)Respondents

TRIBUNAL: SIR STEPHEN OLIVER QC

SHEILA WONG CHONG FRICS

Sitting in public in London on 17-19 June 2010

David Scorey, counsel, instructed by PricewaterhouseCoopers LLP, for the Appellant

Kieran Beal, counsel, instructed by the general counsel for HMRC, for the Respondents

© CROWN COPYRIGHT 2010

1

DECISION

Introduction

1.The Appellant (“NHBC”) appeals against a decision of the Respondents notified on 16 October 2003. The decision is that supplies by third-party builders (“third-party builders”) under NHBC’s “Buildmark” policy are made to NHBC in discharge of NHBC’s obligations under the Buildmark policy and that the tax charged by third-party builders should be treated as wholly attributable to exempt supplies of insurance by NHBC.

2.By way of overview, this appeal concerns remedial work carried out by third- party builders to dwellings built by builders registered with the NHBC (“registered builders”). A registered builder is, by virtue of his own registration, required by the NHBC rules to ensure that any new home he builds is accepted for cover under NHBC’s Buildmark policy or another acceptable home warranty scheme.

3.Where cover under a Buildmark policy is to be given, the registered builder pays a non-returnable charge and NHBC inspects the home. Where the inspection satisfies NHBC that the home has been built in accordance with NHBC requirements, NHBC issues a notice of cover.

4.The Buildmark policy is issued on completion of sale of the home to the homeowner. Cover for the first two years (“section 2 cover”) relates to the registered builder’s obligations to make good relevant defects. The registered builder is required to remedy these and if that builder fails then NHBC undertakes either to pay the costs direct to the homeowner or at its option to arrange for the work to be carried out at NHBC’s expense. Cover in years 2-10 (“section 3 cover”) relates to specified defects.

5.The NHBC rules, which bind the registered builder from the moment of his own registration with NHBC, enable NHBC to give the registered builder written notice of works required by NHBC’s standards and to recover from the registered builder sums which it (NHBC) becomes liable to pay as a result of the default or failure on the part of the registered builder. The rules further provide that NHBC may engage a third party builder to do the remedial work if the registered builder fails to comply with the written notice or where it is inappropriate for the registered builder to carry out these works or where emergency work is required.

6.The sole area of dispute concerns, as already noted, the situation where NHBC engages a third party builder to carry out remedial works pursuance of section 2 of the Buildmark policy.

7.There is no dispute that the service provided by NHBC to the homeowner under section 3 is properly characterised as an exempt supply of insurance. NHBC accepts that when it pays a cash settlement to the homeowner in respect of defects to the property, no input tax is incurred because it makes no supply. And where the registered builder uses a home warranty scheme other than a Buildmark policy, NHBC has no obligation under that scheme and the question whether NHBC is making an exempt supply of an insurance services to the homeowner does not therefore arise.

8.The dispute is whether, as NHBC contends, the services, which it provides when it engages the third-party builder to do the remedial works falling within section 2 of the Buildmark policy, are used for purposes of its taxable transactions (i.e. ensuring compliance with warranties undertaken by registered builders in favour of homeowners): or whether, as HMRC contend, those services are used for the purposes of NHBC’s exempt supplies of insurance services.

The relevant legal principles

9.Article 17(1) of the Sixth Council Directive (“the Sixth VAT Directive”) conferred on taxable persons at the material time a right to deduct deductible tax at the time it becomes chargeable. Article 17 (2) provides that:

“In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax he is liable to pay:

(a)value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person; …”

10.Article 21(1) lays down a general rule that the person liable for the payment of tax should be the chargeable person carrying out the taxable supply of goods or services.

11.Article 13B(a) provides an exemption from VAT for the supply of “insurance and re-insurance transactions, including related services performed by insurance brokers and insurance agents.

12.In Card Protection Plan Ltd [Case C-349/96] and [1999] ECR 1-973 the ECJ notes (in paragraphs 17 and 18) that the concept of insurance is not defined. However the Advocate General’s opinion is referred to where it is stated that:

“The essentials of insurance transactions are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the services agreed when the contract was concluded.”

The ECJ goes on to say that:

“… it is not essential that the service the insurer has undertaken to provide in the event of loss consists in the payment of a sum of money, as that service may also take the form of the provision of assistance in cash or in kind.”

13.The ECJ in Case C-4/94 BLP Group Plc v Customs and Excise Commissioners [1996] 1 WLR 174 confirmed at paragraph 19 that in order to confer a right to deduct, the goods or services supplied to the claimant must have a direct and immediate link with the taxable transactions carried out by the taxable person claiming the right to deduct. More recently, in Case C-29/08 Skatteverket v AB SKE[2009] ECR 1/0000, the ECJ has held, so far as is relevant, that a direct and immediate link between an input tax claim and an output transaction conferring an entitlement to deduct had to be established before input tax could be recovered; nonetheless, where there was no direct and immediate link between a particular input transaction and an output transaction, the right to deduct would still exist where the costs of the services incurred formed part of the trader’s general costs and were therefore component parts of goods or services which he supplied. But, where services are used for purposes of exempt transactions, no input tax may be deducted.

14.Section 24 of the Value Added Tax Act 1994 defines input tax. It provides as follows:

“(1)Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say –

(a)VAT on the supply to him of any goods or services;

…

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”

15.Section 25(1) sets out the obligation imposed on taxable persons to account for and pay VAT in respect of supplies made by him for each prescribed accounting period. Section 25 also states:

“(2)Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.”

The evidence

16.We heard evidence from Mr Richard J Tamayo FCA who is currently Commercial Director of NHBC. He has responsibility for NHBC’s actuarial, claims, legal and builder registration functions.

17.We were provided with, among other things, NHBC’s Annual Report for the year ended 31 March 2007, with the Buildmark documents for the relevant period described as “Your new home warranty cover from NHBC” and a “Guide to the Cover” and the NHBC Rules.

Contentions

18.Shortly stated, the positions taken by the parties are these.

19.NHBC say that when the third party builder is engaged to do remedial work on the insured homeowner’s dwelling, the relevant supplies are made to NHBC by the third party builder. NHBC engages the third party builder to carry out the remedial works for the benefit of the “registered builder” i.e. the original builder who constructed the dwelling. The registered builder is NHBC registered and as such is subject to the contractual obligations imposed by rule 27 of the NHBC rules. The rules enable NHBC to require the registered builder to carry out work, at the registered builder’s expense, in order to remedy any non-compliance with NHBC standards. Alternatively NHBC can engage a third party builder to do the work on behalf of the builder and recharge the costs to the registered builder. NHBC is therefore a link in the chain of supply of remedial works from third party builder to the registered builder. At both stages, therefore, there is a standard rated supply and the input tax on the third party’s supplies is therefore NHBC’s input tax.

20.Even if that were not the proper analysis, claims NHBC, the input tax on the third party builder’s supplies is to be attributed to NHBC’s other taxable supplies with which they have a direct and immediate connection. Alternatively they should form part of NHBC’s residual input tax.

21.HMRC contend that the third-party builder’s supplies are made to NHBC in discharge of its insurance obligation under section 2 of the Buildmark policy to the homeowner. NHBC’s obligation under the Buildmark policy has been engaged by the inability or unwillingness of the registered builder to carry out required repairs in the first two years following completion. NHBC therefore makes exempt supplies of the remedial works to the homeowner by discharging its own insurance obligations to indemnify for loss occasioned by the registered builder’s failure to remedy the defects. NHBC is not supplying the remedial services to the registered builder.

Factual background: NHBC, its memorandum and articles and its financial statements

22.NHBC is a company limited by guarantee that was formed in 1936. It is registered for VAT. It is a non-profit distributing company whose primary purpose is to help raise standards in the new house-building industry and to provide consumer protection to new homeowners.

23.By Clause 3(B)(4) of its Memorandum of Association, NHBC is empowered to carry on schemes under which it will accept responsibility to purchasers of buildings from builders and developers for defects in the buildings purchased. In this respect NHBC is permitted to:

“… insure and re-insure and to provide loans, bonds, sureties, warranties, guarantees and indemnities whether secured or not and other financial services for the benefit of any person or company, organisation, undertaking or authority … for the purposes of or in connection with the funding, insuring or guaranteeing of any business operation or programme … or for assisting with the completion or repair of any such buildings …”.

In its Directors’ Report for the year ending 31 March 2007, the principal activities of NHBC are stated as follows:

“With more than 70 years of experience and technical expertise, NHBC is the world’s leading warranty and insurance provider for new homes … . NHBC does this by … providing consumer protection through “Buildmark”, the most comprehensive 10-year warranty and insurance cover in the UK.”

The Annual Report also stated:

“This year approximately £36m (2006, £36.5m) was paid out in claims for the benefit of new home buyers. This figure does not include the associated claims handling costs or reimbursements received from builders.”

24.The number of new homes protected by Buildmark policy cover were 1,639,000 as at 31 March 2007, with 181,000 new homes being registered in the course of the year. The amounts paid by builders for cover under the Buildmark policy vary by reference to the sale price of homes for which “Notice of Cover” are issued by NHBC (see below). These amounts are brought into NHBC’s profit and loss accounts as “gross premiums written”. (No VAT is charged on these amounts: see below.)

25.The Annual Report shows that NHBC re-insures itself against the claims that it is required to meet under the Buildmark policy. The Report states:

“Re-insurance is used to manage insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a re-insurer fails to pay a claim, the Group remains liable for the payment to the policyholder.”

26.NHBC paid £5.1m in re-insurance premiums in the year ending 31 March 2007. Its gross premiums received from builders and developers for cover were £73.8m. No distinction is drawn in the statutory financial information between premiums paid for section 2 and section 3 cover under the Buildmark policy. NHBC made net claim payments of £41.8m in the year ended 2007. Its general profit and loss account was principally determined by the difference between the premiums received (minus re-insurance costs) and the net claims paid out. Its retained surplus for 2007 was £40.7m. The cost of claims paid out is set against the income derived from the premiums in the profit and loss account. They are a cost component of the services that are remunerated by the premiums. The cost of claims is not set off against the registration fees received as other income in the profit and loss account.

27.Registration fees fall within the definition of “other income” as defined by the notes accompanying the final report. To join the NHBC register of builders, the builder pays a one-off registration fee which is currently £788 plus VAT. The builder pays an annual subscription fee (with VAT) to stay on the register. This varies with the number of homes registered with the NHBC during the previous calendar year. Builders who are registered are required by the NHBC rules of registration (“the rules”) to build homes in accordance with NHBC requirements and to have them inspected; for this a separate inspection fee is charged.

28.The consolidated balance sheet also identified as a discrete class of creditors, those creditors “arising out of direct insurance operations”. The premiums written were shown net of insurance premium tax that might be payable.

29.NHBC’s turnover on “insurance activities” in 2007 was identified as £73.8m, being the amounts paid for cover. No VAT was accounted for by NHBC on those premiums since the provision of insurances services is exempt from VAT pursuant to Item 1 of Group 2 of Schedule 9 to the Value Added Tax Act 1994.

The Buildmark policy document: Introduction

30.The rules prescribe that new homes built or sold by a registered builder must be covered by the “Buildmark Home Warranty Scheme” (or another similar scheme offered by a competitor of NHBC). The “Buildmark” policy is, as already noted, a 10-year home warranty scheme that is offered jointly by NHBC and builders to homeowners.

31.The Guide to NHBC and Buildmark states that the premium for the cover granted is paid directly to NHBC by the builder or developer but is “included in the purchase price of” the new home which is sold to the homeowner. The homeowner signs an acceptance form on completion of the sale of the property and in return receives the NHBC Buildmark policy documentation and certificate of insurance. The homeowner then becomes the policyholder.

32.NHBC states in its Buildmark policy that it is “your new home warranty cover from NHBC”. In the definitions section, Buildmark is defined as “the document containing the cover provided by NHBC and the builder.” The terms “First Owner, Owner” are defined to include “any later owner”. The definition of Insurance Certificate in the same section is as follows:

“The certificate we offer on Completion, which brings sections 2, 3 and 4 of this cover into operation.”

33.The Buildmark policy sets out the general exclusions from cover. The structure of the Policy document is as follows:

• Section 1 sets out the terms of cover offered before completion of the risk property.
• Section 2 sets out the cover offered for the first two years after completion. The section is described as follows: “the builder’s obligations in the first two years and NHBC’s Resolution Service and Insurance cover if the builder does not meet his obligations”.
• Section 3 represents cover in years 3 to 10. This is described as “NHBC’s insurance cover for specified defects first reported in years 3 to 10 which cost more than £500 … to put right”.
• Section 4 relates to additional cover available if NHBC’s subsidiary carried out the building control.
• Section 5 relates to additional cover available in years 3 to 10 for contaminated land.

34.The Buildmark policy states that it “describes the insurance cover given by NHBC and the builder’s obligations” for the policyholder’s newly built or converted home. It is expressly stated not to affect any additional contractual or statutory rights that the policyholder may have against the builder. NHBC is described as “an insurance company authorised and regulated by the Financial Services Authority with substantial reserves”. NHBC is also a member of the General Insurance Standards Council.