National House Building Council v Revenue & Customs [2010] UKFTT 326 (TC)

FTT-Tax
National House Building Council v Revenue & Customs
[2010] UKFTT 326 (TC) · 2010-06-19
[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.[35]In section 1, an “important note” records that:
“… the cover described in section 2, 3, 4 and 5 of this policy only comes into operation when your Home is Complete. Only work done by the builder is insured under these sections. Therefore, if someone other than the builder finishes your home, the cover under sections 2, 3 and 4 may not apply or will be restricted. Any restriction will be shown in the Insurance Certificate”
. The Buildmark policy document: Section 2[36]Under section 2 of the Buildmark policy the registered builder is subject to certain obligations to make good relevant defects appearing in the home within a period of two years from the inception of the policy. The builder is liable within a reasonable time and at his own expense to put right any damage or defect to the property, which is notified to him within the two year period. It reads as follows:
“Section 2 : The first two years after completion The Builder’s obligations This part of the cover tells you what the Builder must do if you give him written notice of Defects or Damage in your Home. This notice must be given as soon as possible within the period of cover. The Builder must take the actions shown in the green panel below, but he does not have to take action to deal with any of the actions in the blue panel. Period of cover: This lasts for two years from the date of the insurance certificate. … What the builder is liable for [the green panel] Within a reasonable time and at his own expense, to put right any Defect or Damage to your Home or its Common Parts which is notified to him in writing within this period of the cover. Any reasonable costs you incur, by prior agreement of the Builder, for removal, storage and appropriate alternative accommodation if it is necessary for you or anyone normally living in the Home to move out so that the work can be done. If he is given written notice of Defects or Damage within this period of cover, the Builder remains liable as above, even after the period of cover ends.”
[37]Section 2 then sets out the terms of “the NHBC Insurance”. The relevant terms of the cover provided starts with the statement that “This part of the cover only applies if the Builder does not meet his obligations under section 2”. The terms continue with the statement that NHBC “will either pay for the items in the green panel identified below or, at NHBC’s option, arrange for the necessary work to be carried out at NHBC’s expense. NHBC will not pay for the items in the blue panel”.[38]The policy requires a policyholder to notify the builder of any defect and call on him to put it right. In the event he does not do so, the policyholder must contact NHBC, which will usually offer its resolution service. If the builder is insolvent, the policyholder must notify NHBC and give it the opportunity to inspect the home.[39]The terms relating to the “resolution service” are as follows:
“ The resolution service If there is a disagreement about the builder’s obligations, we will usually try to resolve the matter under our resolution service. When we offer our resolution service we will investigate any Defects or Damage which you have complained to the Builder about and which he has not put right within reasonable period of time. We may need to visit your Home. We will then issue a report informing you and the Builder of any work that he must carry out to fulfil his obligations under this Section. The Builder must carry out the work within a reasonable period of time, which will be set by NHBC … If the Builder does not carry out the work within the time set and does not agree a programme with you to complete the work, we will, at our option, pay the Cost of the work detailed in our report or arrange for the work to be done. We have no liability under this Section unless we have issued a resolution service report which you have accepted, or unless the Builder is insolvent or has failed to honour an arbitration award or court judgment.”
The Buildmark policy documents: Section 3[40]Section 3 governs cover in years 3 to 10. There is an obligation to inform NHBC of a claim under this cover as soon as possible. Section 3 indicates that:
“We will either pay for the items in the green panel on the next page or, at our option, arrange for the necessary work to be carried out at our expense. We will not pay for the items in the blue panel.”
The period of cover is identified as starting two years after the date of the insurance certificate and ending ten years after that date. A series of financial limits to the cover are stipulated. Buildmark policy documents: general conditions[41]The Buildmark policy contains General Conditions for claims to NHBC. These state that:
“1. If we accept any claim for which you could recover compensation from some other person, you must, at our expense, do whatever we may reasonably require: (a) to recover compensation from that person for our benefit; or (b) to enable us to enforce any rights you may have to that compensation by taking over your claim against that person or in any other way.”
[42]The policy also sets out the availability of a complaints procedure to the Financial Ombudsman Service and gives the Association of British Insurers as a contact point for guidance. Guidance on the Buildmark policy was published by NHBC. It states that since 1965 NHBC has provided cover on over five million homes. It states that – “Buildmark is not a complete guarantee against all defects. Buildmark is an insurance policy that covers you against specified risks which could be very expensive to put right.” The NHBC rules[43]These contain the contractual provisions as between the registered builder and NHBC.[44]Whenever the registered builder builds a house and makes an application for inspection, the registered builder must ensure the house is registered and accepted for cover either by NHBC or by another home warranty scheme (rule 8). Rule 17 has the effect of enabling a registered builder to opt out of the remaining rules where he chooses to use an acceptable alternative warranty scheme. Building cover by NHBC is available if the home is designed and constructed in accordance with NHBC requirements (rule 10) and inspected by NHBC; and if inspected by NHBC, the registered builder authorises NHBC to make an offer of cover and issue the appropriate “NHBC Scheme Documents” (i.e. those dealing with Buildmark policies) on the registered builder’s behalf (rule 19).[45]The registered builder undertakes to fulfil the obligations under the Scheme Documents to which he acknowledges he is a party: that is rule 22. By that means the registered builder for whose houses Buildmark cover is given is made by the rules a party to the provision of the cover.[46]The critical provisions of the rules are rules 27 and 28.[47]Rule 27a enables NHBC any time up to two years from the date of the insurance certificate or before the end of the initial guarantee period under the Buildmark scheme to notify the registered builder of remedial works with a requirement that they be done within a specified time and, if the work is not done within that time, NHBC may engage a third party and the registered builder is barred from doing the remedial work itself (rule 27c). Rule 27a requires the registered builder, on whom a rule 27a notice has been served, to pay NHBC any costs and expenses it incurs when a notice is given or where remedial work is carried out. The notification under rule 27a may be given within the two year period (rule 27h). Rule 27i provides NHBC with the right of recovery even if the registered builder disagrees with the decision that remedial works are required and appeals the decision to an arbitrator.[48]Rule 28 then makes the registered builder liable to repay the costs of investigating a homeowner’s claim (rule 28a) and, by rule 28c, NHBC is entitled to recover from the registered builder any services which it provides or for which it becomes liable to pay in consequence of the homeowner’s claim.[49]By way of comment, the rules were evidently designed to operate in tandem with the Buildmark cover. The rules are the contract between the registered builder and NHBC. They tie the registered builder into the obligations assumed by NHBC to the homeowner under the Buildmark policy.[50]The terms of a Particulars of a Claim (put in evidence) made by NHBC against a registered builder show NHBC claiming that both rules 27 and 28 have given rise to a right of recovery of, among other things, the cost of employing a third-party builder to carry out remedial work. Following a breakdown in the relationship between homeowner and registered builder, NHBC had served a rule 27 notice on the registered builder stating that it (NHBC) would engage a third-party builder and recover the money from the registered builder. Remedial works were duly carried out, partly paid for by the homeowner and partly by NHBC. NHBC was referred to in the agreement as the “employer” of the third-party builder in relation to the remedial works. The Particulars record that a compromise agreement had determined NHBC’s liability under the Buildmark policy to the homeowner. NHBC’s claim for the specific amounts plus costs and expenses were stated as a debt claim or as damages for breach of contract.[51]We heard no evidence of any other scenarios. In particular we were provided with no evidence of any cases in which registered builders had, following the outcome of a resolution service adverse to them, engaged third-party builders to do the remedial works. We should mention a statement made in evidence by Mr Tamayo that the third-party builder would, in most circumstances, be appointed by NHBC from a pre-selected panel to undertake the remedial works “on the builder’s behalf”. We infer however that there must be occasions when the registered builder would refute any suggestion that the remedial works were carried out on his behalf. One occasion would be where the registered builder was in dispute with NHBC about the outcome of the resolution service; another would be where the registered builder was in an advanced state of insolvency and so lacked the capacity to accept NHBC’s alleged “agency”. Conclusions[52]The issue concerns the appropriate treatment for VAT purposes of supplies of remedial works made by third-party builders. It is not in dispute that, where the third-party is VAT registered, the remedial supplies will bear standard rated VAT. The question is whether these are, to use the words of Article 17(2) of the Sixth VAT Directive, used for the purposes of NHBC’s taxable transactions. In the terms of sections 24 and 26 the input tax on the remedial supplies will be NHBC’s input tax if those supplies are used by it in the course or furtherance of its business and are attributable to taxable supplies.[53]The main argument for NHBC is, as noted above, that the supplies of remedial works made in pursuance of section 2 of the Buildmark policy are supplies that NHBC has obtained as agent for the registered builder. NHBC is exercising its authority under the rules to hire the third-party builder to do the remedial work demanded by the outcome of the resolution service; in doing so NHBC, as regulator with responsibility to the building industry, is securing that the registered builder discharges its continuing and primary obligations to the homeowner. So analysed, the nature of NHBC’s undertaking is the discharge of its obligations, in rule 27 of the NHBC rules, to stand as surety or performance guarantor. The fee for registration of the particular dwelling is paid by the registered builder for those undertakings. No fee and no consideration is (says NHBC) given by the homeowner for insurance cover; to the extent that the homeowner is protected by the terms of the Buildmark policy, this is based on section 1 of the Contracts (Rights of Third Parties) Act 1999. It follows, on the argument for NHBC, that the VAT on the third-party builder’s remedial supplies is input tax of NHBC. The remedial supplies are used by NHBC in the course of its business by making surety or performance guarantee supplies to registered builders and are not exempt supplies of insurance services.[54]This brings us to the key questions. Where NHBC engages the third-party builder to do the remedial works, is it discharging obligations as surety or performance guarantor for the registered builder whose building work was shown to have been defective by the outcome of the resolution service? If so, the remedial service will have constituted building supplies obtained by NHBC as principal for the purposes of its business of ensuring that registered builders meet its standards; NHBC will consequently have used their services in making standard rated supplies to the registered builder in question as, for example, its guarantor. Or are NHBC’s supplies to the registered builder insurance supplies to the homeowner made by NHBC in discharge of its obligations under section 2 of the Buildmark policy? And if they are insurance supplies, are they insurance supplies made to the homeowner?[55]Before addressing these questions we make three introductory points.[56]First, as we construe the Buildmark policy, NHBC’s liability to the homeowner under section 2, as summarised in paragraphs 37 and 39 above, is triggered by the registered builder’s failure satisfactorily to repair the relevant defects, whether through its choice, as a result of insolvency or following an award or judgment against it.[57]Second, once NHBC’s liability has been triggered and it is on risk, it is bound either to meet its liability to the homeowner through a cash settlement or, at its sole option, to arrange for the remedial work to be carried out at its own expense. The Buildmark policy is for the benefit of the homeowner and not for the registered builder. There is nothing in the policy or in the rules that expressly or by implication requires NHBC to exercise its choice in a manner that is designed to benefit the registered builder.[58]Third, by way of observation, if following the registered builder’s default NHBC takes the cash settlement option, no issue can arise. NHBC simply meets its obligations under section 2 and, however these are classified, NHBC either makes no VAT supply or makes the supply that is exempt. The argument for NHBC, it will be recalled, is that when it meets it obligations under section 2 of the Buildmark policy and engages the third-party builder to do the remedial work, it is acting for or on behalf of the remedial builder and procuring that standard rated supplies of building services are made to the registered builder. That argument cannot, we think, be correct. Whichever option NHBC takes, it is discharging its own obligation. The rules are consistent with this. They cover the rights of NHBC to obtain reimbursement from the registered builder of amounts paid out in discharge of its section 2 obligations. Rules 27 and 28 give NHBC a contractual right against the registered builder enabling NHBC to recoup those amounts. The example found in the Particulars of Claim summarised in paragraph 50 above shows NHBC exercising its rule 27 and 28 rights as “a debt claim or as damages for breach of contract”.[59]The question whether NHBC is procuring the supply of remedial services to the registered builder by ensuring the performance of his warranty obligations, on the one hand, or is providing an insurance service to the homeowner, on the other, will depend on the proper contractual analysis of section 2 of the Buildmark policy. Here we are guided by the textbooks.[60]Clarke on The Law of Insurance Contracts (6 th Edition) says of a guarantee contract, in Chapter 1-2A, that it is “a specific type of indemnity whereby the guarantor A promises C to answer for the debt or default of another person, B”. The passage goes on to say:
“A guarantee must be distinguished from an insurance contract, especially credit or guarantee insurance, whereby A promises to indemnify C, if B fails to repay a debt. Such insurance contracts are also indemnities but indemnities of a different kind”
. MacGillivray on Insurance Law, 11 th edition, observes (in paragraph 31-040) – “The contract of guarantee is a contract whereby one person (the surety) undertakes to a second person (the creditor) that he will answer for the debt, default or miscarriage of a third (the principal debtor). In modern legal parlance “to answer for” means that the guarantor promises to see that the debtor’s obligation is performed, whereas an insurer promises to indemnify the insured creditor in the event that it is not. A contract for fidelity, credit or guarantee insurance has obvious affinities with such a contract in as much as the insurer undertakes to indemnify the insured in respect of any loss he incurs as a result of the infidelity or insolvency of a third person.” In paragraph 31-041, MacGillivray continues: “It is difficult to tell whether a court will decide that a particular agreement is a contract of insurance or a contract of guarantee. The traditional approach is to be found in the judgment of Romer LJ in Seaton v Heath [1899] 1 QB 782 on pages 792-793, which concentrates on the circumstances in which the agreement is made. He points out that there is no magic in the use of words such as “insurance” or “guarantee” and that the status of the contract depends on “its substantial character and how it came to be effected”.[61]The Buildmark policy is summarised in paragraphs 30-42 above. We note that the stated procedure leading to a section 2 claim by the insured homeowner is, first, the notification of a complaint to NHBC. When there is a disagreement about the registered builder’s obligations, the NHBC resolution service will be offered. NHBC’s liability arises only when a resolution service report has been issued and this has been accepted (or where the registered builder is insolvent or has failed to honour an arbitration award or a court judgment). We refer to the description of “NHBC Insurance” in section 2 which says that cover only applies if the builder does not meet his obligations under rule 2. See paragraph 37 above. The description goes on to say that NHBC will either pay for items specified in the “green panel”, or “at our option, arrange for the necessary work to be carried out at our expense”. The proper analysis of section 2 and rule 27 is that, because the registered builder has defaulted on its obligation to perform its warranty undertakings to the homeowner, NHBC’s promise to indemnify the homeowner is activated. That is the feature which, on the basis of the extracts from the textbooks above, shows section 2 as providing insurance cover as distinct from a performance guarantee.[62]NHBC’s case is based on the proposition that section 2 cover is concerned with the registered builder’s discharge of its primary obligation to the homeowner. The registered builder, it is said, has a continuing obligation to the homeowner. NHBC facilitates the discharge of this by engaging the third-party builder which makes the supply of remedial works to NHBC. Thus NHBC, when responding under section 2, is fulfilling its primary purpose (see paragraph 22 above) consistent with its aim of increasing standards in the building industry and motivating the registered builder to build properly; it does this by enforcing the registered builder’s warranty. In this way, so the argument for the registered builder goes, NHBC guarantees that the registered builder will perform its obligation. Hence when NHBC instructs the third-party builder to perform the remedial work, NHBC is acting for and on behalf of the registered builder to ensure that it satisfies its duties to the homeowner. In VAT terms therefore NHBC is supplying the remedial services on to a registered builder as standard rated supplies made in the course or furtherance of its business. For the reasons just given (in paragraph 61) we do not accept this. NHBC’s liability under section 2 arises as a result of the registered builder’s default.[63]There are, we recognise, difficulties of distinction between contracts of insurance and contracts of performance guarantees and that, as Romer LJ in Seaton v Heath supra observed, the status of the contract will depend “on its substantial character and how it became to be affected”. The character of the Buildmark policy is essentially that of insurance. It is between NHBC and the homeowner and not, as will be expected of a performance guarantee, between NHBC and the registered builder. The Introduction described it as “Insurance Cover”. The Guide says of Buildmark that it “is an insurance policy” (see paragraph 42 above). The certificate issued by NHBC to the builder following inspection is headed “Insurance Certificate” and that it is issued “for insurance purposes” and it gives the “insured value” of the home. The FSA have authorised and regulate NHBC as an insurer and NHBC is a member of the General Insurance Standards Council.[64]The statutory accounts of NHBC show that the premium income earned by Buildmark is on “premiums” payable for the Buildmark policy and that no VAT is charged on that insurance income. The gross claims figure includes the sums paid out to the third-party builders for remedial work, and amounts recouped from registered builders in respect of payments made by NHBC to third-party builders are treated as a deduction from the gross claims part and not as a source of other income. The costs of claims deducted from the premiums received produces the figure for net pre-tax income derived by NHBC from direct insurance activities. The accounting treatment is consistent with NHBC’s character, as regards Buildmark policies, being that of a provider of insurance facilities to homeowners; moreover it is inconsistent with any attempted characterisation of its Buildmark operations as the provision of performance guarantees for the benefit of its registered builders. The amounts recouped by NHBC from the registered builders are not consideration for supplies to those registered builders arranged by NHBC: they are outside the scope of VAT.[65]From the points made above, we can now summarise our conclusion. NHBC’s liability under section 2 of the Buildmark policy is as insurer who is on risk from the moment the registered builder’s obligations to the homeowner have been established. Its liability is to be discharged in the manner prescribed in section 2. Thus when it chooses to engage the third-party builder to do the remedial works, the full cost of those services (including VAT) will be borne by NHBC as principal; and NHBC will have used those services in making its supply of insurance to the homeowner. NHBC will not have engaged the third-part builder in pursuance of an obligation to the registered builder. It will, in this connection, have been under no obligation to consult with or obtain the consent of the registered builder. It follows, we think, that when NHBC engages the third-party builder it is not doing so for or on behalf of or even for the benefit of the registered builder.[66]We recognise that NHBC’s response under the Buildmark policy may be to the advantage to the registered builder who in the circumstances may pro tanto be discharged from warranty obligations to the homeowner; and it will be to NHBC’s advantage to have carried out its primary purpose. But, even so, NHBC is not supplying or procuring the supply of the remedial works to the registered builder. NHBC is exercising its exclusive right to arrange for the third-party builder to discharge its (NHBC’s) insurance obligations to the homeowner.[67]NHBC points out that the homeowner does not pay a premium for the Buildmark cover. This does not, we think, disqualify section 2 cover from being insurance. The “premium” was paid by the registered builder to NHBC as part of the inspection fee for the particular term. NHBC’s “Guide to NHBC and Buildmark”, addressed to the homeowner, states that “your builder pays the premium directly to NHBC” and that “the cost of Buildmark is included in the price of your home”. The Guide, we understand, is a “Scheme Document” issued with the registered builder’s authority (rule 19). On that basis the registered builder is paying the premium for the benefit of itself and of the first and every successive homeowner. The homeowner buys the home and the Buildmark cover as a package. It follows that NHBC as Buildmark can properly be described as insurer for the benefit of the homeowner and the supply as a supply for a consideration. If the homeowner needs formal protection, it can rely on the Contract (Rights of Third Parties) Act 1999.[68]There is no formal definition of “insurance” in either of the EC or the domestic VAT provisions. We have already (in paragraph 12 above) cited the observations of the Advocate General and the Court in CPP . Those indicate that a wide definition should be given to insurance transactions and that the Community notion of insurance includes the provision of benefits in kind. On that basis the exemption covers the right to assistance services such as, in the present case, the engagement of the services of third-party builders to make remedial supplies.[69]On the facts and on the proper analysis of the Buildmark policy we are satisfied that the services provided by the third party builders are used by NHBC in each case for the purposes of making exempt supplies. The link between those remedial services and the provision of insurance cover for the homeowner is, we think, so direct and immediate as to lead to no other conclusion than that the output tax charged by third-party builders is not NHBC’s input tax.[70]For those reasons we dismiss the appeal. We leave costs to a separate application.[71]This is a full reasoned decision and the Appellants are at liberty to apply for permission to appeal to the Upper Tribunal. SIR STEPHEN OLIVER QC CHAMBER PRESIDENT RELEASE DATE: 9 July 2010