matthew_wentworth_phOn 1 May 2013, the Supreme Court released its decision in WHA Ltd & Anor v HMRC [2013] UKSC 24.

The case concerned an arrangement involving the first appellant (WHA) to minimise the overall VAT liability in relation to the supply of repairs and parts pursuant to motor breakdown insurance (“MBI”).

The case is interesting because, despite the range of arguments deployed by both sides, the court based its decision solely on the reasoning in its most recent VAT decision in HMRC v Aimia Coalition Loyalty UK Ltd (formerly known as Loyalty Management UK Ltd) (the case comment for which is here).


WHA was party to an arrangement that was designed to overcome the fact that an insurance company would not normally be able to recover the VAT it incurs on the supply to it of repairs and parts because it is making VAT exempt supplies of insurance.

The facts of the arrangement were highly complicated, but in essence what happened is as follows. National Insurance & Guarantee Corporation plc (“NIG”) supplied MBI to individual customers. NIG entered into an agreement with a company incorporated in Gibraltar, Crystal, for the reinsurance of its liabilities under these MBI policies. Crystal then retroceded 85% of the reinsurance to another Gibraltar company, Viscount (the second appellant). Viscount contracted with WHA to enter into agreements with garages for the making of any repairs required under the MBI policies. WHA and the Gibraltar companies were all in the same group of companies.

When a customer made a claim under its MBI policy, WHA would directly invoice the garage making the motor repairs for the cost of those repairs (and any necessary parts). That supply was subject to VAT. WHA would invoice Viscount for the services it provided to Viscount.

WHA argued that it was entitled to recover as input tax the VAT on the supply to it of repairs (and any necessary parts) by the garages (under the Value Added Tax Act 1994, s 24(1)).

HMRC argued that the supply by the garages was to the individual customers whose car was being repaired, and not to WHA.

Additionally, HMRC argued that, even if this was not correct, the EU law doctrine of “abuse of rights”, developed by the CJEU in Halifax plc v Customs and Excise Commissioners, should apply on the facts, such that the arrangements involving NIG, WHA and Viscount should be redefined in order to prevent WHA recovering this VAT as input tax, because to allow it to do so would be an abuse of the right of input tax recovery provided under the VAT Directive.

The decision of the Supreme Court

The Supreme Court ruled that the arrangements fell at the first hurdle. Lord Reed (who also gave the majority decision in Loyalty Management) considered that the economic reality of the arrangements was that WHA was simply agreeing to make a payment to the garage to cover the cost of the repairs.

Following Loyalty Management, the payment by WHA to discharge an individual’s legal obligation to make a payment in respect of these repairs was not sufficient for the payment to be treated as consideration for a supply of goods and services to WHA, such that WHA could recover the VAT in relation to that payment as input tax.

This was supported by the fact that the economic burden of the supply of goods and services was not borne by WHA; whatever it had to pay to the garage (including VAT) it recovered from Viscount.

The Supreme Court therefore did not need to consider the effect of the abuse of rights doctrine, as WHA was not entitled to recover the VAT as input tax under general VAT principles.


The decision is interesting as it shows how the judgment in Loyalty Management can be applied to, in effect, strike down tax avoidance arrangements without the need to resort to the abuse of rights doctrine.

By focussing on the economic reality of the arrangements it was relatively straightforward for the court to determine that little had happened through the insertion of WHA other than to pass NIG’s obligation to pick up the cost of the repairs through a chain of related companies to WHA.

Had NIG simply met the cost itself then it would not have been able to recover the VAT as input tax for the same reason – it is not receiving a supply of goods and services from the garage itself, rather it is simply meeting the cost of the supply which is made to the individual. The outcome should be no different because the obligation to meet this cost was passed to WHA.