For many years, HM Revenue & Customs (HMRC) has argued where an insurance intermediary pays another entity for the provision of leads, VAT must be charged on the payment.
As insurance intermediary services are exempt from VAT, the intermediaries have generally had to bear the burden of that VAT. This has been a developing issue as internet platforms for generating leads have become more common and more sophisticated. In a recent tax appeal the First-tier Tribunal (FTT) decided particular services of generating insurance leads did not attract VAT, as they themselves fell within the insurance intermediary exemption. Although in this case the services included a pricing engine, the terms of the decision are broad. They may lead to increased availability of VAT exemption for lead generation.
Staysure.co.uk Ltd, an insurance intermediary based in the UK specialising in travel insurance for individuals aged 50 and over, received lead generation services from Intervest Ltd, a related company based in Gibraltar. As the services were received by Staysure in the UK, Staysure would have had to account to HMRC for UK VAT unless the services fell within the insurance intermediary exemption.
For these purposes, the services are “services of an insurance intermediary” if they fall within any of the following categories: the bringing together, with a view to the insurance or reinsurance of risks of: i) persons who are or may be seeking insurance or reinsurance; and ii) persons who provide insurance or reinsurance; the carrying out of the work preparatory to the conclusion of contracts of insurance and reinsurance; the provision of assistance in the administration and performance of such contracts, including the handling of claims; or the collection of premiums.
However, the following services are expressly excluded from the scope of the exemption: the supply of any market research, product, design, advertising, promotional or similar services; or the collection, collation and provision of information for use in connection with market research, product design, advertising, promotional or similar activities.
The VAT position is more complex where multiple elements are provided as part of a package of services. If there is a predominant element then the VAT treatment of that element must be determined and it is then applied to the whole package (see the Court of Justice of the EU case Město Žamberk v Finanční ředitelství Hradci Králové C-18/12). If there is no predominant element then none of the elements will be exempt unless they all are (Finanzamt Frankfurt am Main V-Hochst v Deutsche Bank C-44/11).
In the past, HMRC has argued robustly that mere lead generation is not VAT exempt, either because it is insufficiently characteristic of the services of an insurance intermediary or because it is essentially an advertising service. It has relied in particular on a relatively old UK VAT tribunal case: LeadX v Revenue & Customs (2008) UKVAT V20904. The decision in Staysure.co.uk Ltd v Revenue & Customs refers to a later case, which considered LeadX, and a conclusion there that “mere introduction is not enough”. It also refers to similar comments in Royal Bank of Scotland v Revenue & Customs (2012) EWHC 9.
Intervest’s services to Staysure were described as the provision of insurance leads and consisted of: placing targeted advertising in the press, on television and on-line; owning and operating the domain staysure.co.uk and the related website on which potential customers were encouraged to ask for an online insurance quote; and designing, maintaining and operating a bespoke quote engine, which used algorithms to personalise the price for each customer, taking into account the customer’s age, medical history, personal details and other risks; and various reporting obligations.
Intervest charged Staysure a fee calculated by reference to successful take-up of insurance (28% of premiums) and did not recharge its costs in respect of marketing, web hosting or operating the quote engine. This fee increased over time as volumes increased to some £10m ($11.9m) a year.
Services exemption
Under UK VAT law, which implements the EU directive from which the exemption is derived, the provision by an insurance broker or an insurance agent of any of the services of an insurance intermediary, when acting as such an intermediary and in relation to an actual or potential insurance or reinsurance contract, is exempt from VAT.
Lead generation
The decision in Staysure.co.uk did not accept characterising services as “lead generation” is enough to show they fall outside the exemption. Even though Intervest spent 70% of its total income on advertising and marketing, from the perspective of a typical purchaser of its services, advertising was not a predominant element of its supply.
There was a predominant element, but that element was the supply of leads. In particular, Intervest could decide how to deliver the leads and it used a mixture of different methods to do so.
Most importantly, that supply of leads fell within the insurance intermediary exemption. HMRC argued Intervest provided only technical assistance to Stay-sure and Intervest’s role was that of a passive conduit, which did not satisfy the legal test.
The FTT concluded Intervest’s services went beyond passive assistance; in particular, its quote engine was key to pricing because it produced offers that were competitive and at the same time maximised profits for Staysure, the insurer and Intervest.
This is a welcome decision in favour of the taxpayer. It is to some extent a decision on its own facts. One characteristic feature of insurance intermediary services appears to be to identify the suitability of the insurer for the insured or vice versa. The facts were clearly that Intervest’s pricing engine did that, evaluating the insured, setting pricing and rejecting certain risks as uninsurable. However, based on this decision a label of “lead generation” cannot be fatal.
What matters is the substance: the exemption can apply to services insurance intermediaries rely on to find prospective clients, so long as they are adequately linked to the essential aspects of an intermediary’s business.
This article is authored by Rupert Shiers and Adela Komorowska.
This article appeared in Insurance Day on 7 July 2022
