A recent Court of Justice of the European Union (CJEU) case, Mapfre Warranty (MW), has raised some VAT issues that should be considered by all businesses involved in the supply of warranties.
MW contracted with second hand car dealers to provide mechanical breakdown warranties on sales of cars. Car buyers could choose to take out the additional warranty at the time of sale. In the event of a breakdown, the car owner could choose any garage to undertake the repairs. MW would then receive a breakdown report and authorise the repair.
MW recovered VAT on the basis that it made taxable supplies. It claimed that used car dealers subcontracted part of their after sales service to MW.
MW denied that there was any contractual relationship between MW and the car owner. It stated that a contractual relationship only existed between MW and the dealer, who commissioned MW to perform its obligations (after sales servicing). The dealer was the debtor who deducted the warranty cost from the profit margin to increase the attractiveness of the car.
The tax authorities claimed that this was a VAT exempt supply of insurance services.
The French Court of Appeal (CoA) held that there was a direct contractual link between the car owner and MW created at the point the warranty booklet was issued. As such MW’s supplies could be viewed as made to the car owner not the car dealer.
The referring court asked the CJEU whether the supply of a warranty covering mechanical breakdowns, in return for payment, by an economic operator which was independent of a second hand car dealer, constituted a VAT exempt insurance transaction.
The CJEU ruled that the concept of insurance transactions was broad enough to cover any of three situations:
- Where the contract was between the car buyer and the warranty provider, with the car dealer merely facilitating the transaction as an intermediary.
- Where the contract was concluded between the car dealer and the warranty provider on behalf of the car buyer.
- Where the car dealer concluded the contract in its own name and on its own behalf with the warranty provider and subsequently, transferred the rights to the car buyer.
The CJEU paid regard to the fact that the car dealer did not implement the warranty agreement. In the event of a breakdown, the car buyer was not obliged to have the car repaired in a garage belonging to that car dealer. The chosen garage then contacted MW directly. Even though payment for the warranty was included in the price of the car from the car dealer, it was the car buyer who ultimately paid for it.
Furthermore, although every insurance transaction had a link with the item it covered, this link was not sufficient enough to form an ancillary service to the sale of the second hand car. The car buyer could refuse to take out the warranty and either take up a warranty with another provider or choose not to take out a warranty at all. MW also reserved the right to terminate the warranty without affecting the sale of the car.
The CJEU ruled that the supply of the warranty constituted a VAT exempt insurance transaction and that it was distinct and independent of the supply of the second-hand car.
Implications of the Judgement
HMRC’s current guidance says that extended warranties provided by third parties almost certainly constitute insurance. With this in mind it may be that this judgment by the CJEU has little impact in the UK. Although any third party warranty providers that currently charge VAT may come under challenge from HMRC.
On the other hand, current HMRC guidance provides that retailer and manufacturer warranties are unlikely to be seen as insurance. This is because the warranty is seen as an automatic (often statutory) consequence of the contract of sale. The CJEU’s analysis of single/multiple supplies (insurance transactions are linked to the items they cover, but this is not enough to determine that the sale of the item covered with insurance is a single transaction) may present uncertainty for retailer and manufacturer warranty providers. Depending on how HMRC interprets the scope of this judgment it may be that its current policy changes.
With a reliance on legitimate expectation, there is unlikely to be retrospective challenge for taxpayers who fall within HMRC’s current guidance. However, we would recommend that warranty providers or retailers that incorporate warranty products into their product sales review their ongoing position in light of this judgment.