Amendment to the VAT Act 

With effect from 17th July 2015, road assistance services provided through a subscription/membership package (‘road assistance warranties’) are exempt from VAT in Malta. Such exemption has been promulgated through Legal Notice 227 issued on the said date, which widened the breadth of the exemption covering insurance services (Item 2 of Part Two of the Fifth Schedule to the VAT Act):

Provided that road assistance services provided for a fixed subscription, by a taxable person who undertakes to provide such assistance should the risk of the breakdown or accident covered by that person materialise, shall be considered as an exempt supply of insurance services.

The exemption is one ‘without credit’ meaning that suppliers of such road assistance services are not entitled to recover any input VAT on expenses incurred in the furtherance of such services. The exemption does not cover services of road assistance (such as towing, tyre change, repairs, etc.) provided at a fee on an ad hoc basis and which are not covered by a subscription/ membership package.

Guidelines for the VAT treatment of Road Assistance Services were issued by the VAT Department on 20th July, providing some detail on the implications on suppliers of road assistance warranties.

The Legal Notice was issued the day after the judgement of Mapfre Warranty (joined case with Mapfre Asistencia) made by the Court of Justice of the EU was released. The question put forward to the Court was whether certain breakdown warranties for second hand cars qualify as exempt insurance transactions.   

Mapfre Warranty (Case C-584/13)

Background

Mapfre Warranty SpA is engaged in the provision of warranties covering repairs of break-downs of second-hand motor vehicles. The warranties in question were provided by second-hand motor-vehicle dealers to their customers as an additional warranty to cover breakdown of parts. In the event of a fault in the parts covered, the customer was able to choose any garage for the repairs, obtain a quote for the repair costs and submit it to Mapfre Warranty for approval. Once authorised, the repair costs would be covered by Mapfre Warranty. The dealers paid a lump-sum to Mapfre Warranty. Mapfre Warraty insured the risk of financial loss sustained by itself with Mapfre Asistencia. 

The Judgement

The Court ruled that:

the supply of services whereby an economic operator which is independent of a second-hand motor-vehicle dealer provides, in return for payment of a lump sum, a warranty covering mechanical breakdowns which may affect certain parts of that vehicle constitutes an exempt insurance transaction

In its conclusion the Court also considered whether the breakdown warranty was so closely linked to the sale of the vehicle itself and consequently whether it should bear the same VAT treatment of the sale. While the Court left it to the national courts to decide, it hinted that the warranty service should be considered to be distinct and independent. 

Some of the arguments/observations put forward by the Court included the following:-

The warranty service had all the characteristic elements of an insurance transaction; an insurer – Mapfre Warranty; an insured person – the customer; a risk – the event of a mechanical breakdown; and a premium – the amount paid by the customer either as part of the vehicle price or as a supplement.

- The concept of insurance transactions is in principle broad enough to include provision of insurance cover by a person who is not himself an insurer but who, in the context of a block policy, procures such cover for his customers by making use of the services provided by the insurer who assumes the risks insured.

- Without going into detail on the precise legal relationships, the Court considered that the dealer did not participate in the implementation of the warranty agreement.

- The guarantee did not relieve the dealer of its obligations at law such as to repair hidden defects.

- Although the lump-sum warranty was a cost to the dealer, it was the customer who ultimately bore the cost of the premium.

Local VAT implications

The VAT Department’s Guidelines describe three possible scenarios that suppliers of road assistance services could currently be in:

a) Suppliers which are exclusively engaged in the provision of subscription/membership packages of road assistance services

Such suppliers should not charge output VAT to their customers and are restricted from claiming input VAT on their expenses. An adjustment in favour of the VAT Department would have to be made by such suppliers to refund part of the input VAT claimed thereby on any capital expenditure incurred in the past 5 years (in the case of movable tangible property) or 20 years (in the case of immovable property). 

b) Suppliers which are exclusively engaged in the provision of ad hoc road assistance services

Such suppliers should continue charging 18% output VAT and recovering input VAT incurred in the furtherance of their business.

c) Suppliers which provide road assistance services both through subscription/membership packages and on an ad hoc basis

In such case, input VAT can only be claimed to the extent that it relates to expenses which are directly or indirectly attributable to taxable ad hoc services. An adjustment in favour of the VAT Department would also be required in respect of input VAT claimed on capital expenditure in the past years.

KPMG Observations

Mapfre Warranty brings renewed focus on the boundary between taxable service contracts and exempt contracts of insurance. It implies that certain services that have been treated in the past as taxable warranties, qualify as VAT exempt insurance services even when they are supplied by persons who are not treated as insurers for regulatory purposes (such as in terms of the Insurance Business Act).

Wheareas the Mapfre Warranty case dealt with second-hand car breakdown warranties, the amendment to the VAT Act covers any subscription-based road assistance service. The VAT exemption is not however explicitly extended to cover ‘warranty’ services on other goods (other than road vehicles) where the provider is not the retailer/manufacturer. 

No explicit interpretation has been issued in the case of road assistance services provided by sellers of motor vehicles. Nonetheless, following the arguments in Mapfre Warranty and the earlier judgements released by the CJEU on the VAT treatment of ancillary and composite supplies, the argument for treating such road assistance services as ancillary to the sale of a vehicle remains valid and may still apply depending on the facts of the case.  

The Mapfre Warranty case is of particular interest in the light of the fact that a considerable number of EU Member States levy an Insurance Premium Tax (IPT) on insurance policies. In considering Malta, according to the Duty on Documents and Transfers Act, stamp duty is generally due on policies covering risks situated in Malta at a standard rate of 11% of:

a) the agreed yearly premium, or,

b) of the agreed consideration if a compounded premium is agreed upon as a lump sum payment, or if a once only premium is otherwise payable; subject to a minimum duty of EUR 13.

If you would like to know more about this development and how it might affect your business, or indeed to discuss any other VAT matter, please get in touch with Anthony Pace or Graziella Demanuele Bianco, your local indirect tax contacts, on vat@kpmg.com.mt.