VATINS3740 - Types of insurance: warranties and guarantees: NHBC

The judgement of the First Tier Tribunal in the case of National House Building Council (NHBC) LON/2004/0095 concerned the NHBC insurance policy provided to new homeowners to cover building defect risks. The insurance contract was written as a tripartite agreement between the original builder, NHBC, and the homeowner and the premium was paid to NHBC out of the builder’s proceeds. The agreement required that the original builder made good defects but where that was not possible because the builder no longer trades for whatever reason, NHBC was obliged to arrange for the defect to be made good. During the case, the NHBC argued that part of this contract was not insurance and instead was a performance guarantee, which entitled them to some input tax recovery on the cost incurred on arranging replacement builders to repair the defects that the original builder could not.

The Tribunal found that the NHBC as the insurer was not providing building work under an obligation to the original builder but to the insured homeowner under NHBC’s obligations under the contract and that as insurer it had been on risk to meet its obligations from the very outset of the contract. The input tax incurred on the remedial buildings works had a direct and immediate link to its insurance obligations and the insurance transactions were defined widely enough in cases like CPP not to exclude benefits in kind insurance. Consequently, the input tax was not recoverable because it related to VAT-exempt insurance.