New legislation will restrict the right to deduct input VAT by insurance intermediaries

What’s happening?

From 1 March 2019, new legislation will come into force restricting the right to deduct input VAT in relation to costs incurred by insurance intermediaries in relation to what HMRC refer to as the ‘looping of insurance services back to the United Kingdom’.

Why?

This measure appears to be in response to the case of Hastings Insurance Services Ltd heard by the First Tier Tribunal (FTT) in 2018. Hastings arranged services relating to the insurance of UK customers and recovered VAT on costs it incurred in providing services to the insurer, Advantage, in Gibraltar. As Gibraltar is outside the EU for VAT purposes, Hastings contended it had the right to recover VAT incurred on supplies made outside the EU which would have been exempt if supplied in the UK.

HMRC claimed that Advantage had a UK fixed establishment as a result of the activities carried on by Hastings in the UK and denied Hastings any VAT recovery on the basis that its services were supplied within the UK and so fell to be treated a exempt.

The FTT ruled that Advantage had no UK presence and so Hastings had the right to recover VAT on their costs under the VAT rules.

HMRC believe that the VAT law is currently being exploited by those UK insurance intermediaries that arrange insurance on behalf of companies outside the EU for United Kingdom consumers. This currently allows them to reclaim the VAT they incur and thereby gain a competitive advantage over UK based insurers.

What’s changing?

The VAT (Input Tax) (Specified Supplies) Order 1999 currently gives UK intermediaries the right to deduct input VAT incurred in making supplies of insurance related services to customers outside the EU. This is to be amended by legislation taking effect on 1 March 2019.  The existing order will in future restrict VAT recovery by insurance intermediaries to those instances in which the party insured belongs outside the United Kingdom.

Service providers with insurers outside the EU should consider whether their existing arrangements will be affected. It is only arrangements under which a UK supplier provides services which are insurance related services and which would be exempt from VAT if supplied in the UK which are to be caught by the new measures. It may therefore be necessary for UK claims management companies and others providing outsourced services to overseas insurers to establish whether these services would meet all the conditions to fall under the exemption for insurance related supplies.

If you wish to discuss this measure further and its implications on your business, please contact Nick McChesney at nmcchesney@pkf-littlejohn.com.