Well it’s Budget Day this week and there will be lots of headlines about how much tax a normal family with 2.4 children will have to pay. It’s rare that VAT gets a mention in the headlines, unless there’s a change in the standard rate, like the rise to 20%. Any VAT changes are usually contained in the details so we’ll be checking HMRC’s website for information.

When insurance isn’t insurance and is liable to VAT

In the meantime, I thought I’d talk about insurance – or when it’s not insurance – and when it’s exempt from VAT. Not the most exciting of subjects, but at least it’s change from the budget!

Is it insurance?

One of the most common queries from businesses and accountants is whether they have to charge VAT on “insurance”. People often assume that any charge made for insurance is exempt from VAT, but unfortunately that’s not how it works. As I’ll explain below, amounts charged for “insurance” are normally either disbursements or part of the amount charged for the main supply.

There are three main situations that could apply.

One: when insurance is exempt and when it’s liable to VAT

The first thing is whether you’re actually underwriting insurance for the customer and, if so, whether it qualifies for exemption.

Normally, the only time that charges for insurance are exempt are the premiums charged authorised insurance companies for insurance. There are a few other situations, such as re-insurance, but for the most part, unless you’re an authorised insurer, you don’t actually provide insurance and any charges don’t qualify for exemption.

Otherwise, if you’re charging your customers for providing insurance, even if it is underwritten by an authorised insurer and their charge to you is exempt, your “supply” is liable to VAT and you must charge VAT to your customer.

If you want to know more about the VAT liability of insurance, see HMRC VAT Notice 701/36: Insurance http://tinyurl.com/jbckpf7

Is it a disbursement?

A disbursement is when you pay something for a third party and recharge them the exact same amount as you paid. You’re not actually providing them with the goods or services; you’ve merely paid the bill on their behalf so you can’t claim any VAT on the cost nor should you charge VAT on the recharge.

If you need more information about this subject, you can buy my book as a paperback VAT on inter-company services, management charges and other day to day transactions from Amazon or buy the pdf version VAT on inter-company services and management charges from our shop

A good example is when you buy a house and the solicitor pays stamp duty land tax on your behalf and recharges you the exact amount on your final invoice. In the case of insurance, you might have a group policy where a number of group companies are named on the policy, in which case the recharge would be a disbursement.

See HMRC’s VAT Notice 700, s25 for detailed guidance about disbursements.

Or is it part of the cost of your goods or services?

In many cases, insurance is simply one of the costs of a business and built into the cost to their customers for other services or goods. For example, suppose you’re a removal company and you calculate the charge to your customers by reference to your costs. These would include vehicle costs, staff costs and your insurance cost, among others.

In these situations, you’re actually charging your customers for a removal service, which is liable to 20% VAT. You may offer your customers increased insurance cover, and in this situation the amount you charge to your customer will probably be VAT free as a disbursement as long as the insurance cover is provided directly by the insurer to the customer and you simply pass on the exact cost. In other cases, your charge for insurance is almost certainly liable to VAT.

Always check the contract…

As with all these situations, the VAT treatment of any payment depends on the nature of the payment, so if you’re in any doubt the best place to start is the contract or terms and conditions, whatever explains the basis for any charge for insurance.

Next time I promise to blog about something that’s just a bit more interesting than VAT and insurance……

Marie
March 2016