Understanding VAT on Insurance

General insurance premiums are subject to insurance premium tax (IPT) which adds an additional 12% or 20% to the cost of insurance depending on whether the standard rate or higher rate applies.

The higher rate applies to travel insurance, mechanical or electrical appliances insurance and some vehicle insurance.

But what about VAT?

Insurance transactions are exempt from VAT. The exemption covers:

• insurance provided by an insurer authorised under the Financial Services and Markets Act 2000 (FSMA)
• certain funeral plan contracts even though they’re not FSMA regulated, and
• vehicle breakdown insurance which is given a specific exclusion under the FSMA.

Following a ruling by the Court of Justice of the European Union, the UK has had to change its law to allow insurance provided by unauthorised insurers to be exempt from VAT, although such businesses could still be prosecuted under the FSMA.

VAT and Funeral Plans

Funeral plans which are a pre-payment for a funeral are not exempt insurance, but they may qualify for exemption from VAT as the provision of a funeral.

Management charges for funeral plans, for example, the placing of money in a trust to pay for a funeral, are not insurance or pre-payments, and are subject to VAT at the standard rate.

VAT on Guarantees and Warranties

Guarantees and warranties can be written under contracts of insurance and will, in principle, be exempt from VAT if recognised by the Financial Conduct Authority (FCA).

However, guarantees and warranties provided by the manufacturer or retailer of the goods are not usually recognised as insurance by the FCA for the following reasons:

• A guarantee or warranty provided by the retailer is often the statutory consequence of the contract of sale, rather than the provision of insurance cover.
• Manufacturer warranties are not regarded as insurance because the risk of product failure lies within the control of the manufacturer.

Extended warranties

Extended warranties are unlikely to be recognised as insurance by the FCA, regardless of who provides the warranty. Examples of extended warranties which are not regarded as insurance are:

• Warranties which are subject to the provider maintaining or repairing the goods at the recipient’s expense, although at a discounted price.
• Contracts containing both insurance and non-insurance elements, such as the provision of regular services where the provider’s is not seen as an insurer.

Guarantees and warranties which cannot be treated as insurance are subject to VAT at the standard rate.

VAT and Insurance Related Services

Services supplied by insurance agents and brokers are exempt from VAT if they are closely related to the supply of insurance. Examples of services closely related to insurance include:

• Introductory services, including preparatory work to conclude a contract.
• Assistance in the administration and performance of contracts.
• Claims handling services.
• The collection of insurance premiums.

Services which are incidental to the provision of insurance are not exempt from VAT. For example, VAT is charged on secretarial services and general computer services supplied in connection with insurance.

Certain services are specifically excluded from being treated as exempt by UK law. The services on which VAT must be charged are:

• market research, product design, advertising, promotional or similar services and the collection, collation and provision of information for use with those services
• valuation or inspection services
• supplies by loss adjustors, average adjustors, motor assessors, surveyors and other experts except under specific circumstances.

When to seek advice

It is not always easy to identify whether there is an exempt supply of insurance or a supply of both exempt insurance and related services which may or may not subject to VAT or whether the supply is not viewed as insurance at all and, therefore, subject to VAT.

If you need advice on whether VAT has been correctly charged or if you’re an insurance agent or broker wanting to confirm the VAT treatment of services you provide, the experienced VAT team at Shorts can help.