Summer Budget 2015: Insurance – changes to IPT and VAT

Insurance Premium Tax (IPT)

The standard rate of IPT is currently 6%.

VAT

The supply of repair services to a UK customer is subject to VAT at the standard rate. However, the supply of the same repair services to a business customer outside the EU member states is zero rated, even if the repairs are carried out in the UK.

Insurers regularly arrange for the repair of items they have insured, but they are exempt traders and cannot recover input VAT on their costs. It is therefore advantageous to them to receive such repair services without a charge for VAT, and to achieve this they might set up operations outside the EU.

This principle does not only apply to repair services. Services received in a non-EU establishment will generally be zero-rated. Advertising was the subject of a recent case: Newey (trading as Ocean Finance) v Revenue and Customs Commissioners [2015] UKUT 300 (TCC). The insurance broker was ruled to have successfully triggered zero-rating on their advertising services by setting up operations in Jersey.

Insurance Premium Tax (IPT)

From 1 November 2015, the standard rate of IPT will be increased to 9.5%.

VAT

Separately, the government will introduce VAT provisions to level the playing field for insurers. This will deter insurers from routing costs via offshore associates and will ensure UK VAT is accounted for on all repair services under UK insurance contracts.

The measure will stop UK insurance companies exploiting place of supply rules by setting up outside the EU in order to receive repair services VAT-free. The measure will mean that the relevant repair services will be treated as supplied in the UK and so UK VAT will be charged.  For example, if a car is repaired in the UK under a contract of insurance, then UK VAT will be charged on the repair regardless of whether the insurer is based in the UK or outside of the EU.

The government will apply ‘use and enjoyment’ provisions so that from next year it will be clear that all UK repairs made under UK insurance contracts will be subject to VAT in the UK.

The measure will be effective from April 2016.

VAT – future changes considered

In the following year, the government will also consider a wider review of offshore-based avoidance in VAT exempt sectors, with a view to introducing additional ‘use and enjoyment’ measures for services such as advertising.

Suppliers who must charge IPT will be required to increase their rates and should now consider the implications of this.

Those in the insurance industry who have been establishing themselves in non-EU jurisdictions in order to avoid VAT charges on services such as repair work and advertising should now consider whether this is a worthwhile exercise. From April 2016 the loophole will be closed for repair works, and in 2017 it seems likely that further services will be added to this.