Changes to VAT exemption may increase the cost of insurance

Supplies of insurance are exempt, but it has always been difficult to determine whether a supporting service qualifies for exemption. If the supporting service does not qualify for exemption, the VAT charged will not be reclaimable by the insurance supplier with the result that the cost of insurance will be more expensive.

On 1 April 2016 a CJEU decision was published regarding a Polish case, Aspiro SA v Minister Finansów (Poland) (C40/15).  The decision confirms that insurance claim settlement services were not exempt, contrary to how such services have been treated in the UK.

This could present a challenge to some businesses: if certain services which were exempt become standard rated, the VAT cannot be recovered by the exempt insurers and becomes an additional cost in the supply-chain.  Whether the VAT cost is absorbed by the service-providers, or passed on to the insurers and ultimately the end customers, it is clear that this would have financial consequences which need to be examined.  Will service providers be able to afford to absorb the VAT cost and remain profitable?  Is there another way to structure supplies of such services to avoid the VAT cost arising in the supply-chain (e.g. take on the service-providers as employees of the insurers)?

HMRC has not yet published any changes to its policy. It is therefore open to affected businesses to follow the current UK legislation and HMRC guidance.

Businesses should, in preparation for future changes, begin to consider the impact that this CJEU decision might have and how such changes might be handled in future.

For further information and help on VAT and the insurance industry, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.