Can Insurance Premiums attract VAT

One aspect of VAT which regularly crops up is its applicability to insurance. Insurance is of course taxed by means of Insurance Premium Tax but, in some instances, it may instead (or sometimes also) attract VAT.

Unfortunately, the VAT boundaries for insurance have become increasingly blurred, and therefore increasingly contentious. This has been exacerbated by technological advances: the definitions of insurance business in 1973, when VAT was first introduced in the UK , or indeed in 1994, when the present version of the Value Added Tax Act was drafted, were founded on insurance supplied in traditional ways, and by traditional parties (high street brokers etc.); the explosion of online business, with often quite a number of electronic counterparties to a single insurance transaction, each with its own VAT consideration, could never have been envisaged.

This difficult relationship between the Law as written and insurance business in practice has led to substantial and wide ranging disputes between businesses and HMRC, and subsequent Case Law.

One of my recent cases involved a taxi firm making charges for vehicle insurance to its drivers, to whom it also hired cars. HMRC took the view that these charges either fell short of insurance, in which case they were subject to the full rate of VAT or, in the alternative, they were further consideration for the hire charges and therefore, again, subject to VAT at the full rate.

At Court, following a two day hearing, careful analysis and cross examination of witnesses, the Judge ultimately found for our client, which is of course excellent news in view of the substantial amount of tax at stake. However, one cannot be complacent and there is a very strong chance that HMRC will wish to appeal the Judgment in view, not just of the tax in dispute, but the potentially very wide ranging implications of the decision. At this stage, I would therefore have to say that whilst we have won the battle, the war may not yet be over…

If you wish to read the decision, it can be found here

Author: Colin Woodward
VAT & Custom Duties Director
Barringtons Chartered Accountants