VAT rules can be mind-boggling at the best of times. We highlight frequent areas of confusion for brokers and MGAs, and explain the relevant guidelines.
Operating within a regulated industry does not automatically mean that all activities carried out in the sector qualify for VAT exemption. In fact, businesses do not need to be regulated to be treated as insurance brokers/MGAs for VAT purposes. It’s the commercial and economic elements of the underlying transaction which determine the VAT treatment.
Insurance brokers and MGAs navigate regulatory complexities daily. The list of insurance terms set out on the Lloyd’s website alone can overwhelm most VAT advisers. Taking a step back and removing the insurance vernacular can help demystify preconceived assumptions about how VAT applies to the sector.
It’s an age-old saying that VAT is a consumption-based tax. VAT is added to taxable supplies made by VAT-registered businesses. A taxable supply is any supply made in the UK that is not exempt from VAT.
When are supplies by insurance brokers or MGAs VAT-exempt?
The UK VAT Act exempts insurance-related services supplied by insurance brokers/MGAs when they’re acting in an intermediary capacity.
What does this mean?
Acting in an intermediary capacity means the insurance broker/agent must be an intermediary between someone who provides insurance and someone seeking to obtain insurance.
Traditionally, this would have meant meeting or corresponding with both parties. But in an increasingly digital age, brokers/MGAs now use online questionnaires and digital platforms to automate, and actively engage in, connecting the potential insured to insurance providers. This too should be within the scope of acting in an intermediary capacity.
The following insurance-related services are exempt from UK VAT when supplied by an intermediary:
- Bringing together, with a view to the insurance or reinsurance of risks, (i) persons who are or may be seeking insurance or reinsurance, and (ii) persons who provide insurance or reinsurance
- Carrying out work preparatory to the conclusion of contracts of insurance or reinsurance
- Providing assistance in the administration and performance of such contracts, including the handling of claims
- Collecting premiums.
Any other services (or those not supplied by an intermediary) should be treated as taxable supplies.
Which supplies are taxable?
A UK-established business must register for VAT if its taxable supplies (net of turnover) exceed the VAT registration threshold of £90,000 (£85,000 until 31 March 2024) under the historic or future test:
- Historic test – if at the end of any calendar month the value of taxable supplies in the previous 12 months exceeded the VAT registration threshold
- Future test – where there are reasonable grounds for believing that the value of taxable supplies within the next 30 days (on their own) will exceed the VAT registration threshold.
These are the taxable supplies that count towards the VAT registration threshold:
- Supply of staff salaries – this regularly arises where a single (unregulated) entity employs and recharges its staff to other members of the corporate group (see Post-Brexit arrangements below)
- Any type of intra-company charges to reallocate costs from one company to another
- Other services which are not insurance-related. Real-life examples include:
- legal helpline fees relating to insurance policies
- fees to use insurance software
- fees earned by insurers/brokers from lawyers, vehicle hirers, vehicle repairers, medical reporting agencies, among others, for referring the details of insured parties (and their accidents) to those third-party suppliers
- Any services where the supplier does not act as intermediary
- Reverse charge – the purchase of services (such as advertising and IT) from non-UK suppliers. The purchased services are included as taxable supplies made by the business. While it may seem counterintuitive, the reverse charge seeks to put the business into the same position as if it had purchased the services from a UK VAT-registered supplier (ie, the UK supplier would have charged UK VAT). The reverse charge is the most commonly overlooked issue that we see in practice.
Most of the time, it’s not HMRC that identifies these VAT-able services but trained VAT specialists when carrying out due diligence in preparation for a sale, investment, or flotation of the business.
This is because the insurance sector business is not usually registered for VAT, so isn’t on any HMRC VAT officer’s radar for an inspection. It is left to the VAT specialist to deliver the bad news that the insurance sector business should have registered for VAT many years ago. And not only does it probably owe HMRC a significant amount of VAT, but also a substantial ‘late VAT registration’ penalty.
This can cause eleventh-hour angst before the completion of a deal or flotation. What’s more, it usually results in back-dated VAT registrations, significant payments to HMRC, and indemnities and warranties in sale and purchase agreements. Ultimately, the non-registration delays the whole transaction process by weeks or months and, in some cases, can derail it completely.
Potential opportunities (it’s not all bad news)
With unregistered brokers/MGAs, we sometimes find that registering for VAT voluntarily (ie where the mandatory registration threshold is not met) can unlock historic VAT refunds under the VAT ‘specified supplies’ law.
Under this law, insurance services supplied to insured parties established outside the UK, benefit from VAT recovery on goods or services bought in to make those supplies. This means a voluntary VAT registration may be a major advantage to brokers that engage significantly with customers outside the UK.
There may also be opportunities for those brokers/MGAs that are VAT-registered to increase their VAT recovery position by considering alternative use-based VAT recovery methods. Examples are those under the standard method override (SMO) or partial exemption special method (PESM) provisions. A robust accounts payable function should help with realising these opportunities.
It’s increasingly common for corporate groups to include a group services company that engages with third-party suppliers (on behalf of the corporate group) and recharges the costs incurred to other group companies under a group recharge model. Costs are not usually utilised equally within the group, and a sectorised PESM (or a sectorised SMO) could unlock additional VAT recovery and increase cash flows.
Post-Brexit arrangements
Many insurance intermediary businesses opted to incorporate EU subsidiaries following Brexit. These subsidiaries created and registered UK branch offices with UK Companies House. This was so that employees of the UK company could be seconded to the UK branch of the EU entity, effectively allowing the UK business to continue supplying insurance intermediary services to EU recipients post-Brexit.
As we’ve said, the supply of staff is taxable for VAT purposes. But after recent decisions in the European Court of Justice (such as SC Adient), it may be worth revisiting these planning arrangements. Otherwise, their commercial and economic reality could lead to irrecoverable VAT costs within the corporate group. So, it’s important to make any necessary amendments to mitigate possible VAT risks.
For more information on VAT for brokers, please contact Mark Ellis.
