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Peter Hewitt CTA (Fellow) Client Director - European Tax Practice Fiscal Reps Limited


Demystifying VAT for insurance companies


Points covered • Partial exemption principles • Place of supply and VAT liability of insurance • Partial exemption methods • Reverse charges


Partial exemption What is partial exemption? Input tax = VAT on goods and services bought for use in the business • Businesses which make only taxable supplies are entitled to full recovery of input tax • Businesses which make only exempt supplies are not entitled to recover any input tax • Businesses which make both taxable and exempt supplies are entitled to partial recovery of their input tax – The intention of the law is to allow input tax recovery to the extent that input tax relates to taxable supplies ONLY


Partial exemption Some basic rules • Input tax must be directly attributed to taxable supplies or to exempt supplies – To the greatest possible extent

• Any input tax which cannot be directly attributed must be apportioned • The means of apportionment of non-attributable input tax is the crux of partial exemption – This is the partial exemption ‘method’ – There is a standard method – Or the insurer can agree a ‘partial exemption special method’ or PESM


Partial exemption

Input tax relating to taxable supplies

Input tax relating to exempt supplies

All

None

Input tax relating to both taxable and exempt supplies

Some


VAT: Liability of Insurance • Provision of insurance is exempt • Technically, place of supply is where policyholder belongs • So insurance is only exempt if insured is in same country as insurer BUT

• There is a different input tax treatment for insurance provided inside and outside the EU • For a UK insurer (in definitions within PESM): – non-EU premium is sometimes described as “taxable” even though place of supply is outside the EU – EU premium sometimes described as “exempt” even though place of supply is outside UK


Partial exemption Scope of the right to deduct • The type of input tax which may be deducted – Articles 168 & 169 of the VAT Directive 2006/112/EC – s26(2) VAT Act 1994, VAT (Input Tax) (Specified Supplies) Order 1999 •

„Taxable input tax‟ – Input tax incurred in making: (a) Taxable supplies of services (b) Services supplied outside the UK which would be taxable supplies if made in the UK (AKA „foreign supplies‟) (c) Certain exempt services, including insurance and insurance intermediary services, made to persons outside the EU, or services closely connected to the export of goods (AKA „specified supplies‟)


Partial exemption

Input tax relating to taxable supplies

Input tax relating to exempt supplies

Input tax relating to both taxable and exempt supplies

All

None

Some


Partial exemption methods Standard method: • Directly attributable to „taxable‟ (non-EU) premiums – 100% recovery

• Directly attributable to „exempt‟ (EU) premiums – 0% recovery • The rest of the input tax („residual input tax‟) recovered on the basis of non-EU to total premiums • Gross written premium is used for the apportionment calculation


Partial exemption methods Special method: •

Directly attributable to „taxable‟ (non-EU) premiums – 100% recovery

Directly attributable to „exempt‟ (EU) premiums – 0% recovery

The rest of the input tax („residual input tax‟) recovered on whatever basis you can dream up and agree with HMRC

Gross written premium is usually used for the apportionment calculation, usually only that written in UK

But it is permissible to include or exclude premium taxes if it helps

And anything else can be agreed (e.g. number of insurance contracts, non-EU to total)


VAT partial exemption – typical partial exemption method UK input tax recovery EU 70%

Non EU 30%

INSURANCE “SECTOR”

Insurer Measured by premium receipts – 30% recovery for most costs Insurance costs

EU sales 6 Insurer

Non EU sales 4

INVESTMENTS “SECTOR” Measured by number of sales transactions – 40% recovery for investment management costs

Investment costs


Partial exemption The three ‘A’s of partial exemption • Attribution – Of input tax to taxable supplies or exempt supplies

• Allocation – Of input tax to sectors in a (special) „sectorised method‟

• Apportionment – Of non-attributable input tax


Partial exemption Legislation • Articles 167-169 of the VAT Directive 2006/112/EC – Origin and scope of the right to deduct

• Articles 173-175 of the VAT Directive – Proportional deduction (partial exemption)

• s24 VATA 1994 – Whether VAT incurred is input tax

• s26 VATA 1994 – Whether input tax is deductible

• Regulations 99 to 110, VAT Regulations 1995 – The detailed rules on partial exemption


Reverse charge •

FRL in UK charges InsCo in Ireland £1000 – No VAT added on invoice – place of supply is Ireland

InsCo is registered for Irish VAT – InsCo has to impute an Irish VAT charge at 23%

In effect InsCo is charging itself VAT – Has to pay £230 (in euros – say €275) to Irish Revenue on VAT return – Also entitled to treat €275 as input tax and possibly recover some of it on same return

Cannot treat €275 input tax as fully deductible against €275 output tax – I.e. cannot attribute input tax to reverse charge “deemed” supplies

Reverse charge saves FRL from needing to be VAT registered in Ireland – Since InsCo is already VAT registered in Ireland, it is a simpler system – FRL can still claim Irish VAT on costs under a separate system – online claim


Reverse charge – VAT registration Taxable turnover •

Insurance companies do not have much taxable turnover •

Regulatory regime does not allow an insurance company to carry out non-insurance activities

In the UK, there is a threshold of £77,000 per annum – below that registration is not required

Reverse charge “supplies” count as taxable turnover, so are likely to be the only values which make VAT registration mandatory

VAT returns may be all claims (input tax exceeds output tax) if reverse charge liability is small

Many insurance companies register to recover input tax attributable to non-EU insurance business


VAT: Demystified!

Questions?


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