Issuu on Google+

VAT Issues for Captive Managers Martin Le Pelley Compliance Director, Heritage Insurance Management Peter Hewitt CTA (Fellow) Client Director – European Tax Practice, FiscalReps


Agenda • Background to VAT • Accounting for VAT • VAT on Captive Costs

• Structuring implications • Issues to consider • Some practical examples • Summary


Background to VAT •

Value Added Tax (“VAT”) is a tax charged on business transactions (e.g. the supply of goods or services)

Most countries have some form of VAT

Rates vary by country and by type of goods/services

Businesses register for VAT, so that they can reclaim the VAT that they pay suppliers for raw materials and stock that they purchase

Some services (e.g. insurance) are exempt from VAT in the UK and other countries (although other taxes are levied on insurance premiums)


VAT on Captive Costs •

EU VAT governed by EU VAT Directive 2006/112/EC

UK VAT governed by VAT Act 1994 and associated regulations

Place of supply amended from 1st January 2010 for some services – most now subject to VAT where received

There is no VAT in many countries where captives are based e.g. –

Guernsey, Jersey, Gibraltar, which are outside the EU for VAT purposes

However, some countries do have a VAT system e.g. –

Ireland, Malta, Switzerland


Accounting for VAT •

The rates of VAT in the EU are between 15% (Luxembourg) and 27% (Hungary) with an average between 21% and 22%

There are also reduced and super-reduced rates, eg in the UK: – Standard Rate = 20% – Reduced Rate = 5% – Zero Rate = 0%

Reduced rate applies to some residential building works, domestic fuels and heating products, and other goods in the public interest

Zero rate applies to food and some drink, aircraft and ship manufacture, some residential building works, exports of goods and other services/goods in the public interest


Accounting for VAT •

Insurance, Finance and many Health services are exempt from VAT

Businesses that supply zero rated goods are able to recover Input Tax, but businesses that supply exempt goods and services cannot recover Input Tax

Therefore, it is CRITICAL that captive managers reduce the incidence of VAT on costs incurred by a captive insurer

Captives in a non-VAT jurisdiction do have a competitive advantage against insurers in a VAT jurisdiction, as the place of supply for most services is where the recipient belongs

However, it is not quite that simple……


Structuring Implications •

Goods – the place of supply rule is different and so consideration must be given to goods being supplied to the captive parent or insured party

Services – Although the basic place of supply rule for services states that VAT is chargeable where the recipient of the supply is established, some services are chargeable to VAT elsewhere eg land-related services are chargeable where the land is situated. In this case, again, consideration must be given to goods being supplied to the captive parent or insured party

Basic rule services – if the captive is in a VAT jurisdiction, it may be better to have the services received by the parent or insured

Exemption for services – some services such as claims handling or loss adjusting may qualify for exemption as “insurance-related” services, so the application of this exemption must be maximised


Issues to Consider 1. Consider upfront if claims costs should be borne by insurer directly or by insured and reimbursed by insurer 2. Consider the claims handlers/loss adjusters that will be used, and whether their services can be made VAT exempt 3. On suffering a loss, consider whether any VAT charged by fulfilment providers is correctly charged 4. Make sure invoicing is to the correct party: – –

insured if supply is to the insured, so that the insured can reclaim, or captive if supply is to the captive, so that no VAT is charged


Issues to Consider • What is land-related and what is not?


Supplies to UK Insured v CI Insurer


Issues to Consider •

Let us assume the UK is the insured base, and Guernsey is the captive base (i.e. establishment)

If a claims handler is assessing a loss which falls below the deductible, this cost may not be exempt from VAT

Loss adjusting is an expert service in relation to valuation – and is not insurance-related (unless the loss adjustor has delegated authority to settle a claim) – so loss adjusting is not normally exempt


Policy Wording •

Property Insurance. Guernsey insurer should indemnify UK policyholder for cost of repairs (not settle the costs directly to the builder). This is because the policyholder may be able to recover the VAT, so the claim to the insurer can be net of recoverable VAT.

Motor own damage. Guernsey insurer should both arrange and settle the repair cost directly with the repairer (excluding VAT). This is because, if the insurer buys the services directly, there is no VAT charged on this service

Contents or Stock Insurance. Guernsey insurer should indemnify the UK policyholder for the cost of replacement of UK contents or stock. This is because VAT on goods is charged where the goods change hands. If UK policyholder buys the replacement goods, they may be able to recover the VAT, whereas the Guernsey insurer won’t be.


Claims Handling etc – Property Insurance. Claims handling is VAT free (it’s an insurancerelated service) but loss adjusting is VATable in relation to UK property (it’s a valuation service). The insured should appoint the loss adjustor as they may be able to recover the VAT. – Motor own damage. Claims handling is VAT free. Loss adjusting is VAT free if the loss adjustor is appointed by the Guernsey insurer, but VATable if appointed by the UK insured. In this case, the loss adjustor should be appointed by the Guernsey insurer directly. – Contents or Stock Insurance. Claims handling is VAT free. Loss adjusting is VAT free if the loss adjustor is appointed by the Guernsey insurer, but VATable if appointed by the UK insured. In this case, the loss adjustor should be appointed by the Guernsey insurer directly.


Practical Example 1 •

ABC Limited is a UK printing company. ABC Insurance Limited is the company’s Guernsey captive.

ABC Insurance Limited writes the following covers: – Property Damage - £500k e.e.l. and in the aggregate – Employers Liability (via a front) - £1m e.e.l. and in the aggregate – Business Interruption - £750k e.e.l. and £1.5m in the aggregate

On 23rd March 2013 an employee of ABC got his tie stuck in a printing press causing extensive damage to the machine and injuring the employee. The following losses arose: – Repairs to the machine - £623k – Employers Liability claim - £200k – Business Interruption - £400k How should these losses be treated by the Guernsey insurer?


Practical Example 1 • Repairs to the machine - £623k Any new parts required for the machine should be purchased by ABC Limited in the UK, as they may be able to recover the VAT. The cost of repairing the machine (which may include the parts required) may be borne directly by ABC Insurance as there will be no VAT on a service provided to a Guernsey company. • Employers Liability claim - £200k Loss adjustor / medical examination costs should be borne directly by ABC Insurance if possible to avoid VAT – however the claim cost itself is a compensation and not a taxable supply. Furthermore it is a reinsurance claim, and therefore no VAT will arise. If the original claim had been VATable, the fronting company may have been liable to pay VAT, and recover the cost via the reinsurance. • Business Interruption - £400k Loss adjustor costs should be borne directly by ABC Insurance if possible to avoid VAT – however the claim cost itself is a compensation and not a taxable supply.


Practical Example 2 •

Jolly Eater plc is a company which runs a chain of restaurants in the UK. Their captive is called Chips Insurance Limited

Chips Insurance writes the following covers: – Property & Contents insurance: £200k e.e.l. and £5m in the aggregate – Public Liability: £1m e.e.l. and in the aggregate – Business Interruption: £200k e.e.l. and £1m in the aggregate

On 1st April 2012 a fire broke out in the kitchen of the Dudley branch of Jolly Eater causing extensive damage to the property. Luckily no employees or customers were injured. – Damage to Property: £100k – Damage to Kitchen equipment: £50k – Repairs and redecorating costs: £80k

How should this property claim be handled?


Practical Example 2 • Damage to Property: £100k Property repair costs are VATable regardless of whether the costs are borne by a non-UK insurer. As such Jolly Eater plc should incur the costs of the property repair itself, inclusive of VAT, and seek to recover the VAT through its VAT return. The claim to Chips Insurance should include the repair costs plus any irrecoverable VAT. Note that the Loss Adjustor’s costs will also be VATable in this case as it is a property-related loss. • Damage to Kitchen equipment: £50k Replacement equipment is a supply of goods. As the supply occurs in the UK, the costs will be VATable. As such Jolly Eater plc should incur these costs directly and seek to recover the VAT through its VAT return. The claim to Chips will be the costs plus any irrecoverable VAT. Note that, in this case, the Loss Adjustor’s costs will be VAT free if the supply is directly to Chips. • Repairs and redecorating costs: £80k Repair costs are a service which will be land-related and subject to UK VAT if supplied directly to Chips Insurance. As such Jolly Eater plc should incur the costs of the property repair itself. Note however that the total claim exceeds the limit of cover, so the allocation of these losses will impact the ability of Chips to settle direct anyway.


Summary •

VAT is a complex tax which varies by jurisdiction and by type of goods or services

Insurance is exempt in the EU, which means that insurers cannot recover input VAT on purchased goods and services

Most insurers based in jurisdictions with no VAT can avoid input VAT as Article 44 states that the rate applicable shall be the rate in the place of establishment of the purchaser

Irish, Maltese or Swiss insurers may not be able to avoid input VAT on services as there is a standard rate of 23% in Ireland, 18% in Malta, and 8% in Switzerland


Summary •

In order to ensure that the most effective tax treatment is achieved, the insured and insurer should agree: – Who should pay for the cost of losses arising in relation to different types of loss? The insured or the insurer? – How should the supplier of goods or services invoice for their supply? (e.g. inclusive of VAT if supplied to the UK, or exclusive of VAT if supplied to Guernsey) – When should VAT be charged? Always in relation to Property claims, but otherwise only when the supply is within the UK – Why should VAT be charged? It is charged if the supply is not exempt (i.e. insurance-related such as claims handling) and the supply is within the UK – What rate should apply, if VAT is correctly chargeable?

The answers to these questions should be explicit within the policy documents and / or any claims handling agreements / protocols


european-breakout-session-c