VAT & Insurance Intermediaries

There’s been a significant development in the VAT treatment of insurance intermediaries, in the recent First-tier Tribunal (FTT) case of Hastings Insurance Services Limited. This case is particularly relevant for UK insurance intermediaries who supply services to non-UK insurers, especially where the insured party is based in the UK.

Traditionally, insurance and related intermediary services are exempt from VAT, which means intermediaries can’t usually reclaim the VAT they incur on their costs. However, there’s been a long-standing exception: the Specified Supplies Order allowed intermediaries to recover input VAT on services supplied to customers outside the UK.

In 2019, the government tightened these rules, introducing the so-called “Offshore Looping Regulations”. The new rules said that, for input VAT to be recoverable, not only did the insurer (the intermediary’s customer) have to be outside the UK, but the insured party (the policyholder) did too. This was designed to stop UK intermediaries from reclaiming VAT when the ultimate insurance cover was for UK-based customers, even if the insurer was offshore.

Hastings challenged this, arguing that under EU law, the right to recover input VAT should depend on where the direct customer (the insurer) is based, not the ultimate insured party. The FTT agreed, finding that the term “customer” in the relevant EU Directive refers to the direct recipient of the intermediary’s services – the non-UK insurer – not the policyholder. As a result, the 2019 UK amendment was incompatible with EU law for the relevant periods.

Crucially, the FTT also held that this EU law right continued to have direct effect in the UK for periods up to 31 December 2023, due to the way Brexit was implemented. It seems that HMRC has accepted the decision and won’t appeal. This means that, for accounting periods ending on or before 31 December 2023, insurance intermediaries can reclaim input VAT on services supplied to non-UK insurers, even if the insured party is in the UK.

From 1 January 2024, however, the position changes. The direct effect of EU law has ended, and the UK’s more restrictive rules now apply. Input VAT can only be recovered if both the insurer and the insured party are outside the UK.

In practical terms, insurance intermediaries should review their VAT recovery for the relevant periods. If they’ve under-claimed input VAT, they can submit claims to HMRC, subject to the usual four-year time limit. It’s important to have supporting documentation and to revisit partial exemption calculations if necessary.

In summary, the Hastings case has opened a window for VAT recovery on certain insurance intermediary services supplied to non-UK insurers for periods up to the end of 2023. Going forward, the rules are much tighter, so businesses should act quickly to take advantage of this opportunity.