VAT: use and enjoyment of insurance repair services
Published 10 August 2016
© Crown copyright 2016
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Who is likely to be affected
This measure will affect insurers of UK risks who have structured their arrangements to receive repair services free of UK VAT and the providers of those services.
General description of the measure
The government has become aware that a small number of insurers have structured their arrangements to avoid incurring irrecoverable VAT by undertaking to repair insured goods via an offshore insurance entity. Several other insurers have complained that this practice challenges fair competition.
The government is responding by introducing a use and enjoyment provision into VAT law to ensure that repair services carried out in the UK for UK policyholders are subject to UK VAT irrespective of whether the insurer belongs outside of the EU.
Policy objective
This measure counters VAT avoidance by those UK insurers who arrange their affairs so that the insurance to UK customers is in fact provided by a company based off shore, for example, in Gibraltar or the Channel Islands, where there’s no VAT. Any insurance repairs are charged to the offshore company. As a result the insurer of the UK risk is not charged VAT which in normal circumstances it wouldn’t be able to reclaim because insurance is VAT exempt.
By widening the use and enjoyment provisions to encompass repair services the place of supply will be the UK and VAT will be charged. The measure also deters possible expansion of this avoidance and levels the playing field.
Background to the measure
This measure was announced at Summer Budget 2015 and draft legislation was published for technical consultation in February 2016, which resulted in some minor changes in drafting and a change in implementation from spring 2016 to October 2016 to accommodate changes to taxpayer systems.
Detailed proposal
Operative date
The measure will affect insurance repair service transactions carried out on or after 1 October 2016.
Current law
Current law is contained in the Value Added Tax Act 1994 section 7A and Schedule 4A.
Proposed revisions
The proposed change will amend VAT Act 1994 Schedule 4A by affirmative Treasury Order using powers contained in section 7A(6). It will introduce a use and enjoyment provision, similar to that contained in Schedule 4A paragraph 8, for repair services carried out on goods in the UK, as a result of an insurance claim.
This will ensure that such services are subject to UK VAT when they are effectively used and enjoyed in the UK. This now means that an offshore recipient of these services, such as an insurer, will be charged UK VAT on a service that is currently outside its scope. It will no longer be treated as a business to business transaction falling under the general rule, which puts the place of the supply where the recipient belongs.
It will also introduce a mirror provision so that repair services that would have been treated as supplied in the UK, but are used and enjoyed outside the EU, will now be seen as outside the scope of UK VAT.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| negligible | +5 | +5 | +5 | +5 |
The Exchequer impact of ‘Indirect tax: overseas insurance’ was set out in Table 2.1 of Summer Budget 2015 and was certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015. The reduced yield for 2016-17 in this document reflects the revised implementation date of 1 October 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be any specific impacts on any equalities groups.
Impact on business including civil society organisations
This measure will have no impact on businesses and civil society organisations who are undertaking normal commercial transactions; it will only impact on the businesses that are structuring their arrangements to avoid irrecoverable VAT.
Operational impact (£m) (HMRC or other)
This measure is expected to have a negligible operational impact.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through HMRC monitoring behaviour and VAT receipts in the insurance sector.
Further advice
If you have any questions about this change, please contact Des Farndell on telephone 03000 544 596 or email desmond.farndell@hmrc.gsi.gov.uk, or Andy Heywood on telephone 03000 544 534 or email andrew.heywood@hmrc.gsi.gov.uk
Declaration
David Gauke MP, Financial Secretary to the Treasury has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.