Using the VAT margin scheme for linked insurance products and warranties
How to account for VAT on linked insurance products and warranties.
The situations which can commonly arise are described in this guidance together with the appropriate VAT treatment.
Definitions
Linked insurance products
A linked insurance product is a contract of insurance between an insurer (usually someone other than yourself) and the purchaser of the goods. The contract will provide cover against particular risks.
These are commonly linked to second-hand car sales but can be found in other sectors.
Linked insurance products include:
- mechanical breakdown insurance
- indemnity fees
- guaranteed asset protection
- key, wheel and tyre cover
- paint and fabric damage cover
If you arrange linked insurance products for your customers, you should also read Insurance (VAT Notice 701/36).
Warranties
A warranty is an undertaking or guarantee, which you give to your customer. If goods prove to be faulty within a specific time or mileage limit, the warranty states you will bear the cost of repairs or replacement parts.
Insurance Premium Tax
The higher rate of Insurance Premium Tax applies to:
- insurance-backed warranties
- mechanical breakdown insurance policies
- similar products (such as extended warranties)
Generally, insurers account for Insurance Premium Tax. However, if you make a charge in connection with this type of insurance, you may need to register and account for Insurance Premium Tax on those charges.
You can find further information on the higher rate of Insurance Premium Tax in Notice IPT1: Insurance Premium Tax.
Including linked insurance products or warranties in the price of the goods
If you provide your customer with a ‘free’ linked insurance product or warranty, the price of the goods shown on the sales invoice to the customer must be the same as that entered in your stock book.
Any mention of the linked insurance product on your invoice must show that no separate charge is being made.
Making a separate charge for a linked insurance product
If you arrange linked insurance products for your customer to purchase, you’re acting as an agent of the insurance company. The VAT treatment depends on whether any risk covered by the insurance policy is yours or your customer’s.
When the charge is exempt from VAT
The supply of the linked insurance product is exempt from VAT if it satisfies the following conditions:
- it is supplied under a contract of insurance between an insurer and your customer
- it is your customer’s risks which are insured
- your customer is free to purchase the goods without the insurance product
- you disclose the insurance premium and any other amount (fees or commission) being charged to the customer
Read Insurance (VAT Notice 701/36) for further information.
Under these conditions, these are separate supplies of the goods and insurance, each with its own consideration.
Your selling price for the purposes of calculating the margin on the goods must not include the charge for the insurance product.
When the charge is standard-rated
The supply is standard-rated if both of the following apply:
- the insurance contract is between you and the insurer
- your only risk covered is having to repair defective items
You must account for VAT on the:
- margin (if there is one) on the vehicle under the margin scheme
- standard-rated ‘insurance’ charge outside the margin scheme
VAT-rating a linked insurance product in other circumstances
Negotiating a reduced price for goods
You may later negotiate a reduced price for the goods (including the linked insurance product) with the customer. If so, the exempt premium payable for the linked insurance product remains unchanged.
Supplying an upgraded linked insurance product at an increased premium
If the customer negotiates an upgraded insurance product at a higher premium, you must itemise the product separately. You must also show the increased exempt premium.
Supplying goods and a linked insurance product at a single price
Any insurance fee or commission income you receive is standard-rated if you both:
- advertise the goods and the linked insurance product at a single price
- do not disclose to the customer the amount of the premium
The net premium, paid to and retained by the insurer, is still exempt.
You must only show the selling price of the goods, net of the insurance, in your stock book.
In all cases, the value shown on the sales invoice for the goods must be the same as that entered in your stock book.
You can find further information on the implications of these arrangements for Insurance Premium Tax in Notice IPT1: Insurance Premium Tax.
Making a separate charge for a warranty
If you provide a warranty, and make a separate charge for it, that charge will be standard-rated.
Your selling price, for the purposes of calculating the margin on the item, must not include the charge for the warranty.
You must account for VAT on the:
- margin (if there is one) on the goods, under the margin scheme
- standard-rated charge for the warranty, outside the margin scheme
The value shown on the sales invoice for the goods must be the same as that entered in your stock book.
Supplies made under other schemes
The supply of a warranty or a linked insurance product under any other type of scheme is standard-rated.
For example, a dealer may set up a ‘fund’:
- into which amounts charged to customers for warranties are paid
- from which repair claims are met
The dealer may obtain insurance cover against any deficiency in the fund. These policies are covered by arrangements commonly known as ‘stop-loss’. In such circumstances, there is no contract of insurance between the insurer and the customer purchasing an item. Only the dealer’s risk is insured, so any charge to the customer will be taxable at the standard rate.
Examples
Example 1
In this example, the amount due under the contract of insurance is £200 (the net amount payable to the insurer is £120 and the commission you retain is £80).
If the gross premium (£200) is disclosed to the customer the £200 is exempt from VAT.
If the gross premium is not disclosed to the customer, you must account for the VAT on this outside the margin scheme.
Insurance Premium Tax is due on the gross premium of £200.
If you disclose the gross premium to the insurance provider, then they will account for the Insurance Premium Tax.
If you do not disclose the £80 commission to the insurance provider, you may be liable to register and account for the higher rate of Insurance Premium Tax on this amount, in addition to any VAT that may be due.
Example 2
In addition to the £200 in Example 1, you charge the customer a fee of £50 for arranging the insurance-backed product (the net amount payable to the insurer is £120, you retain the £80 commission and the £50 fee).
If the value of both the amount due under the contract and the fee is disclosed to the customer, then the £250 is exempt from VAT.
The £120 premium is exempt from VAT if you disclose either:
- the amount due under the contract of insurance but not the fee
- the fee but not the amount due
As the agent, you pass this to the insurance provider in addition to the:
- £80 standard-rated commission
- £50 standard-rated fee
You must account for the VAT on these charges outside the margin scheme.
Insurance Premium Tax is due on £250.
If the whole charge is made under the contract of insurance, and you disclose the gross premium to the insurance provider, they will account for the Insurance Premium Tax.
It may be that:
- you do not disclose the commission (£80) to the insurance provider
- the £50 fee is charged under a separate contract between you and your customer
If so, you must register and account for Insurance Premium Tax on these amounts in addition to any VAT that may be due.
Partial exemption
If you receive a lot of VAT-exempt income from providing linked insurance products, there is a possibility that your business may be partially exempt. Read Partial exemption (VAT Notice 706) for more information.
VAT returns
You must show any goods you buy or sell using a margin scheme on your VAT return.