Burial and cremation: Prepayments and funeral plans
Prepayment schemes allow participants to make a payment for a funeral in advance. The money is only released to the participant’s nominated funeral director upon their death. This safeguards their estate from the effect of inflation. The participant will pay the provider, either by lump sum or in instalments, for a funeral of a given standard at some future date but at current prices.
The taking of funeral prepayment monies is a regulated activity under the Financial Services and Markets Act 2000. The Financial Services Authority is the regulatory body that governs this. Under these regulations, a funeral director cannot receive prepayment monies (or up front payments) unless they are paid into a qualifying trust or a qualifying whole life insurance policy.
Basic information about the VAT treatment of prepayment plans can be found in Notice 701/32 Burials and cremations. The guidance below supplements the notice.
If an agent is involved in selling a trust-based plan, any payment received for recommending it to an individual and making the necessary arrangements is standard-rated. This is because the agent is not making physical arrangements for the disposal of the remains of the dead, but is merely providing an introductory service between that individual and a third party.
Court of Appeal Decision
In Co-operative Wholesale Society Ltd v Customs and Excise Commissioners  STC 727, the taxpayer (CWS) carried on a funeral services business. It entered into an agreement with an insurance fund to provide to the fund’s members with a specified funeral service. CWS entered into two supplemental agreements with the fund to facilitate the choice of a funeral director other than CWS and to administer the choice of an alternative funeral director.
The Court of Appeal held that it was wholly unreal to regard the supply of funeral services as supplies made to the fund. The fund was supplied merely with CWS’s promise that in specified circumstances it would make (or facilitate) the supply of funeral services to others. The supply of a promise in such circumstances was not a Group 8 supply.
In those cases where CWS merely facilitated and administered the estate’s choice of an alternative funeral director, CWS’s services were plainly not exempt under Group 8.
Sometimes agents may market “whole life insurance policies” as “funeral expenses insurance”. In such cases the commission which the agent or intermediary receives for arranging the policy will be exempt, as commission received for arranging insurance falls under item 4 of Group 2 (Insurance) of Schedule 9.
For further information on insurance see VATINS.