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HMRC internal manual

VAT Insurance

Types of insurance: self-insurance

Where an organisation or group of similar bodies (for example, schools or councils) feels it is financially able to carry its own risks, or at least part of its risks, it may create its own reserve fund by putting money aside each year to cover future losses.

In such situations, where there is no contract of insurance, there is likely to be no supply for VAT purposes and any payments into the fund will be outside the scope of VAT (although a possible VAT liability may arise if additional charges are made for this facility to companies outside the VAT group).

The organisation involved in this sort of risk management may decide that it only wishes to carry its own risk up to a certain level, and may purchase insurance cover from a commercial insurer for the higher level risk. In these circumstances, the portion of risk borne by the organisation may be referred to as the ‘deductible’ or ‘voluntary excess’

When considering arrangements such as this it is important to establish whether charges made by third parties in respect of, for example, risk management, administration or claims handling services, are properly treated for VAT purposes. Any charge that does not specifically relate to the contract of insurance and is made solely in respect of the ‘self-insurance’ part of the arrangement will fall outside the insurance exemption.