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HMRC internal manual

VAT Insurance

Types of insurance: warranties and guarantees: warranties that are not insurance

In example (a) in VATINS3705, customers may be charged an amount which is described as a guarantee or warranty. The amounts so received are paid into a fund which is used to pay for any repairs which may be necessary under the terms of the warranty.

The retailer or manufacturer may also take out an insurance policy to protect itself against the risk of having to pay claims should there be any shortfall in the fund. This type of arrangement is called stop-loss and is common in the second hand vehicle business.

As explained in VATINS3700, the provision of a warranty by the retailer or manufacturer is likely (although not always) to be linked to their obligations under the Sale of Goods Act to meet quality standards and not, therefore, a supply of insurance.

In these instances, the charge to the customer for the warranty will be standard rated. The risk insured under any stop-loss policy is the retailer’s and not the customer’s and is not the same as the risk covered by the warranty itself. The retailer cannot pass this on as an exempt charge to the customer.