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HMRC internal manual

VAT Insurance

Claims Handling: Defendant delegated authority claims handling by Lawyers re Motor Liability, Employers Liability, Public Liability and Costs Claims

Law firms are contracted by Insurers to undertake defendant delegated authority claims handling work when Third Parties have made claims against their policy holders in terms of the liability and the costs incurred. The four categories of defendant delegated authority claims handling services which this guidance covers are Motor Liability, Employers Liability, Public Liability and Costs Claims. The majority of these claims are routinely settled without the need to litigate through the courts.

When determining if the claims handling exemption under Item 4 (c) of VATA 1994, Schedule 9 can apply the Lawyers are regarded as other experts and therefore must fulfil the requirements set out under Legal note 9 to Item 4. In particular the need to have written delegated authority from the Insurer or re-Insurer to accept or reject the claim in whole or in part and settle the amount to be paid on the claim. The details are set out in VATINS5530 and VATINS5540.

There are two distinct stages to the claims handling services provided in this specialist area.

Pre-Litigation and Post-Litigation to which the following liabilities should apply –

Pre-Litigation Services The stage up until it has been decided to litigate a claim through the courts. Services supplied under contracts with “delegated authority” and which comprise assessing whether to accept or reject a claim and, where a claim is accepted in whole or in part, settling the amount to be paid, constitute claims handling, which can be exempted under VAT Act 1994, Schedule 9, Group 2, Item 4, note 1 (c). Conditional to the requirements of legal note 9 being met.

Post-Litigation Services, by which we mean services undertaken after a case goes into litigation, are taxable at the standard rate. Regardless of whether some elements of the claims handling services commenced in the pre-litigation stage continue to be carried out.

Post-Litigation Services are considered as taxable for the following reasons –

  • Unlike insurance claims handling services, they can only be provided by regulated law firms.
  • They fall under the regulation of the SRA, as opposed to the pre-litigation services which fall within the FCA regulatory rules applicable to insurance claims handling services.
  • Whilst much of the post-litigation services may be carried out by non-legally qualified claims handlers, unlike pre-litigation work, they must be carried out under the supervision of qualified lawyers.
  • Whilst we understand that the claims that go into the post litigation stage are often settled without the need to go to court and the level of specialist legal input varies accordingly. All the post litigation services are governed by the applicable regulated legal process and the day to day administration and management of these claims is provided in support of that process.

Fee structures and Mixed Supplies of both Pre- and Post-Litigation Services

Claims Handling Service Contracts which consist of both Pre- and Post-Litigation services with the following fee structures will have the VAT Liabilities as follows –

  1. Pre-Litigation claims only, single fee per claim – Exempt
  2. Pre-Litigation claims only, single fixed fee for dealing with a batch of claims – Exempt
  3. Post-Litigation claims only, single fee per claim – Taxable
  4. Post-Litigation claims only, single fixed fee for dealing with batch of claims – Taxable
  5. Pre- and Post-Litigation claims, tiered fee per claim (i.e. fixed fee for Pre-Litigation, additional fixed fee if Post-Litigation stage is reached). The Pre-Litigation fee is Exempt and the Post-Litigation fee is Taxable.

A single fee paid for both Pre and Post Litigation services as follows –

     6. Pre- and Post-Litigation claims, single fixed fee per claim irrespective of whether litigation happens or not; and

    7. Pre- and Post-Litigation claims, single fixed fee for dealing with batch of claims irrespective of how many litigate.

Here HMRC see these services as a multiple supply of Exempt Pre-Litigation and Taxable Post-Litigation services. With the appropriate liability applying to each element, even when being delivered under a single contract for a single fee. To accept single supply treatment to examples 6 and 7 would not be appropriate. Allowing a Single Exempt supply approach would result in an extension of the exemption not contemplated by the legislation as per our guidance in VATSC81500. However if the supplies were treated in their entirety as taxable because of the taxable legal services this could undermine the exemption available for the claims handling element. The charging and accounting procedure to follow for VAT is set out below –

The single fee should be split into pre-litigation and post-litigation elements using a fair and reasonable apportionment method, and VAT should be charged only on the post-litigation element. More information on apportionment of output tax can be found at section 31 of the VAT Guide (VAT Notice 700).

Staged payments relating to Pre- and Post-Litigation services

Where the service provider issues separate fees for pre-litigation and post-litigation defendant delegated authority claims handling work, the invoice(s) relating to the pre-litigation element of the work undertaken will be VAT exempt, and the invoice(s) relating to the post-litigation element of work will be taxable. The timing of the issuance of these invoices will not alter the VAT treatment applicable, such that if an invoice relating to pre-litigation work is issued after a claim has litigated, provided this invoice relates only to the pre-litigation element of work, the invoice should be treated as exempt from VAT.

If such staged invoices are calculated by allocating work to pre-litigation and post-litigation elements, then the calculation should be done using a fair and reasonable apportionment method.

Detailed records of how the allocations between Pre- and Post-Litigation services are made should be kept to enable HMRC to audit as and when required.