Insurance with other goods and services: value shifting: general
An important tax avoidance issue in the sale of insurance with other goods and services is value shifting. This occurs when the value of goods or services attracting standard rated VAT is reduced whilst the value of the insurance element is increased leading to a decrease in the VAT payable on the package as a whole.
Exactly when this shift in values becomes tax avoidance rather than a genuine marketing strategy is not clear-cut. Whilst it is clear that VAT liability can be reduced by a business taking little or no profit on their standard rated products and compensating for this by inflating the profit margin on their insurance services, we would not normally view this as tax avoidance where:
- it appears to be motivated by genuine business reasons rather than tax avoidance (for example, because customers are prepared to pay a higher mark-up for the insurance); and
- the insurance is optional and the customer, knowing what they are paying for it (for the insurance related services to be exempt, the premium and any fee must be disclosed in writing - see paragraph 5.16), makes a conscious decision to purchase it; and
- the insurance is charged for as an additional cost and the final amount paid by the customer is reduced by the cost of the insurance should the customer opt not to take it out; and
- there is no discounting of the standard-rated goods/services conditional upon the customer taking out the insurance.
We would also not be concerned when the shift in values applies to goods and/or services sold with insurance that is liable to the higher rate of IPT because there is no tax advantage to be gained by this.