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HMRC internal manual

VAT Insurance

Insurance with other goods and services: value shifting: insurance provided at no additional cost

When we are likely to have more of a problem, however, is where the cost of insurance liable to IPT at the standard rate is carved out of the price of VATABLE goods or services.


A product that is liable to standard rate VAT is on sale for £1,000.00. At the time the sale is agreed the salesman suggests taking out insurance for £300.00 and offers to discount the price of the product by the same amount. The discount is conditional upon the customer taking out the insurance, they cannot refuse the insurance and purchase the goods at the discounted price. However, full disclosure of the premium and any additional fee is made on the sales documentation.

As there is no overall increase in the cost to them, the customer would have no reason to object; they are in effect getting the insurance for nothing.

The amount actually received by the insurance company is a small percentage of the £300 (say about £30) and the rest of the premium is made up of commission due to the retailer for their insurance arrangement services.

From a tax point of view instead of paying 1/6 of £1000.00 the trader pays 1/6 on £700.00 and 3/53 (6% IPT) on £300.00.