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HMRC internal manual

VAT Valuation Manual

Specific applications: motor dealers and manufacturers: liability of Mechanical Breakdown Insurance (MBI) and warranty charges

Current UK legislation allowed exemption only for insurance provided by insurers permitted to provide insurance under the Financial Services and Markets Act. However in the Card Protection Plan case the ECJ ruled that under the principle of fiscal neutrality any insurance qualifies for the VAT exemption whether it is provided by a permitted insurer or not. As a consequence, we accept that the UK legislation cannot be used to limit the exemption in such a way.

One of the implications of this is that the borderline between exempt and non-exempt warranty products has become blurred; we cannot automatically assume that a warranty provided by a company that is not a permitted insurer is taxable.

As a general rule, we would not normally see warranties provided by the dealer themselves as insurance. This is because they are often linked to the dealer’s obligations under the contract of sale and cover faults over which the dealer has an element of control. Warranties provided by third party companies not connected to the dealer or manufacturer, are likely to be insurance. Each case would need to be considered on its individual facts, however.

An insurance or warranty charge will be taxable, therefore, where:

  • it is for a supply that does not meet the criteria for insurance, or
  • it is the recharge of an insurance cost incurred by the dealer where the dealer and not the customer is insured under the contract.

More guidance on all of the above is available in VATINS3700 Insurance. If you are unable to establish the liability of the MBI/warranty after consulting VATINS3700 please contact the Deductions and Financial Services Team.