Insurers Could Incur Increased Tax Liabilities Under New VAT Rules

Changes do not affect only UK-domiciled companies.

Leading accountant and insurance consultant Moore Stephens says that companies in the insurance industry need to be aware that, under changes to the VAT international services rules which will take effect on 1 January 2010, they could incur increased VAT liabilities and associated costs on certain services bought in from any country outside the UK. It also warns that, under the changes, many more non-VAT-registered businesses may find themselves caught in the VAT net.

The changes result from a widening of the services which currently attract VAT under the ‘reverse charge mechanism’ to include almost all business-to-business services, with a very limited number of exceptions, such as those relating to land transactions. The motivation behind the changes is to try to establish a level playing field for VAT rules relating to the cross-border supply of services. The result of the changes is that, wherever possible, VAT will be payable in the country where the customer is based.

Writing in the latest issue of the Moore Stephens newsletter, Insured Interest, Gwen Ryder, the firm’s Head of VAT, explains, “The point of the reverse charge mechanism, and the changes which will increase its scope, is to put the importer of most business-to-business services in the same position as it would have been if it had contracted for those services in its own country. This will mean that UK businesses will have to account for VAT via the reverse charge mechanism on most services received from overseas suppliers.

“The effect of the reverse charge is that the importer of a specified service must account for output tax on its VAT return, but may recover a ‘contra’ amount of VAT as input tax on the same return to the extent allowed. This means that the position for businesses which are ‘fully taxable’ is revenue-neutral. For VAT-registered businesses in the insurance industry, the position is already very different. Such businesses are ‘partly exempt’ and can only recover a percentage of this reverse charge input tax.

“On 1 January 2010, when this reverse charge rule is extended to most other services, including clerical, administrative, management services, and some ‘back office’ functions, even more VAT will be lost under the reverse charge. The new rules will result in an increase in paperwork and administration, as 1 January 2010 also brings in the requirement to complete the likes of European Sales Lists to record relevant supplies to EU VAT-registered businesses.

”Insurance businesses which are not even VAT-registered in the UK should be aware that the reverse charge requirements which applied to them before 1 January will not go away. In fact, because the scope of the reverse charge will widen, many more non-VAT-registered businesses will find themselves caught in the VAT net. Many do not realize that, on services imported from anywhere outside the UK that are caught by the reverse charge, they are obliged to register for VAT and account for output tax if they exceed the VAT registration limits, which are currently £68,000. As these businesses would usually make wholly exempt supplies of insurance, they cannot recover a ‘contra’ amount of input tax at all. The cost to them is the whole amount of VAT due (currently 15 per cent) plus penalties of up to 15 per cent if they register late for VAT.”

The changes do not affect only UK-domiciled companies, but apply throughout all EU states. They do not affect the supply of exempt insurance and reinsurance-related products and services themselves, the VAT status of which remains unchanged under the new legislation.