Unlocking VAT opportunities for the insurance sector - insights from Hastings Insurance Services Ltd

The recently heard case of Hastings Insurance Services Ltd v HM Revenue and Customs has clarified several key issues regarding VAT and customer definitions that could impact the VAT position for insurers, potentially favourably.

The facts of the case may be of particular interest to UK-based insurance brokers that receive commission from non-UK insurers, resulting in the provision of insurance to UK policyholders. 

Under EU and UK law, insurance transactions are VAT exempt. Where the customer is outside of the EU, Article 169 (c) of the EU Principal VAT Directive allows for VAT recovery where the services are provided to a customer outside the EU. This rule has also been implemented in the UK, by way of the Specified Supplies Order 1999.

However, this UK order was amended in 2019 to prevent UK insurance intermediaries from recovering VAT where the party insured was based in the UK, otherwise known as the Offshore Looping Regulations. This anti-avoidance provision requires a taxpayer to ‘look through’ to the location of the insured party for the purposes of applying the insurance VAT exemption, as opposed to considering the supplies being made to the non-UK insurer.

In the recent FTT case however, Hastings submitted a claim to HMRC for the recovery of input tax attributable to supplies made to a non-UK insurance provider, relating to a pre-31 December 2020 Brexit period and a post-1 January 2021 Brexit period, on the basis that the 2019 amendment was incompatible with the EU Principal VAT Directive.

The FTT ruled in favour of Hasting’s claim for the following three key reasons:

• Definition of ‘customer’ - the FTT held that ‘customer’ in Article 169(c) should be understood as referring to Hastings’ customer only, the non-UK insurer, and not the final customer, the UK policyholder (as was argued by HMRC under the Offshore Looping Regulations)
• Direct effect of the EU Principal VAT Directive, Article 169 (c) prior to Brexit (relevant for periods before 31 December 2020) – the FTT confirmed this could be relied upon in national courts
• Recognition of direct effect of the EU Principal VAT Directive post Brexit (relevant for periods post 1 January 2021) - under Section 4 of the EU (Withdrawal) Act 2018, directly effective rights arising under an EU Directive and recognised and enforced before 31 December 2020 continued to be recognised and enforced in UK law, if they are ‘of a kind’ recognised by the European Court or any UK court or tribunal in a case decided before 31 December 2020. The FTT held that EU case law provided that Article 169 had direct effect, or alternatively, that Article 169 was ‘of a kind’ and/or had a ‘close relationship’ with Article 168, which covers the general right to deduct input tax, which had previously been held to have direct effect. Accordingly, the FTT has ruled in favour of Hastings for the period post Brexit too

It is worth noting that the decision by the FTT is potentially positive for insurance intermediaries in the UK, albeit the decision is not binding and we expect HMRC to appeal the decision.

The key findings of the case are particularly relevant to insurance intermediaries receiving commission from non-UK insurers in relation to UK based policies.  

Whilst we expect HMRC to appeal the decision, there is a potential opportunity worth exploring and given the general four-year statute of limitations for historic reclaims, this should be considered now.  

For further information and support on any of the above, please get in touch with your usual contact or one of the contacts listed.