In the regulated world, adherence to false beliefs is a risky business. We take a look at the most prevalent VAT misconceptions that could cause your business to come a cropper.
It is a common misconception that if a company is regulated by the FCA, everything it does is exempt from VAT. It is actually the other way around. What matters is the nature of the service, not the nature of the supplier.
An often-quoted illustration of this is where the Tax Tribunal found that a taxi firm was supplying VAT-exempt insurance to its drivers, despite the taxi firm not being a regulated entity like an insurer or an insurance broker.
Another frequent misconception is that all services that are related in some way to VAT-exempt supplies of insurance, or insurance broker services, are also exempt from VAT. There is only one exemption in the VAT Act for “closely related” services and that relates to education services supplied by a relevant supplier. There is no other “closely related” services exemption in the VAT Act.
As a result, many of the additional services that are supplied in the insurance sector are likely to be subject to standard rate VAT, rather than be exempt. Real life examples of services that fell foul of the rules as a result of this misconception include:
Legal helpline fees relating to insurance policies;
Charges for use of insurance-specialist staff;
Fees to use insurance software;
Charges to an unlicenced broker for effectively being able to use the licence of an FCA-regulated broker;
Fees earned by insurers / brokers from lawyers, vehicle hirers, vehicle repairers, medical reporting agencies etc for referring the details of insured parties (and their accidents) to those third-party suppliers;
Intra-company “management charges” (or any other name you can come up with) to reallocate costs from one company to another.
Most of the time, the identification of these VAT-able services is made not by HMRC, but by trained VAT specialists when carrying out due diligence in preparation for a sale, investment, or flotation of the business. This is because the insurance-sector business is usually not registered for VAT and is therefore not on any HMRC VAT officer’s radar for a VAT inspection. It is left to the VAT specialist to deliver the bad news that the insurance-sector business should have registered for VAT many years ago and probably owes HMRC a significant amount of VAT plus a considerable “late VAT registration” penalty.
Not only can this cause eleventh-hour angst prior to the completion of a deal or flotation, but it also usually results in back-dated VAT registrations, significant payments to HMRC, indemnities and warranties in sale and purchase agreements and ultimately delays the whole transaction process by weeks or months and, in some cases, can derail the transaction completely.
The message is simple: just because your insurance-sector business is not VAT-registered now does not mean that it should not be registered for VAT (and in some cases with effect from a date many years ago). It is far better to investigate your VAT position fully now with a VAT specialist and avoid any potential buyer, or investor, unearthing a can of VAT worms when they carry out their due diligence on your business. That way, you can address any issues early and get yourself VAT-compliant, if needs be, before any future transaction.
You may even be able to restructure your business and change the way you operate (including changing the wording of contracts that support your transactions) in order to give yourself a fighting chance of persuading HMRC (and the Tribunals or Courts, if necessary) that your services are actually exempt from VAT. Without the time-pressure of an impending transaction, a VAT specialist can sometimes stave-off future potential disasters.
Transfer Pricing Director Farhan Azeem explains why UK-based MGAs and brokers operating in the EEA will need to (re)assess their business operating model from a transfer pricing perspective or risk facing tax adjustments and fines.