VAT is often the Cinderella of taxes among insurance brokers. We highlight three reasons why it deserves much more attention than it gets.
The industry’s neglect of VAT isn’t so surprising. After all, insurance and reinsurance transactions – including related services performed by insurance brokers and agents – are generally exempt from VAT.
But PKF Littlejohn’s extensive due diligence experience in the sector indicates that VAT should be taken much more seriously. Here’s why.
Although group members’ supplies to their customers may be exempt from VAT, intra-group management charges are frequently forgotten. This supply of services is potentially taxable. And, where they exceed the VAT registration threshold (currently £85,000), the entity should register and account for VAT.
Recharges of employee salaries are another pitfall for the sector. Broker businesses are often under the impression that employees are on joint employment contracts and, for that reason, believe there’s no requirement to charge VAT as there is no supply for VAT purposes. But on closer inspection we regularly find that they are not, and therefore VAT is due.
Even if no domestic VAT is payable, the reverse charge regime can impose a mandatory registration liability when services (above £85,000) are bought in from outside the UK. In our technological age, it is common for brokers to buy in advertising services from companies like Google (based in Ireland). These oblige them to self-account for the VAT due, and this requirement is often overlooked.
Customers based outside the UK
Under the VAT ‘specified supplies’ law, insurance services supplied to insured parties outside the UK benefit from VAT recovery on goods or services bought in to make those supplies. As a result, registering for VAT on a voluntary basis (assuming it isn’t mandatory) may be a major advantage to brokers that engage significantly with customers outside the UK.
Call for action
A head-in-the-sand approach to VAT is not in the interests of the insurance broker community for several reasons:
Unlimited historic liability – a business is liable to register and account for VAT from the date on which it exceeded the applicable VAT threshold. This means the period of assessment is unlimited and isn’t going away.
Penalties – where a business has failed to register for VAT and has therefore not accounted for it correctly, HMRC will likely charge interest on any underpaid VAT until the date it is settled. It may also charge a penalty of up to 30% of the VAT due.
Bad for business – when VAT issues are discovered during a due diligence, the buyer may use them as ammunition to lower the purchase price or withdraw from the deal altogether. What’s more, the buyer may insist on onerous warranties and indemnities.
VAT poses serious risks, as well as opportunities, for insurance brokers. PKF Littlejohn has over 100 years’ experience in the insurance market and has the depth of expertise to quickly identify potential VAT risks and offer practical and tailored solutions.
For more information, or to consult one of our experts, please contact Natalie Braier.
The FCA has published the findings of its Thematic Review on wind-down planning in TR 22/1 – observations on wind-down planning: liquidity, triggers and intra-group dependencies. Paul Goldwin helps you navigate the key points.