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Commission relating to insurance is not always exempt

Commission relating to insurance is not always exempt

VAT

We often deal with businesses that have assumed that commission income they receive in relation to insurance services and financial services is VAT exempt.

Unfortunately this is not always the case as in order to be VAT exempt the commission has to be generated from activities that meet a number of specific criteria.

In the recent VAT Tribunal case of Westinsure Group the appellant undertook activities that resulted in income that had a connection to the generation of insurance business, but the Upper Tier tribunal found that its activities were too remote from the supply of insurance for exemption to apply.

The Group had been formed to provide introductions and improve terms to member insurance brokers.

Its business consisted of facilitating cooperation between insurance providers and insurance brokers to facilitate the insurance business of both and enable buyers of insurance to obtain good value.

HMRC ruled that its supplies were not exempt from VAT and the First Tier Tribunal (Tax) agreed with this.

The business appealed to the Upper Tier Tribunal who upheld the decision of the First Tier Tribunal and determined that Westinsure Group's services were subject to VAT.

This was on the basis that the company did not act as a broker or an agent as is required by law.

An essential characteristic of being either a broker or agent is that they are in the business of putting insurance companies in touch with potential clients, or acting as intermediaries between insurance companies and clients or potential clients.

Therefore, to determine if the services supplied were VAT exempt it was necessary to first identify if Westinsure was either acting as an agent or broker.

The Tribunal was certain that Westinsure was not acting as an insurance agent as it did not act on behalf of insurers. This meant that for exemption to apply it would have to act as a broker.

Although it had some characteristics of a broker as it brought insurers and brokers together, it did not introduce people seeking insurance to insurers in the same way that a broker did.

Therefore in the eyes of the Tribunal it did not qualify to treat its supplies of services as VAT exempt.

If you or your client receive income relating to either insurance or financial services it is always worth contacting our free VAT helpline for an initial discussion to establish the VAT liability of the income and whether VAT exempt treatment is possible.

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