When Do You Have to Pay VAT on Insurance?

Businesses of all kinds may struggle to understand and fulfil their VAT obligations. The rules and allowances that can apply, and even the terminology, can quickly become complicated. It is important to understand the nuances that apply to your specific circumstances in order to understand how much you need to pay and to meet all of your legal obligations.

While these challenges affect all businesses, they can be especially difficult for insurance providers. While insurance transactions are generally considered to be exempt from VAT, there is sometimes a need to pay VAT at the point where services are consumed. As such, while organisations based in the UK will not normally be liable for VAT on any insurance services, they should still understand how these rules apply to ensure they meet their legal obligations and can support their customers where necessary.

Here, the experts at The VAT People outline when a UK insurance company may need to pay VAT on insurance supplies outside the UK, and offer guidance to help these businesses apply the correct tax treatment to their services. For dedicated support and bespoke advice about your situation, contact our team today.

What taxes are due on insurance supplies?

In general, authorised insurance providers do not need to charge or pay VAT on any insurance transactions, because they are exempt from VAT. In some cases, this includes additional services delivered by non-authorised providers - such as vehicle breakdown insurance, or funeral plan contracts. These may be considered exempt 'insurance' services under the law for VAT calculations.

However, as we have indicated above, VAT may be due if services are consumed overseas, or in other unique cases, even for what would otherwise be considered an exempt supply. If you supply exempt insurance overseas, it is especially important to make sure you understand the VAT rules that apply and are able to fulfil them, because the penalties for failing to comply with tax legislation can be severe.

Below are some examples of taxes that may apply to VAT-exempt insurance supplies:

● Insurance premium tax: Insurance providers must often collect insurance premium tax on certain insurance products. Insurance premium tax is a separate tax that is unlike VAT and that is specifically applied to insurance premiums. The rate of this tax may vary depending on the type of insurance policy, but there are currently two standard rates: a standard rate, which is charged at 12%, and a higher rate which is charged at 20%. In some cases, insurance premium tax is mistaken for VAT because the higher rate of 20% is the same as that of VAT. Some insurance products may be exempt from the tax, so it is important to review the specifics of your supplies to ensure you meet your legal obligations.

● Business-to-business transactions: VAT rules can be different for business-to-business transactions. In some cases, insurance services provided to other VAT-registered businesses may be subject to the reverse charge mechanism, where the responsibility for paying VAT shifts from the supplier to the recipient. This applies most often to services supplied overseas - these insurance products and services may be exempt in the UK, but subject to VAT in another territory.

● VAT on commission and fees: Insurance brokers and intermediaries who earn commissions or fees for arranging insurance may also be subject to VAT on their services, depending on the circumstances. If additional services are provided alongside the insurance that are not directly related to the insurance cover itself, these might also be subject to VAT. For example, administrative fees or charges for making changes to a policy might be subject to VAT.

● Insurance-related services supplied by intermediaries: Any fees charged by insurance brokers or agents for arranging insurance are typically subject to VAT at the standard rate, as are any other related services provided by third parties.

With these requirements in mind, it is also vital to check the specific circumstances that apply to any territories in which you make supplies outside the UK. The place of supply rules can affect whether VAT is due on insurance services, especially if the services are supplied to or from outside the UK. Each jurisdiction will have a unique legal landscape for VAT, including products and services that are exempt, and the rates that apply. As such, businesses should understand the rules that apply to any overseas territories in which they trade.