VAT is not charged on insurance transactions. Normally, VAT cannot be reclaimed on goods and services purchased to make exempt supplies; for additional information, see paragraph 7.1.
Some premiums earned under insurance contracts are subject to IPT. It’s important not to mix up IPT and VAT; they’re two completely different taxes. For VAT reasons, the word ‘insurance transaction’ differs from the term ‘insurance contract’ for IPT purposes. IPT, unlike VAT, is not refundable. Notice IPT1: Insurance Premium Tax contains more information on IPT.
What insurance is
There is no formal definition of insurance, but earlier judicial decisions that have explored the essential character of insurance can provide help.
In general, if an activity requires the provider to be authorised as an insurer under the terms of the Financial Services and Markets Act 2000, it is considered insurance for VAT reasons (FSMA).
Furthermore, despite the fact that certain funeral plan contracts are not regulated as insurance under the FSMA insurance regulatory rules, HMRC accepts that they constitute insurance (and thus exempt from VAT). In paragraph 3.5, you’ll find further information on funeral plans.
Even though providers are exempt from the FSMA’s requirement to be authorised, vehicle breakdown insurance is nonetheless considered insurance. In paragraph 3.6, more information about vehicle breakdown services is provided.
Reinsurance
A reinsurance contract is one in which an original insurer is compensated by a reinsurer for a risk that the original insurer has taken on. Unless otherwise specified, all references to insurance in this notice should be interpreted to include reinsurance.
The regulation of insurance
The Financial Services and Markets Act (FSMA) governs the regulation of financial services in the United Kingdom, including insurance. The FSMA took effect on December 1, 2001, and replaced the Insurance Companies Act of 1982, which had previously regulated insurance.
The FSMA makes it illegal for UK businesses to enter into insurance contracts without being authorized to do so (with the exception of certain bodies specifically granted exemption from the need for authorisation). The Financial Conduct Authority is in charge of regulating businesses and unincorporated organisations under section 19 of the FSMA (FCA).
The FSMA (Regulated Activities Order) 2001 establishes the activities that are subject to the Act’s regulations. There are various types of insurance risks, each with its own set of regulatory requirements. Insurers can be authorized to insure all types of risks or only certain types of risks.
An insurance firm is prohibited from engaging in activities in the UK or elsewhere that are not related to or for the purposes of its insurance business under section 19 of the FSMA.
Insurance supplied by unauthorised insurers
Until March 1997, the VAT exemption was only available to enterprises that were authorised (or exempted from being authorised) under UK regulatory laws. However, in the case of Card Protection Plan Ltd (CPP), the Court of Justice of the European Union (CJEU) concluded that the UK could not limit its VAT exemption to authorised insurers.
This means that insurance provided by unlicensed insurers is VAT-free. Such businesses may be prosecuted under the FSMA, and we may report matters to the FCA if they come to our attention.
Insurance transactions affected by holders of block policies
The CJEU’s ruling in CPP has ramifications for block insurance policyholders who make supplies. CPP was the owner of a block insurance policy, and the insurer gave them permission to arrange for their clients to be covered by the policy. CPP was found to be supplying insurance transactions to their consumers despite not being an insurer themselves, according to the CJEU.
We regard supplies made by block policyholders as insurance transactions for the purposes of the VAT exemption, notwithstanding the fact that they would not be considered insurance for regulatory reasons, following the CJEU ruling.
This means that when block policyholders perform insurance transactions, they are acting as principals rather than as intermediaries arranging insurance supply.
What a block policy is
The CJEU coined the phrase “block policy” to describe CPP’s position. We’re aware that the word might refer to a variety of policies in the insurance market. Other terminology, such as’master policy,’ can also be used to denote the type of policy possessed by CPP. It’s crucial to understand what we mean when we use the phrase ‘block policy’ in relation to the CJEU decision in CPP and its broader implications for the insurance exemption in this area.
- The block policyholder and the insurer have an agreement that allows the block policyholder to obtain insurance coverage under specified conditions.
- The block policyholder obtains insurance coverage for third parties from the insurer in their own name.
- The insurance is obtained through a contractual connection between the block policyholder and third parties.
- When it comes to providing insurance to third parties, the block policyholder takes the position of the insurer.
In the sector, this type of policy is very frequent. A block policy is typically taken out by a supplier of goods or services to cover a number of small transactions over a set period of time. For example, a removal company might take out a block policy to provide its customers with insurance against the risk of damage to their belongings during a house move.
Block or’master’ plans are also used by membership groups to obtain insurance coverage on behalf of their members. For example, a pony club may utilize a block policy to provide coverage against the risk of damage or liability for another’s injury when participating in equestrian activities.
A block policy may cover both the risks of the block policyholder and those of their customers. For example, a moving company may purchase a policy to cover both its own risk of damaging its customers’ property as well as its customers’ risk of damage to their property for which the moving company is not responsible.
The ‘policy holder’ on a block insurance policy is often the business that takes out the policy, with the ‘persons insured’ being the policyholder’s clients. The contract may refer to the ‘persons insured’ as the company that purchased the policy and its clients, rather than mentioning each individual customer.
The policyholder pays the insurer a premium based on the previous year’s trading, with changes made at the end of the year when the precise number of people covered under the policy is known.
VAT implications for supplies made by block policyholders
Instead of providing insurance-related services as middlemen, block policyholders provide VAT-exempt insurance transactions as principals.
This means that if you’re a block policyholder, rather than just the amount of any commission or charge you receive, the entire consideration you receive in respect of your own services and the acquisition of insurance cover for your customers becomes income of your firm.
This could affect your partial exemption method’s computation of recoverable input tax (see Partial exemption method) (VAT Notice 706).
There could also be ramifications for the VAT treatment of insurance transactions involving other goods or services, as indicated in paragraph 4.6.
Are insurances subject to VAT?
Commissions on insurance and reinsurance are subject to VAT (RR 16- 2005). A reinsurance premium received by a reinsurance business on which the direct insurer has previously paid VAT is VAT-free (RMC 11-1996). Non-residents’ reinsurance premiums are subject to VAT withholding (BIR Ruling 007-07).
Is insurance claim VAT exempt?
In most cases, insurance transactions are VAT-free. However, there are a number of complications that can occur when it comes to the VAT responsibility of some insurance transactions. One of these challenges is how insurance claims are treated in terms of VAT.
Insurers are unable to recoup VAT paid on replacement items or repairs for policyholders. Regardless of who pays the supplier, this supply is treated as though it were made to the policyholder.
A VAT-registered insurance policyholder, on the other hand, can recoup the input tax paid, subject to the usual regulations. As a result, the insurer will usually give the policyholder compensation before including VAT. As a result, most insurance claim forms question if the policyholder is VAT registered. The insurer will only be responsible for paying the net amount payable if the covered party is able to collect the VAT charged.
In other cases, such as when a company is partially exempt, the company may not be able to fully recover the input tax. Between the policyholder and the insurer, this problem must be resolved. HMRC does not get involved in settling these kinds of problems.
What is considered outside the scope of VAT?
Vat is imposed on the supply of goods and services, hence it is regarded Outside the Scope if no goods or services are provided. This implies you can’t charge VAT on it, can’t be charged VAT on it, and it can’t be included in your VAT taxable turnover.
Are insurance premiums included in gross income?
(The information on this site is provided solely for educational purposes and is not intended to be legal advice.) To comply with IRS requirements, we must inform you that if this site provides tax advice, it was neither intended nor written to be used for the purpose of avoiding penalties that may be imposed under federal tax law, and it cannot be used for that purpose. Under these restrictions, a taxpayer can only rely on expert advice to avoid federal tax penalties provided such counsel is reflected in a thorough tax opinion that complies with federal law’s strict criteria.)
In general, any health-care-related expenses incurred by an employer (for employees or dependents) are tax-deductible in full as ordinary business expenses on both state and federal income taxes. Taxes become a little more complicated after this broad guideline. You may set things up such that your employees save money on taxes. An employee can contribute to the cost of health insurance on a pre-tax basis with just a little paperwork. That is, you subtract the cost of the premium from the employee’s paycheck before calculating and deducting state and federal taxes. This raises the employee’s take-home compensation while also lowering the amount of taxable income.
Employers should be aware that the Affordable Care Act provides healthcare tax credits to small businesses to assist offset the cost of insurance.
Since the 2010 tax year, small business healthcare tax credits have been available. Small business owners must pay at least half of their employees’ healthcare premiums and have 25 or fewer full-time equivalent employees earning an average of $50,000 or less per year to qualify for a tax credit of up to 35 percent of premium costs now and 50 percent in 2014.
Things get a little more difficult after this broad guideline. We’ve broken down the tax implications of offering a group plan for your company in the sections below. Before we begin, there are a few significant distinctions to be aware of. There are a few primary aspects to consider when debating the taxability of health insurance:
- Whether or not an employer’s contributions to health-care premiums are deductible as a business expenditure.
- Whether or whether an employer’s reimbursements for coverage and care costs are deductible as a business expense.
- Whether pre-tax or after-tax income is used to pay an employee’s portion of the premium.
Furthermore, the taxability of health insurance is influenced by how the plan is set up. For example, a worker can contribute to the cost of health insurance on a pre-tax basis with just a little paperwork from the employer, lowering the amount of taxable income and boosting the worker’s take-home pay. Furthermore, when taxable income is lowered, so are related employer-paid payroll taxes. We’ll go through this in further depth later.
Because tax concerns can be difficult, you should speak with an accountant or an attorney about your unique situation.
If you become perplexed, keep in mind that the majority of tax-related queries boil down to one or more of the primary issues described above. These are the most common inquiries that employers and employees have. We’ll respond to them in the sections below.
What Does It Mean to Be Self-Employed?
Keep in mind that the answers to these questions may vary depending on the company’s legal structure. Some employers are classified as self-employed and must follow special guidelines. In general, owners of C corporations and limited liability companies (LLCs) designated as corporations for tax purposes are not considered self-employed. These business owners are treated as employees of the company.
For the purposes of health-care benefits, however, the following sorts of employers are considered self-employed:
Keep in mind as we go over the guidelines below that employers who aren’t self-employed are considered workers, so any restrictions that apply to workers also apply to the employer. A specific rule may apply if the employer is self-employed.
Tax-Deductibility of Employer’s Premium Contributions
Employers frequently wonder whether their contributions to health-care premiums are tax deductible as business expenses. Generally speaking:
- Under federal and state tax law, employer premium contributions for employees, their opposite-sex spouses, and tax dependents are fully deductible as business costs. This is true regardless of whether the company is a single proprietorship, a partnership, an LLC, or a corporation. These laws also apply to owners of C corporations and limited liability companies (LLCs) that are taxed as corporations. For the purposes of determining the tax status of premium contributions, these business owners are considered employees of the company.
- Contributions for the employer, his or her opposite-sex spouse, and tax dependents are 100% deductible as a business cost on the business owner’s tax return if the employer is self-employed.
- Employers should be aware that the Patient Protection and Affordable Care Act (PPACA) provides healthcare tax credits to small businesses to aid with insurance costs. Since the 2010 tax year, several tax credits have been available. Small business owners must pay at least half of their employees’ healthcare premiums and have 25 or fewer full-time equivalent employees earning an average of $50,000 or less per year to qualify for a tax credit of up to 35 percent currently and 50 percent in 2014 through health exchanges.
Tax-Deductibility of Employer’s Medical Reimbursements
Employer-provided reimbursements for medical expenses and employee health-care coverage are treated in the same way as employer-provided premium contributions, as long as certain standards are met. The company must have a written “plan” stating that it will provide health care to its employees by reimbursing all or a portion of medical expenses or the cost of coverage acquired directly by the employees. Before reimbursing an employee, employers should seek documentation of the medical services.
Employers may deduct any reimbursements made for their employees, their opposite-sex spouses, and tax dependents as business costs as long as the conditions are met under federal and state tax law.
Employers who are self-employed can deduct healthcare costs for themselves and their tax dependents as personal expenses rather than business expenses.
Taxability of Value of Health Plan to Employee
Another question that businesses must address is whether the health plan’s valuebasically, the amount of premium costsis taxable to the recipient. Keep in mind that the beneficiary could be a salaried employee or a sole proprietor. The following is the general rule:
- Employees are not charged a tax on the value of their health insurance. Under federal and state tax law, the value of employer-provided health coverage for the employee and their opposite-sex spouse or tax dependents is not taxable income to the employee. The Department of Labor published a notice in November 2014 stating that whether coverage is given under a group or individual insurance policy, it is NOT tax-exempt to the employee.
- An employee who receives coverage for a same-sex spouse, domestic partner, or dependents is subject to federal tax on the value of the coverage given by the employer for the non-tax dependents, less the amount paid by the employee for the coverage (if any). For the purposes of federal payroll taxes, such payments are also considered wages.
- Self-employed business owners are taxed on the value of their health insurance coverage. Owners of sole proprietorships, partnerships, LLCs categorized as partnerships for tax purposes, and 2 percent stockholders in a S corporation are all deemed “self-employed,” as we mentioned before. These business owners will be taxed on the value of their health insurance, but will be able to deduct it from their taxes.
Taxability of Reimbursements to Employees
The reimbursement is normally excluded from the employee’s gross income and is not taxed under both federal and state tax law if the employee pays the premiums on personally owned health insurance or incurs medical costs and is reimbursed by the employer. Premiums for tax dependents and opposite-sex spouses are included. However, in other cases, the reimbursement constitutes taxable income, such as in the following situations:
- If an employer just provides an extra sum to an employee without specifying in writing that the money must be used to pay the health insurance premium, the money is taxable as income to the employee.
- Any reimbursements for the employer’s or their dependents’ health-care costs are taxable income for the self-employed employer.
Employer reimbursements for same-sex spouses, registered domestic partners, and their dependents are likewise exempt from gross income under California law, but not federal tax law.
Taxability of Employees’ Premium Contributions
Unless the employer arranges a unique arrangement under Section 125 of the federal tax code, an employee contribution for health care is generally deducted from pay on an after-tax basis. Employees’ pay is taxed before they pay their portion of the premium if there is no Section 125 plan in place.
- “Premium only” plans that are paid before taxes. Plans that allow employees to pay their premiums using pre-tax cash for themselves and their tax dependents. Employees may also pay premiums for non-tax dependents with pre-tax monies, as long as the value of the coverage is factored into the employee’s taxable income calculation.
- Plans for flexible spending accounts. Employees can use pre-tax cash to pay for certain approved out-of-pocket medical expenses through reimbursement plans.
- Cafeteria or benefit schemes with a wide range of options. Employees can choose between taxable salary and nontaxable perks under these plans.
These plans help you and your employee save money on taxes in a variety of ways. Employees can decrease their federal income tax, state income tax, Social Security tax, and other payroll taxes by contributing to the premium with pre-tax earnings. You will also save employer taxes (FICA and FUTA) on the amount of pre-tax contributions made by your employees.
Beginning in 2013, yearly contributions to FSAs under a cafeteria plan will be limited to $2,500 under the Affordable Care Act; the maximum will be linked to the Consumer Price Index in subsequent years. There is currently no government limit, and the annual ceiling is determined by businesses.
Another thing to keep in mind is that the FSA’s definition of eligible medical expenses is the same as the itemized tax deduction definition. This change, which took effect on January 1, 2011, means that over-the-counter items are no longer covered unless they are prescribed by a physician.
Is exempt the same as outside the scope?
Rate given to semi-essential products and services, such as domestic and residential gas and electricity (5 percent ).
A supply that is exempt from VAT by legislation, such as Royal Mail’s postal services. It is not a taxable supply, and the VAT paid on connected expenses is often not recoverable.
Taxes, MOT certificates, and tolls for publicly operated bridges and tunnels are examples of goods and services that are fully beyond the purview of VAT (as well as wages paid to employees).
1. VAT-free sales and purchases must be included in the total sales (box 6) and purchases (box 7) figures (box 7). Items that aren’t subject to VAT aren’t reported on the VAT return (for example, employee earnings or employment tax payments).
2. If you use the Flat Rate Scheme, exempt sales are included in the flat rate turnover, while sales that are not subject to VAT are excluded.
Do I include outside of scope sales on VAT return?
- Corporation tax and self-employed lone trader income tax have different laws.
- It’ll be crucial if you want to avoid having to register for VAT and other services.
Does insurance count as income?
Life insurance benefits received as a beneficiary owing to the death of the insured individual are generally not included in gross income and are not required to be reported. The taxable amount is generally reported based on the type of income document you get, such as a Form 1099-INT or Form 1099-R.
Does employer-paid health insurance count as income?
Premiums for health insurance paid by an employer are excluded from federal income and payroll taxes. Furthermore, the percentage of premiums paid by employees is usually exempt from taxation. Premiums are excluded from most workers’ tax bills, lowering their after-tax cost of coverage. This tax break helps to explain why the majority of American families receive health insurance via their work. Other factors, such as group coverage economics, also play a role.
ESI Exclusion is worth more to taxpayers in higher tax brackets
Because the deduction for premiums for employer-sponsored insurance (ESI) lowers taxable income, it benefits taxpayers in higher tax rates more than those in lower brackets. Consider a worker in the 12 percent income tax bracket who also pays a 15.3 percent payroll tax (7.65 percent paid by the employer and 7.65 percent paid by the employee). If his company pays $1,000 for his insurance, he pays $254 less in taxes than if the $1,000 was paid as taxable wages. The cost of his health insurance after taxes is consequently $1,000 less $254, or $746. For a worker in the 22 percent income tax bracket, however, the after-tax cost of a $1,000 premium is only $653 ($1,000 minus $347). Savings on state and local income taxes usually reduce the cost of health insurance even more after taxes.
These examples presume that employees are fully responsible for all employer payroll taxes. Because those rates are applied to compensation after the employer’s share of payroll taxes has been deducted, the effective marginal tax rates (25.4 percent for the worker in the 12 percent income-tax bracket and 34.6 percent for the worker in the 22 percent income-tax bracket) are less than the sum of the income-tax and payroll-tax rates (27.3 percent and 37.3 percent, respectively). Thus, if a company raises compensation by $1,000, cash wages will only rise by $929 since the firm will have to pay $71 in increased employer payroll taxes. The total income and payroll tax for a lower-wage worker would be 27.3 percent of $929, or $254. The combined income and payroll tax for a higher-wage worker would be 37.3 percent on $929, or $347. The example assumes that the higher-wage worker’s earnings are below the Social Security tax threshold.
ESI Exclusion is costly
In 2019, the ESI exception is expected to cost the federal government $273 billion in income and payroll taxes, making it the single highest tax outlay in history. It’s also worth noting that the tax subsidy’s open-ended nature has likely raised health-care costs by encouraging the purchase of more comprehensive health-insurance policies with lower cost sharing or less strictly managed care.
Replacing the ESI exception with a tax credit would level the playing field for taxpayers in various tax bands, as well as those who get insurance via their employers vs those who get it from other sources. Making the credit refundable would allow people whose tax liability is less than the credit’s value to benefit. Furthermore, designing the credit so that it does not support insurance on the margin (i.e., a fixed cash amount rather than a percentage of the premium) could help to reduce health-care expenditures.
Background
Employers can consider employee health insurance premiums as an employer-paid benefit that is not subject to federal, state, or Social Security (FICA) taxes under Section 125 of the Internal Revenue Code. The Research Foundation (RF) has a Flexible Benefits Program that allows employees to pay health insurance premiums before taxes, resulting in lower tax withholding and more money in their pockets. The amount of money saved depends on the health plan selected, whether an employee has individual or family coverage, and how many withholding allowances are claimed for tax purposes.
Pretax or After-Tax Biweekly Deductions
Employees are automatically enrolled in the Flexible Benefits Program after selecting the type of health coverage they want (the Research Foundation Regular Health Plan or a Health Maintenance Organization), unless they choose not to participate and complete a “Participant Waiver Form for Regular Employees.”
Who is Eligible
The Flexible Benefits Program is available to active employees who are enrolled in the Research Foundation Regular Health Insurance Plan or a Health Maintenance Organization (HMO).
Domestic Partner Coverage
Domestic partners are not eligible for pretax deductions unless they are deemed dependents by the Internal Revenue Service.
As a result, premiums for coverage that includes a domestic partner who is not a dependant must be paid after-tax. The pretax component of the premium for individual coverage can be kept.
Changes in Participation Status
Once registered in the program, an employee cannot stop or amend the pretax health insurance deduction throughout the calendar year unless there is a qualifying event. Refer to the “Qualifying Events Permitting Pretax Deduction Changes” document for further information.
Although it is not possible to change your Flexible Benefits participation status during the year, other changes may have an impact on your pretax position. If you go from “individual” to “individual plus dependents” coverage without a qualifying event during the year, only the individual portion of the deduction will be pretax, while the dependent portion will be after-tax until January 1 of the following calendar year.
Impact on Social Security
Because pretax health insurance deductions are not deemed part of an employee’s compensation, they are not liable to FICA taxes. The amount of Social Security benefits received upon retirement may be slightly lowered as a result of the reduction in FICA taxes. Unless an employee earns a salary more than the Social Security Wage Base in force during active employment, the employer and employee contribution for FICA taxes will be reduced by the amount of pretax biweekly deductions. When biweekly deductions are taken, FICA taxes are calculated at the current rate.
Impact on Salary-Based Benefits
Pretax health deductions have no impact on an employee’s RF benefits, which are calculated based on compensation. Life and disability insurance, as well as retirement contributions, will continue to be based on gross earnings before the pretax health insurance deduction.
Example of Savings With Pretax Health Deductions
The following is an example of take-home pay for an employee who is covered by family health insurance:
For a person registered in a family health plan, participating in the Flexible Benefits Program, and married filing jointly in 2006, this example results in a tax savings of $823. Savings will differ depending on your real income and tax situation.
Change History
- December 9, 2005 – Added 2006 figures to the example and made other minor changes.
- Convert and update be-a-04 (January 1, 1999) from the Benefits Manual on May 7, 2002. Draft number two.
Is outside the scope of VAT exempt or zero rated?
These rates may be applicable only if certain conditions are met, or in specific circumstances, and are based on one or more of the following:
Certain trades, such as builders and charities, have their own VAT laws that impact how they account for VAT, how much they must pay, and how much they can recover.