Almost every country gives some goods and services preferential treatment, making them “zero rated” or “exempt.” The government does not tax the retail sale of a “zero-rated good,” but it does offer credits for VAT paid on inputs. This lowers the cost of a product. Zero-rating necessary items like food and utilities, as well as prescription drugs, is a frequent way for governments to reduce the tax burden on low-income households.
EXEMPTING
When a good or business is “exempt,” the government does not tax its sale, but manufacturers cannot claim a credit for the VAT they paid on the inputs used to make it. Exemptions can occasionally raise prices and revenues because they interrupt the VAT chain of credits on input purchases. As a result, governments often employ exemptions only when defining value added is difficult, such as with financial and insurance services.
IN PRACTICE
In 2016, 18 countries in the Organization for Economic Cooperation and Development (OECD) with a VAT “zero-rated” certain commodities, and all but Chile and Japan had at least one reduced VAT rate.
VAT liability of insurance transactions
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.
Is insurance 0 rated or exempt?
It is critical to distinguish between zero-rated and exempt items for VAT reasons when entering transactions into your bookkeeping system. Despite the fact that neither will be subject to VAT, they are considered quite differently for the purposes of VAT calculation. The figure indicated for the value of the purchases (box 7) for the period will be inaccurate if the right rate is not used.
Insurance, Royal Mail postage services, rent (assuming no option to tax), education and vocational training provided by recognized bodies, bank charges and interest, membership subscriptions to professional bodies, donations, salary payments, HMRC payments, dividends, and loan payments are all examples of common exempt items. This is not intended to be an exhaustive list; extra information can be found in Schedule 9 of the VATA of 1994.
Use the rate “No VAT” for registering such items in Xero; other bookkeeping systems may use the rate “n/a.”
If your receipt/invoice does not indicate VAT and it is not one of the items listed in the exempt section above, you should record it in Xero using the rate “Zero Rated Purchases,” whereas other bookkeeping systems may simply use the rate “0%.” Any items reported in this manner will be included in the period’s total purchases (box 7) figure.
Food (with certain exceptions), literature, public transportation (not taxis), and clothing are all zero-rated items (children and protective clothing).
Remember that any input tax (VAT on purchases) claim must be accompanied by a VAT invoice. You should not be claiming VAT if you don’t have this.
Even when input tax (VAT on purchases) has been charged, there are rare circumstances when it is not recoverable. Business entertainment, cars available for private usage, and leasing cars available for private use are all examples of this (50 percent ).
These things should be recorded without VAT in the same way that zero-rated items are.
Is insurance zero rated or exempt Ireland?
Insurance and reinsurance transactions, as well as associated services, carried out by insurance brokers and agents, are excluded.
Are insurance premiums subject to VAT?
On business and personal lines policies, premiums are not subject to VAT. Please note, however, that tax is still due in the form of Insurance Premium Tax (IPT).
- a higher premium – for trip insurance, insurance for mechanical or electrical items, and some car insurance
The IPT rate is lower than the VAT rate, and it is set at 12% by default. Insurance premium tax, unlike VAT, cannot be refunded and, like other taxes, is subject to change. The higher rate has been set at 20%.
- Premiums for risks that are located outside of the United Kingdom may be subject to equivalent levies imposed by other nations.
On the UK Government website, there is a page dedicated to Insurance Premium Tax. Here’s the URL to the page.
What are zero-rated purchases?
- Products that are exempt from value-added taxation are known as zero-rated items (VAT).
- Because they are major contributors to other manufactured items and an important component of a larger supply chain, countries classify products as zero-rated.
- Frequently, zero-rated goods and services are those that are considered essential, such as food, hygiene supplies, and animal feeds.
- Certain meals and beverages, exported items, disabled equipment, prescription prescriptions, water and sewage services are all examples of zero-rated goods.
Is Uber zero-rated or exempt?
The Uber cab company’s VAT concerns in the United Kingdom are being closely scrutinized. Uber London Ltd is being sued in the High Court by Jolyon Maugham QC, who believes the business should have provided him with a VAT receipt for his travel.
Uber does not charge VAT because each of its drivers is treated as a self-employed individual.
Mr Y Aslam and Mr J Farrar v Ober B.V. Uber London Ltd and Uber Britannia Ltd,2202550/2015, proved that Uber’s employees are not self-employed for the purposes of employment law.
As a result, Mr Maugham asserts that their turnover is the same as Uber’s, and that if that is the case, Uber is trading beyond the VAT threshold. Because it provides transportation services, VAT must be charged.
Except where a vehicle may accommodate 10 or more passengers, transportation services are standard rated for VAT.
Are EU Sales zero rated or exempt?
- Exports of goods from the United Kingdom to non-EU nations and EU firms are zero-rated, which means that no UK VAT is levied at the moment of sale.
- The “place of supply” laws dictate which countries you must charge and account for VAT if you provide services.
Are business water rates vat exempt or zero rated?
For most businesses, business water rates are a zero-rated supply. For enterprises in the industrial sector, business water rates might be handled as a standard rated supply. Please see our detailed guide above.
Is there vat on welsh water bills?
Water and wastewater services are considered as a zero-rated supply, thus most businesses and consumers don’t have to pay VAT on their bills. Businesses in the industrial sector, however, are subject to the ordinary VAT rate. For additional details, please see our VAT for water bills page above.