For example, an insurer may combine car and life insurance premiums into a single invoice; the life insurance must be recognized as exempt, while the car insurance is subject to 5% VAT. Insurance contracts are recognized as ongoing supplies of services for VAT purposes, according to the FTA.
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.
Do we charge VAT on insurance?
It’s worth noting that, under section 2 of the Value Added Tax Act No. 89 of 1991 (the VAT Act), premiums paid under a long-term insurance policy are considered a financial service and are thus VAT-free. The following are included in the definition of “financial services” in Section 2(1)(i) of the VAT Act:
“The provision of a long-term insurance policy, or the transfer of ownership of such a policy, or the provision of re-insurance in respect of any such policy: Provided, however, that such an activity shall not be deemed a financial service to the extent that it includes the management of a superannuation scheme;”
As a result, any premiums paid by a company during the lives of its directors or workers will be exempt from VAT, resulting in no input credit on premiums paid under such a policy. If a payment is made under a long-term insurance policy as a result of the death of an employee or director, the payment will not be subject to VAT, unlike payments made under short-term insurance policies.
The nature of the coverage will also influence whether or not the premiums paid are deductible for regular tax purposes. If the insurance complies with section 11(w) of the Income Tax Act No. 58 of 1962 (the Act), the premiums paid under the policy can be claimed as a deduction by the firm. If a payment is made under the policy, the funds will belong to the company and will be subject to standard taxation. When a taxpayer purchases a second-hand policy as an investment, the proceeds received on the partial or complete surrender or dispose of that policy are not subject to VAT. This is because such a sale will fall under section 2(1)(i) of the VAT Act’s definition of financial services. In this situation, the business will be subject to Capital Gains Tax (CGT) in accordance with the rules set out in the Act’s Eighth Schedule, as long as it can demonstrate that the gain deriving from the policy is capital in nature.
Is VAT charged on insurance Ireland?
UPDATES ON IRISH VAT. Because providing insurance is a VAT-exempt business, VAT paid on costs associated with providing insurance is often not recoupable (with the exception of insurance services to customers located outside the EU).
Can I claim insurance premium tax on my VAT return?
Insurance Premium Tax (IPT) is a fee charged by insurers in addition to the cost of your insurance policy. Depending on the sort of insurance you choose, you may be charged a cost of 12 percent or 20%.
In the last two days, two different consumers have inquired about claiming IPT.
IPT is levied at a rate of 20% when you buy a mechanical item that comes with an insurance coverage.
It is presumed that because this rate is the same as the VAT rate, it is VAT that can be claimed back.
It isn’t, and it isn’t possible to claim it.
IPT is an additional insurance expense that should be added to the insurance cost to get the entire cost of insurance.
Despite being divided on your invoice or receipt, the two expenses do not need to be separated in your accounts because they are one cost.
This is due to the fact that insurers are required to disclose the rate and amount of IPT.
Insurance and the IPT you are charged are permitted business expenses that can be deducted from your net profit by deducting them from your turnover.
Insurance companies that must charge IPT must register with HMRC and file returns every three months.
Is insurance premium tax the same as VAT?
Although Insurance Premium Tax (IPT) is not VAT, it is sometimes referred to as “VAT for insurance.” It is a tax levied on insurance premiums paid under taxable insurance contracts. It is charged at two rates: a normal cost of 12% and a higher rate of 20% for insurance provided with certain goods and services.
Is there tax on insurance in Ireland?
Non-life insurance policies linked to risks located in Ireland are subject to a charge of 3% of gross premiums paid by insurers. This levy is due four times a year, within 25 days of each quarter’s conclusion (i.e. within 25 days from quarters ending 31 March, 30 June, 30 September, and 31 December).
Premiums paid in relation to non-life insurance plans are subject to an additional 2% contribution to the Insurance Compensation Fund. The payment applies where premiums are collected in respect of risks based in Ireland, similar to the 3% non-life insurance levy. In addition, the payment is due four times a year in combination with the non-life insurance premium levy.
Certain classifications of life insurance policies linked to risks located in Ireland are subject to a 1% levy on gross premiums paid by insurers. This levy is due four times a year, within 25 days of each quarter’s conclusion (i.e. within 25 days from quarters ending 31 March, 30 June, 30 September, and 31 December).
Each non-life insurance policy with a risk in Ireland is additionally subject to a stamp duty responsibility of one euro (EUR).
All premiums produced by motor insurers are subject to a 2% contribution to directly finance the Motor Insurers’ Insolvency Compensation Fund (MIICF). The MIICF’s goal is to create a reserve fund, which will be administered by the Motor Insurers’ Bureau of Ireland (MIBI), to ensure that outstanding policyholder claims are satisfied if a motor insurer goes bankrupt. The additional levy is expected to stay in place for several years in order to build up the required reserves of EUR 200 million. The rate is predicted to drop to 0% after the project is completely funded.
Risk equalization fixed levies apply to certain voluntary health insurance policies. Risk equalisation is a technique aimed at equitably neutralizing discrepancies in insurers’ costs caused by differences in the insured’s age profile. The levies are revised on a monthly basis and now range from EUR 52 to EUR 449 per policy (on or after 1 April 2021), depending on your age profile and the kind of coverage.
The standard VAT rate in Ireland is 23%
A wide range of goods and services are subject to the statutory VAT rate of 23%. Motor vehicles, adult apparel, electrical goods, gasoline, alcohol, cigarettes, most home goods, and non-basic foodstuffs are among these items.
Most professional services and telecommunications are subject to the regular VAT rate.
All goods and services that do not fit into one of the lower rate categories specified below are subject to the regular rate of VAT. Details on decreased VAT rates can be found below.
(The regular rate of VAT was temporarily decreased to 21% between September 2020 and March 2021.)
Do I have to pay insurance premium tax?
Is it necessary for vehicle insurance customers to pay Insurance Premium Tax? Yes, consumers’ premiums include IPT, and any increases will have a direct impact on the amount they pay. It is not, however, a fixed price that applies to all policies: IPT has the greatest impact on those with the highest premiums.
What is premium tax on car insurance?
The Insurance Premium Tax (IPT) is a tax on all types of insurance premiums, such as car, home, and pet insurance. IPT is applied to travel insurance, electrical appliance insurance, and some automobile insurance at two rates: a standard rate of 12 percent and a higher rate of 20 percent.