Final settlement Agreement


  1. 1. Overview
  2. 2. VAT and insurance transactions
  3. 3. VAT and particular supplies of insurance
  4. 4. Insurance supplied with other goods or services
  5. 5. Insurance claims
  6. 6. Insurance supplied outside the UK
  7. 7. Accounting for VAT on insurance transactions
  8. 8. What insurance related services are
  9. 9. Insurance brokers and agents
  10. 10. VAT and particular supplies of related services
  11. 11. Related services supplied with other goods or services
  12. 12. Insurance related services supplied outside the UK
  13. 13. Accounting for VAT on insurance related services
  14. Your rights and obligations
  15. Help us improve this notice
  16. Putting things right
  17. How we use your information
  18. Final settlement Agreement

1. Overview

1.1 What this notice is about

This notice explains the VAT liability of insurance transactions and insurance related services. It also gives other VAT related information relevant to the suppliers of such services. This notice does not cover Insurance Premium Tax (IPT). You can find information about IPT in Final settlement Agreement.

1.2 Who should read this notice

You should read this notice if you’re:

  • an insurer
  • an insurance broker
  • an agent
  • supplying services connected to insurance such as claims handling
  • arranging insurance in connection with other goods or services you supply

1.3 How to use this notice

This notice assumes you have a knowledge of the principles of VAT explained in VAT guide (VAT Notice 700). Apart from where specifically stated, the guidance in this notice is not part of the law and does not override it. It reflects only our interpretation of the law and current practice.

It’s unlikely that all the information in this notice will apply to you. To make it easier for you to use the notice has been divided into 2 halves:

  • sections 2 to 7 cover insurance transactions and will be of particular interest to insurers and block policyholders
  • sections 8 to 13 cover insurance related services

1.4 The law covering this notice

Article 135(1)(a) of the EU VAT Directive (2006/112) provides exemption from VAT for insurance and reinsurance transactions and related services performed by insurance brokers and insurance agents.

The provisions of Article 135(1)(a) are implemented in UK law by the Value Added Tax Act 1994, Schedule 9, Group 2.

Items 1 to 3 of Group 2 concerns the exemption of insurance and reinsurance transactions – this is explained in sections 2 to 7.

Item 4 of Group 2 is concerned with the exemption of insurance related services – this is explained in sections 8 to 13.

Before the 1 January 2010 the Value Added Tax (Place of Supply of Services) Order 1992 (SI 1992/3121) determined whether a supply of insurance or insurance related services takes place in the UK.

1 January 2010 saw the implementation of the Place of Supply of Services Directive which formed part of the EU VAT Package (Directive 2008/08/EC). This resulted in substantial changes to the Place of Supply of Services rules. For details see paragraphs 6.2 and 12.2.

The Value Added Tax (Input Tax)(Specified Supplies) Order 1999 (SI 1999/3121) provides for input tax recovery on certain ‘specified supplies’ of insurance – see paragraphs 6.6.1 and 12.3.1.

2. VAT and insurance transactions

2.1 VAT liability of insurance transactions

Insurance transactions are exempt from VAT. Normally VAT cannot be recovered on goods and services bought in to make exempt supplies, see paragraph 7.1 for more information.

Some premiums received under contracts of insurance are liable to IPT. Care should be taken not to confuse IPT with VAT, they’re 2 very different taxes. The term ‘insurance transaction’ for VAT purposes is not the same as the term ‘insurance contract’ for IPT purposes. Unlike VAT, IPT cannot be recovered. More information on IPT can be found in Notice IPT1: Insurance Premium Tax.

2.2 What insurance is

There’s no statutory definition of insurance although guidance can be gained from previous legal decisions in which the essential nature of insurance has been considered.

Generally, something is insurance for VAT purposes if it’s an activity that requires the provider to be authorised as an insurer under the provisions of the Financial Services and Markets Act 2000 (FSMA).

In addition to this, HMRC accepts that certain funeral plan contracts are insurance (and therefore exempt from VAT) even though they’re not regulated as such under the FSMA insurance regulatory provisions. More information on funeral plans is explained in paragraph 3.5.

Vehicle breakdown insurance is also seen as insurance even though providers are given a specific exclusion under the FSMA from the requirement to be authorised. More information on vehicle breakdown services is explained in paragraph 3.6.

2.2.1 Reinsurance

Reinsurance contracts are those under which an original insurer is indemnified by a reinsurer for a risk undertaken by the original insurer. Unless specifically stated otherwise, references to insurance in this notice should also be taken to include reinsurance.

2.3 The regulation of insurance

The FSMA is the law under which financial services, including insurance, are regulated in the UK. The FSMA came into force on 1 December 2001 and replaced the previous law regulating insurance, the Insurance Companies Act 1982.

The provisions of the FSMA make it illegal for UK businesses to effect contracts of insurance without being authorised to do so (with the exception of certain bodies specifically granted exemption from the need for authorisation). The regulation of companies and unincorporated bodies under section 19 of the FSMA is carried out by the Financial Conduct Authority (FCA).

The FSMA (Regulated Activities Order) 2001 defines the activities that are subject to regulation under the Act. There are different classes of insurance risks with different regulatory requirements attaching to them. Insurers can be authorised to underwrite all classes of risks or to underwrite some classes but not others.

Under section 19 of the FSMA, an insurance company is not permitted to carry out activities in the UK or elsewhere, otherwise than in connection with or for the purposes of its insurance business.

2.4 Insurance supplied by unauthorised insurers

Until March 1997, UK law restricted the VAT exemption to businesses authorised (or exempted from being authorised) under UK regulatory legislation. The Court of Justice of the European Union (CJEU) in the case of Card Protection Plan Ltd (CPP), but found that the UK could not restrict its VAT exemption to authorised insurers.

This means that insurance supplied by unauthorised insurers is exempt from VAT. Such businesses could be liable to prosecution under the FSMA and we may refer cases that come to our attention to the FCA.

2.5 Insurance transactions affected by holders of block policies

The decision of the CJEU in CPP also has implications for supplies made by holders of block insurance policies. CPP were holders of a block insurance policy and they were given authority by the insurer to arrange for their customers to become insured under the policy. The CJEU found that CPP were making supplies of insurance transactions to their customers even though they were not themselves insurers.

Following the CJEU decision, we regard supplies made by block policyholders as being insurance transactions for the purposes of the VAT exemption even though they would not be seen as insurance for regulatory purposes.

This means that block policyholders are acting as principals when they’re effecting insurance transactions rather than as intermediaries arranging supplies of insurance.

2.5.1 What a block policy is

The term ‘block policy’ was used by the CJEU to define the policy held by CPP. We’re aware that the term can be used within the insurance industry to mean other types of policy. We’re also aware that other terms, like ‘master policy’ can be used to describe the type of policy held by CPP. It’s important therefore to be clear what’s meant by the term ‘block policy’ when used by us with reference to the CJEU decision in CPP and its wider implications for the insurance exemption in this area.

The main characteristics of a block policy are that:

  • there’s a contract between the block policyholder and the insurer which allows the block policyholder to effect insurance cover subject to certain conditions
  • the block policyholder, acting in their own name, procures insurance cover for third parties from the insurer
  • there’s a contractual relationship between the block policyholder and third parties under which the insurance is procured
  • the block policyholder stands in place of the insurer in effecting the supply of insurance to the third parties

This type of policy is commonly used within the industry. It’s often taken out by a supplier of goods or services to cover a number of small transactions over a set period, for example, a removal company may take out a block policy to provide its customers with insurance against the risk of damage to their belongings during the house move.

Block or ‘master’ policies are also used by membership bodies to effect insurance cover on behalf of their members, for example, a pony club may arrange insurance under a block policy to provide their members with cover against the risk of injury or liability for another’s injury whilst taking part in equestrian events.

Sometimes a block policy will cover the risks of the block policyholder as well as those of their customers, for example, a removal company could take out a policy to provide cover for both its own risk of damaging its customers’ property as well as its customers’ risk of damage to their property for which the removal company is not liable.

A block insurance policy will normally name the business taking out the policy as the ‘policy holder’ with the ‘persons insured’ shown as the customers of the policyholder. Sometimes the contract will name the ‘persons insured’ as the business taking out the policy and its customers, without actually naming each individual customer.

The premium paid by the policyholder to the insurer is calculated on the basis of the previous years trading with adjustments made at the end of the year when the exact number of persons insured under the policy is known.

2.5.2 VAT implications for supplies made by block policyholders

Block policyholders supply VAT exempt insurance transactions as principals rather than insurance related services as intermediaries.

This means that if you’re a block policyholder, the whole consideration you receive in respect of your own services and the purchase of the insurance cover for your customers becomes income of your business, rather than just the amount of any commission or fee you receive.

This could have implications for the calculation of recoverable input tax under your partial exemption method,

see Partial exemption (VAT Notice 706).

There could also be implications for the VAT treatment of supplies you make which consist of insurance transactions with other goods or services, this is explained in paragraph 4.6.

3. VAT and particular supplies of insurance

3.1 The purpose of this section

The guidance in the previous section should be enough in most circumstances to allow you to determine whether something is or is not within the exemption as an insurance transaction. But there’s some areas where the nature of either the supply, or supplier, or both could lead to uncertainty and this section gives guidance on areas where we know difficulty may occur.

3.2 Supplies by Friendly Societies

Friendly Societies are organisations registered under the FSMA. Their main purpose is to provide insurance against distress in the event of:

  • accident
  • sickness
  • old age
  • widowhood

They’re not for profit, membership organisations. Their insurance capital is provided by subscriptions from members.

Where these subscriptions relate solely to the provision of insurance they’re exempt from VAT. If the subscription also covers other goods and services, the part of the subscription relating to those other supplies will not be exempt as insurance but may qualify for VAT relief elsewhere, for example, under the exemption which covers certain supplies relating to health and welfare.

More information on when subscriptions are exempt in their own right and the rules on the apportionment of subscriptions when both taxable and exempt benefits are supplied can be found in Clubs and associations’ VAT responsibilities (VAT Notice 701/5).

3.3 Supplies by medical and welfare funds

Subscriptions to a medical or welfare fund which is not a Friendly Society, mentioned in paragraph 3.2, but it provides specified non discretionary benefits in the event of, things like, illness or accidents are exempt from VAT as insurance. Employers often operate this type of funds for the benefit of their employees. Under such schemes, the employee has a legal right or entitlement to a benefit on the occurrence of a specified event.

A scheme would not amount to insurance, but where benefits are not specified and the amounts paid out are entirely at the discretion of the persons controlling the fund. If this is the case, the subscriptions may qualify as donations and be outside the scope of VAT because they’re not consideration for any supply.

See Clubs and associations’ VAT responsibilities (VAT Notice 701/5) for more information on the VAT treatment of subscriptions.

Final settlement Agreement