UK VAT on insurance intermediary services – exemption expanded?

The CA’s reasoning can be relevant to any insurance policy which has a physical device or a piece of technology as its essential component. Insurance intermediaries should be aware that the exemption applying can impact on their input tax recovery, resulting in extra costs, and adjust their VAT position accordingly. It remains to be seen if such costs will be passed on to the insurers and, ultimately, to policyholders. 

The taxpayer, referred to in the judgment as ISL, was an insurance intermediary who sold telematics car insurance aimed at young drivers under 25. As is customary for policies of this type, a “black box” device was required to be fitted in the customer’s car after the policy was entered into. ISL was responsible for providing and fitting the device, and it incurred input tax costs in doing so. 

The CA considered whether the services fell within the scope of the exemption in Item 4 Group 2 of Schedule 9 of the Value Added Tax Act 1994. The exemption applies to the provision by an insurance broker or insurance agent of any of the services of an insurance intermediary which are related to an insurance transaction and are provided in the course of the broker or agent acting in an intermediary capacity. This needs to be read together with Notes (1) and (2), the relevant parts of which provide that: 

(1) “services of an insurance intermediary” include the carrying out of work which is preparatory to the conclusion of contracts of insurance and the provision of assistance in the administration and performance of such contracts, including the handling of claims; and 

(2) a broker or an agent is acting “in an intermediary capacity” when acting as an intermediary between a person who provides insurance and a person who is or may be seeking insurance or is an insured person. 

The CA concluded that the exemption applied to the services of providing and fitting the device. For a prospective consumer, the services were an integral and indispensable part of the insurance product sold by ISL. Put another way, the policy was a telematics car insurance policy which cannot function without the device being installed in the customer’s car. 

The services were “preparatory” to the conclusion of the policy, even though the device was installed after the policy had been entered into. The CA considered a temporal construction of Note (1) to be unwarranted, given that the policy could not operate as intended until after the device had been fitted. “Preparatory” services therefore extended to “work which is preparatory to the proper functioning of this type of insurance contract”. This interpretation can extend beyond services which are essential to the conclusion of insurance contracts. The CA also noted that the services would in any event qualify as providing assistance to both the insurer and the policyholder in the administration and performance of the contract because without such assistance the policy could not function as intended. 

Further, ISL was contractually bound (to the insurer and to the policyholder) to provide the services and it did so in the course of its contractually agreed activities as intermediary. This satisfied the requirement for ISL to act “in an intermediary capacity”. 

This conclusion was, in CA’s view, consistent with the economic reality of the services, especially since part of the commission received by ISL was attributable to the device and referable to ISL’s intermediary services. Having concluded that the services were essential to the insurance transaction, the CA decided that excluding them from the scope of the exemption would be artificial and would deprive the exemption of its intended effect. What matters is the commercial substance of the contractual arrangements. 

Authored by Adela Komorowska and Philip Harle.