Clarification of VAT rules on buying insurance
The Court of Appeal decision on 22 April 2010 in Insurancewide.com Services Ltd and Trader Media Group Ltd, both of which provided a similar form of internet ‘click through’ service, directing site users to insurance suppliers and brokers, has resulted in changes to and clarification of what constitutes exempt introductory services in connection with a supply of insurance.
Crucially, the court decided it was not necessary for there to be intermediation of the insurance contracts, and the click through services were exempt because they involved much more than just that.
For example, via the click through service, they provided a means of access to insurers who could offer a range of relevant products, and those who ‘clicked through’ were, by definition, looking for insurance. And they appraised and selected insurers according to the competitiveness of their pricing and products and their level of consumer service
These and other factors led the court to conclude that the services in question constituted the business of bringing together insurers and those seeking insurance, rather than being supplied in a sub-contract capacity.
It is also important to note that an insurance broker or agent should be defined for VAT purposes by what they do, and not by how they describe themselves, and by whether or not they fall within the definition of an insurance intermediary for regulatory purposes.
HMRC accept this decision and will allow the exemption where the service provider is doing much more than acting as a ‘mere conduit’ between insurance seeker and supplier. Interpretation of ‘much more’ is, of course, subjective, so HMRC have published some guidelines regarding their view.
They say the person must be in the business of putting insurance providers in touch with potential clients or more generally acting as intermediaries, whether or not this is their main business activity; they must supply the ‘means’ of introduction to the insurance supplier or another intermediary (such as ‘click through’ services); the introduction must be at a time a potential customer is seeking a supply of insurance, whether or not it is concluded, and the services involve playing a proactive role in putting in place the arrangements necessary for the introduction.
Historically, these provisions have caused many major disputes and there is significant case law on the subject, mainly because any services falling outside the exemption and thus standard rated, often involve large sums incurred by business with little or no entitlement to input tax deduction. Inconsistencies between EU and UK law and the interpretation of both further complicate the issue.
Businesses that have applied the standard rate to their introductory services, which they now consider exempt as a result of this decision, may submit a claim to HMRC, which will be subject to the capping and unjust enrichment rules.