Value-added tax specialists, TMF have noted a ruling against the UK tax authority, HM Revenue and Customs (HMRC) will pave the way for insurance introductory and comparison websites to be treated as VAT exempt services in the future, opening up an opportunity for them to reclaim overpaid VAT.
The ruling however may lead to an unexpected tax bill for insurers with service agreements with such websites, the firm has warned.
TMF made comments following HMRC's announcement that it would no longer contest the VAT cases against InsuranceWide and Trader Media.
Under current EU regulations, insurance services, including brokers and agents, are VAT exempt. This means that they do not charge VAT, but also cannot recover any VAT on their own costs (marketing, office costs, outsourced services etc.).
HMRC took the view that this exemption did not apply to many insurance price comparison websites. Its opinion was that the sites were not materially part of the line of communication between the insurer and the insured or participated in the price or terms negotiations. Further, they did not take on the traditional roles of insurance brokers, including collecting and remitting premiums or claims handling. HMRC viewed such sites as merely advertising services, which are not VAT exempt and should charge VAT to their customers. For some time, this was viewed as contradictory to the EU VAT rules, and was first challenged in the InsuranceWide.com test case.
The tax authorities have been targetting InsuranceWide.com, one of the first comparison sites, with great determination for a number of years, taking it to the High Court and then the Court of Appeal. In the latest round, at the Court of Appeal in April this year, it was ruled that the provision of VAT exempt intermediary services included ‘click through’ introductions without further involvement in the process. The ruling held that such websites were also providing a wider service by bringing together select insurers for the target market.
HMRC last week confirmed that it will not pursue these cases any further and will consider comparison websites as VAT exempt. It has also issued new guidance to help the industry understand the rules it will apply in the future to determine whether VAT is liable or not.
Richard Asquith, Managing Director of TMF Value-Added Tax & Insurance Premium Tax Services, commented:
“This brings to an end a long battle HMRC was waging on comparison sites. Given the conflict with EU legislation, it was never clear that it would win. It now confirms that comparison sites do not need to charge their customers VAT as an exempt service.”
“Any comparison site may be able to recover VAT that it has suffered – this has a three year cap."
“However, there may be an unexpected nasty consequence for some insurers with service agreements with introductory websites. These agreements often include a clause that puts the liability for any unrecoverable VAT onto the insurer. Since the comparison sites are now confirmed as exempt, and therefore cannot reclaim their input VAT, this bill may switch to the insurer under these clauses. The insurers trapped in this situation may wish to require the comparison site to force through a repayment claim to take the sting out of this liability.”