09 01 2019

UK Legislates To Close Insurance VAT Loophole

On December 11, 2018, the UK Government tabled The Value Added Tax (Input Tax) (Specified Supplies) (Amendment) Order 2018 before the House of Commons to close a VAT avoidance loophole that is exploited by some UK insurers.

The legislation is intended to prevent offshore looping, a VAT avoidance technique that involves UK insurers setting up associates in non-VAT territories and using these associates to supply their UK customers. It will be effective from March 1, 2019.

Currently, the Specific Supplies Order allows companies who export certain financial services from the EU to reclaim the VAT they incur while providing those services. When these services are supplied inside the EU, this VAT cannot be reclaimed. The Order is currently being exploited by companies that form arrangements with organizations outside of the EU to re-supply or "loop" those services back to United Kingdom consumers, allowing themselves to reclaim the VAT.

The legislation will restrict the application of the Specified Supplies Order in certain circumstances to prevent offshore looping. The Government previously said that, in response to feedback it received during a consultation that concluded at the end of September 2018, it will refine the measure to target it more tightly on the known cases of avoidance. As such, it will now apply to insurance intermediary supplies only and VAT recovery will only be restricted when the principal supply is made to consumers located within the UK, rather than within the UK and the EU as originally drafted.

At present, intermediary services (as described in item 4, group 2, schedule 9 Value Added Tax Act 1994) that are supplied to a person outside of the EU are specified, allowing recovery of input VAT no matter who the final consumer of those supplies is. Intermediary services made in respect of a principal supply which is made to a customer belonging in the UK will no longer be specified, and therefore no longer have a right to recover input tax.