1. Technical Tax Masterclass: Claims Costs and VAT Peter Hewitt FTII Head of European Tax Practice, FiscalReps

2. Agenda Background to VAT VAT on Claims Costs Planning for VAT – Claims Fulfilment Issues to Consider Examples Summary

3. Background to VAT Value Added Tax (VAT) is a tax charged on business transactions (the supply of goods or services for consideration) Most countries have some form of VAT Rates vary by country and by type of goods/services Businesses register for VAT, so that they can reclaim the VAT that they pay suppliers for raw materials and stock that they purchase Some services (e.g. insurance) are exempt from VAT in the UK and other countries (although other taxes are levied on insurance premiums)

4. The rates of VAT in the EU are between 15% (Luxembourg) and 27% (Hungary) with an average between 21% and 22% Background to VAT V V A A T T There are also reduced and super-reduced rates, e.g. in the UK: Standard Rate = 20%Reduced Rate = 5%Zero Rate = 0% There are also reduced and super-reduced rates, e.g. in the UK: Standard Rate = 20%Reduced Rate = 5%Zero Rate = 0% Reduced rate applies to some residential building works, domestic fuels and heating products, and other goods in the public interest

5. Zero rate applies to food and some drink, aircraft and ship manufacture, some residential building works, exports of goods and other services/goods in the public interest Background to VAT V V A A T T Insurance, finance and many health services are exempt from VAT Businesses that supply zero-rated goods are able to recover input tax, but businesses that supply exempt goods and services cannot recover input tax

6. Insurance is exempt if supplied to an EU based policyholder (person receiving the insurance supply) Background to VAT V V A A T T Outside the scope of VAT with the right to recover input tax (OSR), if policyholder is outside the EU Therefore, it is important that EU based insurers reduce the incidence of VAT on costs incurred, unless they relate to non-EU policyholders

7. VAT on Claims Costs EU VAT is governed by EU VAT Directive 2006/112/EC UK VAT is governed by VAT Act 1994 and associated regulations Place of supply was amended from 1 st January 2010 for some services – most now subject to VAT where received Deutsche Ruck challenged the notion that VAT on claims costs should be recovered at the insurance company’s residual rate Instead, it should be recovered according to the policyholder’s place of establishment/usual residence, ie attributed to a particular policy The High Court agreed with Deutsche Ruck

8. VAT on Claims Costs Where UK VAT is charged: o It should be recovered in full if it relates to a policy with a non-EU policyholder o It should not be recovered at all if it relates to a policy with an EU policyholder Where UK VAT is not charged: o Insurer should account for reverse charge VAT on a taxable supply, and Recover all of the VAT if the cost relates to a policy with a non-EU policyholder Recover none of the VAT if the cost relates to a policy with an EU policyholder What if the residual recovery rate has been applied?

9. VAT on Claims Costs HMRC are raising assessments where: o Residual VAT has been recovered, where there was no entitlement (EU policyholders) o No reverse charge VAT has been accounted for where there is an EU policyholder They are NOT concerned if: o No VAT has been recovered, but the policyholder is non-EU o No reverse charge VAT has been accounted for but the policyholder is non-EU But for non-EU policyholders there may be an under claim, where VAT has been charged on costs

10. Planning for VAT – Claims Fulfilment Goods – consideration must be given to goods being supplied to the insured party, if they can recover the VAT Services – if the insurer is in a VAT jurisdiction, or services are otherwise VATable (e.g. land-related) it may be better to have the services received by the insured, if they can recover the VAT Services – if the insurer is in a non-VAT jurisdiction, it may be better to have the services supplied to the insurer, if the insured cannot recover the VAT Exemption for services – some services such as claims handling or loss adjusting may qualify for exemption as “insurance-related” services, so the application of this exemption must be maximised (and these should be supplied to the insurer usually)

11. Issues to Consider – General Points 1.Consider upfront if claims costs should be borne by insurer directly or by insured and reimbursed by insurer 2.Consider the claims handlers/loss adjusters that will be used, and whether their services can be made VAT exempt 3.On suffering a loss, consider whether any VAT charged by fulfilment providers is correctly charged 4.Make sure invoicing is to the correct party: o Insured if supply is to the insured, so that the insured can reclaim, or o Insurer if supply is to the insurer, so that no VAT is charged

12. Issues to Consider – Loss Adjusting Let us assume the UK is the insured base, and the UK is also the insurer base (i.e. establishment) Loss adjusting is an expert service in relation to valuation – and is not insurance-related (unless the loss adjustor has delegated authority to settle a claim) – so loss adjusting is not normally exempt Can the insured be seen as the recipient of the loss adjustor’s service? (if insured is VAT registered) Can DA be granted? (to make supply exempt)

13. Issues to Consider - Claims Fulfilment Let us assume the UK is the insured base, and the UK is also the insurer base (i.e. establishment) Property damage claim Claims fulfilment - can the insured be seen as the recipient of the supplies of goods and services(if insured is VAT registered)? This also needs to be considered up front as it will affect the sum insured Same goes for motor claims? What if insured is a private person?

14. Examples – Property Insurance Insurer should indemnify UK VAT registered policyholder for cost of repairs (not settle the costs directly to the builder) This is because the policyholder may be able to recover the VAT, so the claim to the insurer can be net of recoverable VAT Claims handling is VAT free (it’s an insurance-related service) but loss adjusting is VATable in relation to UK property (it’s a valuation service) The insured should appoint the loss adjustor as they may be able to recover the VAT If that is not possible, the insurer should consider giving the loss adjustor delegated authority (making it a claims handler)

15. Examples – Motor Own Damage A non-EU insurer should both arrange and settle the repair cost directly with the repairer (excluding VAT) – cash indemnity not benefits in kind insurance This is because, if the insurer buys the services directly, there is no VAT charged on this service However, HMRC frown on this process as a lot of insurers set up in Gibraltar to gain such an advantage, and if it can be proved that the non-EU establishment is purely to avoid VAT it can be ignored Claims handling is VAT free if the insurer is based in certain EU countries (UK, Ireland and a few others) or in a non-EU country without VAT Loss adjusting is VAT free if the loss adjustor is appointed by the non- EU insurer, but VATable if appointed by the UK insured

16. Examples – Contents or Stock Insurance An EU or a non-EU insurer should indemnify the UK policyholder for the cost of replacement of UK contents or stock Benefits in kind insurance is not advisable This is because VAT on goods is charged where the goods change hands - If UK policyholder buys the replacement goods, they may be able to recover the VAT, whereas the insurer will not Claims handling is VAT free in the UK and some other EU countries Loss adjusting is VAT free if the loss adjustor is appointed by a non-EU insurer, but VATable if appointed by the UK insured or by an EU insurer (generally)

17. Summary VAT is a complex tax which varies by jurisdiction and by type of goods or services Insurance is exempt in the EU, which means that insurers cannot recover input VAT on purchased goods and services Sums insured should take into account any VAT cost, so underwriters must consider this upfront Most insurers based in jurisdictions with no VAT can avoid input VAT as Article 44 states that the rate applicable shall be the rate in the place of establishment of the purchaser EU based insurers may not be able to avoid input VAT on services received by them, but can consider having the policyholder receive the services instead

18. Summary In order to ensure that the most effective tax treatment is achieved, the insured and insurer should agree upfront: o Who should pay for the immediate cost of losses arising in relation to different types of loss? The insured or the insurer? o How should the supplier of goods or services invoice for their supply? (e.g. inclusive of VAT if supplied to the UK, or exclusive of VAT if supplied to Gibraltar) o When should VAT be charged? Always in relation to Property claims, but otherwise only when the supply is within the UK or another VAT jurisdiction o Why should VAT be charged? It is charged if the supply is not exempt (i.e. insurance-related such as claims handling) and the supply is within the UK or another VAT jurisdiction o What rate should apply, if VAT is correctly chargeable? The answers to these questions should be explicit within the policy documents and / or any claims handling agreements / protocols

19. Questions