Andrew Needham looks at the VAT consequences of block insurance policies.
The key characteristics of a ‘block policy’ are that there is a contract between the block policyholder (sometimes called the master policy) and the insurer, which allows the block policyholder to affect insurance cover subject to certain conditions.
The block policyholder, acting in their own name, procures insurance cover for third parties from the insurer. There is a contractual relationship between the block policyholder and third parties under which the insurance is procured, and the block policyholder stands in place of the insurer in effecting the supply of insurance to the third parties.
Is FSA registration required?
Until March 1997, UK law restricted the VAT exemption to businesses authorised (or exempted from being authorised) under UK regulatory legislation.
However, the ECJ found that the UK could not restrict its VAT exemption to authorised insurers only. This meant that insurance supplied by unauthorised insurers is exempt from VAT.
Following the ECJ decision, HMRC now regards supplies made by block policyholders as being insurance transactions for the purposes of the VAT exemption, even though they would not be seen as insurance for regulatory purposes.
The provisions of the Financial Services and Markets Act 2000 (FSMA) make it illegal for UK businesses to effect contracts of insurance without being authorised to do so. So, you can obtain VAT exemption but you might be considered to be providing insurance illegally if not registered with the financial services authority (FSA)!
Who uses block policies?
Businesses that are likely to be providing insurance under a block policy alongside other goods or services are those where insurance is intrinsically linked with their principal supply. For example:
- a removal company, which provides insurance against the risk of damage during the move; or
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a sports organisation, which provides its members with cover against the risk of injury or liability to another person whilst taking part in an event.
Other businesses that provide block policies include vehicle rental companies, hire companies, membership bodies to effect insurance cover on behalf of their members and storage companies.
A block insurance policy will normally name the business taking out the policy as the ‘policy holder’ with the ‘persons insured’ shown as the customers of the policyholder, normally without actually naming each individual customer.
VAT saving
If a business provides insurance under a block policy and charges its customer for it, the business can split the value of its supply and obtain a VAT saving; this can be particularly useful when dealing with the public as the business can reduce its charges.
For example, a car hire company hires a car for an all-inclusive price of £70.00 per day. The VAT on this would be £11.67. If it separates out the insurance element, which is calculated as being £15.00, the invoice would show exempt insurance of £15.00 with a hire charge of £55.00 of which £9.17 was VAT. This would give a VAT saving of £2.50 per day, which could either increase the profits or be passed on to the customer as a lower price, making it more competitive.
Because the business now has exempt as well as taxable income it will have become partially exempt and will need to undertake a partial exemption calculation, which could result in some restriction of the input VAT that can be claimed. However, any possible VAT restriction would be far less than the VAT savings obtained.
Practical tip
If a business is providing its customers insurance under a block policy it should make a separate charge for it and obtain a VAT saving. But remember to
