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Indirect Tax and Insurance: back to business as usual?

David Jordorson, Policy Adviser, Taxation, ABI David Jordorson, Policy Adviser, Taxation, ABI

The tax authorities must face the prospect of the Autumn months with some resolve: there is much to be done to keep the ship of business, and the UK economy, on course. It is uncertain how long the process of the UK exiting from the European Union will take, and what the end result will look like.

Opportunity ahoy?

If the UK is ultimately to have a freer hand, then for example the VAT grouping regime could be made available to a wider range of businesses, the cost sharing group VAT exemption could be more flexible – such changes could potentially benefit partly exempt businesses.
The formal consultation on VAT grouping is not expected to start until October at the earliest. We expect more consultations and announcements in the next few months. Businesses and advisers alike will be looking for hints as well as statements of intent in the Autumn Statement, given the new Chancellor has indicated his readiness to ‘reset’ economic policy.

In relation to the cost-sharing VAT exemption, HMRC is watching the outcome of two cases at the Court of Justice of the European Union (CJEU): EC v Luxembourg and DNB Banka. Advocate General Kokott’s Opinions are due on 6 October, but the hearings on 30 June indicated that while the UK accepts that exemption is available to financial services, it does not have direct effect and is for national law to determine eligibility conditions. The UK and Poland further argued that the exemption is not available for cross-border supplies: hardly encouraging signs for business.

In more insurance-specific territory, we have been pondering the future shape of the VAT exemption for insurance intermediation since March’s CJEU judgment in Aspiro SA. HMRC’s consideration of its implications were delayed – now superseded – by the EU Referendum.
There is no need for a rush to judgment on its implications for UK legislation, when so many other overlapping areas remain to be addressed. We may continue with our own, slightly wider and more ‘commercial’ interpretation for the time being, perhaps indefinitely.

On IPT, there is a sense – not explicitly confirmed – that HMRC is letting the recently announced rate rises ‘bed in’. We understand that HMRC is drafting legislation to give effect to the rate rise implementation changes agreed between the industry and HMT, which will be recommended to ministers with the next increase. However, the ABI will be emphasising that any imminent rate rises will not help to enhance the attractiveness of the UK as a place to do business, something which must be paramount for business and government alike.

Open waters

Looking wider, what about exemptions for insurance and financial services? In theory these could be tweaked, simplified, widened or indeed, restricted. There are a number of areas in which the nature of basic VAT concepts – the VAT grouping and cost-sharing exemptions, supplies to overseas branches and VAT recovery by pension funds and holding companies – are already under fundamental review. Arguably the larger adjustments in prospect reinforces the new administration’s sense of root-and-branch overhaul, but it will require some serious consideration as to how everything fits together when the shape of our relationship with Europe is as yet unclear.

Finally, in future years with the primacy of European legislation ebbing away, what of the direct effect of European jurisprudence? If EU precedent and principles are no longer the basis of treatment, will the liability to VAT change post-secession to one based on UK statute or case law? The Supreme Court will become the final arbiter, but will supplies be treated differently before and after, or will the effect be only prospective? At what point will these things start to change? The implications are indeed significant.

We welcome the thoughts of our members and the industry as we move forward.

David Jordorson is Policy Adviser, Taxation at the Association of British Insurers (ABI).

Last updated 05/10/2016