Budget 2018: VAT anti-avoidance measure 'part of rise of user-based taxation'

Out-Law News | 31 Oct 2018 | 2:03 pm | 1 min. read

A UK anti-avoidance measure to restrict recovery of VAT when offshore insurance intermediaries provide services to UK consumers is more evidence of the rise of user-based taxation according to one expert.

The ability of insurance companies to recover VAT incurred when insurance is provided via offshore intermediaries to UK consumers will be restricted from 29 March 2019, the UK government announced in Monday's Budget.

Tax expert Eloise Walker of Pinsent Masons the law firm behind Out-law.com said: "It is striking that in the Budget documents, especially the overview, it is implied that the proposal is an anti-avoidance measure aimed at groups who deliberately 'loop' their exempt supplies through non-VAT territories and back to the UK so as to take advantage of the Specified Supplies Order’s lenient input tax recovery mechanism. But what is intended goes far wider than this."

“The detailed policy paper makes no mention of purpose or intent, nor does it refer to the intermediary needing to be a member of, or associate of, a group. We await further detail, but if they go with the draft legislation previously proposed, no avoidance motive or other condition will be required: if you are an intermediary, and the end user is in the UK, input tax recovery will be forbidden, full stop,” Walker said

The measure has been narrowed since it was first announced in July 2018 and will now only apply to insurance intermediary services provided to UK consumers, rather than broader financial intermediary services provided across the EU.

“As a practical matter there will be a very real difficulty for insurance intermediaries to work out where the end customer is located," said Walker. "Even if the information to identify the final customer is available, and it may well not be given that the counterparty will be abroad, significant alterations will be required to internal data processing systems to capture and report the necessary data back so it can be viewed by HMRC during an audit process.”

Walker warned that this measure is further evidence of a growing assumption that consumer location equates to a right to tax. This measure follows a recent tax tribunal case where HMRC tried to claim that a Gibraltar-based insurance underwriter which supplied insurance to UK customers through a UK based broker had a fixed establishment in the UK for VAT purposes. The case was decided in favour of the insurance broker.

“There are many who were hoping that the fact that the Hastings case came to court was an aberration and taxation with reference to the end user as a concept was not here to stay. Sadly, it appears that concept is gaining ground," she said.