HMRC breaks silence on UK VAT recovery rules for insurance intermediaries

HMRC has published a new briefing highlighting a change in the right to input tax deduction for insurance intermediary services supplied outside the UK before 31 December 2023 providing a potentially valuable opportunity for insurers, insurance intermediaries, brokers or agents supplying services linked to the insurance sector.

The policy paper follows a significant decision issued by the FTT earlier this year which found that input VAT was still recoverable by Hastings Insurance Services Limited (HISL) on services supplied to a Gibraltar-based entity even when the insured policyholders resided in the UK.

Although generally the supply of insurance intermediary services is exempt from VAT, thereby preventing the intermediary from recovering its input VAT, the UK’s Specified Supplies Order allowed intermediaries to recover input VAT where services were being supplied to customers outside the UK.

However, HISL challenged the introduction of legislation from 1 March 2019 that purported to change the law to clamp down on so-called offshore looping – a process by which businesses seek to reduce their VAT liabilities by routing supplies to UK customers through an offshore intermediary service. The 2019 change to the legislation had been introduced following an earlier successful legal challenge by HISL. The 2025 challenge was brought on the basis that the change to the law was contrary to the EU VAT directive.

The FTT agreed with Hastings in its finding, issued on 3 March, that it was incompatible with EU law and that they could continue to rely on the direct effect of EU law after IP completion day – 31 Dec 2020.

In its briefing published on 10 November, HMRC confirmed that it has not appealed the FTT’s decision. Crucially, the paper explicitly highlights that intermediaries that have submitted VAT returns on the basis that the 2019 change to the law was valid will now be able to make claims to recover input VAT going back four years – the standard period for amending VAT return assessments.

HMRC states that it now accepts that the direct effect continued until 31 December 2023, but that it does not apply from 1 Jan 2024. It is basing the distinction on the Retained EU Law (Revocation and Reform) Act 2023 (REULA), which repealed the legislation that retained the right to directly effective rights.

HMRC says that even though VAT and excise law is expressly, by virtue of the Finance Act 2024, to be interpreted in the same way as it was before 1 January 2024, this interpretation does not maintain directly effective rights:  “From 1 January 2024, Article 169(c) of the principal VAT directive cannot be relied upon and Article 3A of the SSO restricts the right to deduct input tax for insurance intermediary services to circumstances where the final consumer (the insured party) belongs outside the UK.”

Bryn Reynolds, a tax expert at Pinsent Masons, said the long-awaited confirmation of HMRC’s position substantially changes the VAT recovery rights in the UK’s insurance intermediary sector. “Given HMRC considers the decision to be time-limited, the clock is now very much running for businesses to submit a reclaim for the input tax,” he said. “Claims should be submitted as soon as possible to prevent periods going out of time."

Reynolds said that HMRC’s interpretation of the EU provisions may give rise to further litigation, but that for now the briefing provided welcome clarity for UK insurance intermediaries.

Alexis Roberts, insurance expert at Pinsent Masons, added: “UK-based intermediaries will need to look at this policy paper carefully and review their structures, operating models and client propositions.”