EXEMPTIONS - 28.08.2012

Exempt insurance commissions?

Insurance

The provision of insurance is exempt from VAT (Group 2, Schedule 9 of the VAT Act 1994). But many businesses receive commissions from insurance companies for introducing and helping to arrange cover. For example, mechanical breakdown insurance for motor vehicles, extended warranties for electrical equipment. But is this commission also exempt from VAT?

What’s an intermediary?

The legislation allows for the insurance exemption to be extended to an “insurance intermediary”, but what exactly is this?

To qualify for exemption the intermediary must fulfil two requirements. The first is bringing the two parties together - so that’s easy, all you have to do is introduce the customer and insurance company. The difficult part is the second stage which the legislation calls “work preparatory” to arranging the contract of insurance. This can include administrative functions such as assisting in the completion of the application forms and “claims handling” which includes giving customers claims forms and associated help in making a claim and collecting premiums.

Trap. If you don’t provide both the introduction and preparatory work then the commission will be standard-rated income.

Tip. Retailers can ensure that they benefit from this exemption by helping customers complete the application form and providing an after sales service - keeping a stock of claim forms etc.

Trap. Retailers that do have exempt insurance commissions will become partially exempt and could have a restriction on the input tax that they claim (most smaller retailers will not be affected).

Affected by partial exemption?

Input VAT can’t normally be recovered on the costs associated with making an exempt supply. If you make a mixture of exempt supplies and taxable supplies you are partially exempt.

Attribution. The first stage in the process of recovering input VAT is to directly attribute the costs associated with making taxable and exempt supplies. Any purchases directly attributed to making taxable supplies can be recovered in full and input tax relating to exempt supplies cannot. The balance of the input VAT (light, heat and other general overheads) can’t normally be directly attributed, and so will be the subject of the partial exemption calculation. It’s then necessary to carry out a calculation on the input VAT incurred on general overheads, in order to identify the proportion deemed to be related to the exempt supplies. The calculation is based on the formula:

Total taxable supplies

Total taxable and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered.

Tip. If the total exempt input tax is less than: £625 per month on average (£1,875 per quarter or £7,500 per annum); and 50% of the total input VAT, then it can be recovered in full as if it had related to taxable income.