17 Feb 2010HMRC Attack Insurance Arrangement Fee

Taxation

Traders which supply insurance contracts on products where the policies are underwritten by insurance companies should take note of a little-reported decision of the court. It involved Homeserve, which supplies insurance contracts to householders on behalf of insurance companies.

Homeserve’s documentation split the contractual agreement into two parts. The first part created a contract between the householder and the insurance company. The second part was a separate contract, between the householder and Homeserve, which represented an administration fee. Homeserve used this reasoning to exempt the administration charge from Insurance Premium Tax (IPT).

HM Revenue and Customs (HMRC) considered that the whole of the charge to the householder should be subject to IPT and the VAT Tribunal agreed. Homeserve appealed to the High Court, which upheld its appeal, ruling that the phrase ‘separate contract’ meant a contract which was not the contract between the householder and the insurance company.

HMRC are said to be planning an appeal, so watch this space.

This case illustrates the importance of making sure that contractual documentation is watertight as far as indirect taxes are concerned. If you make supplies that involve more than one VAT rate on a single charge, it is worth reviewing your documentation to make sure HMRC cannot justify the assertion that you are making a single ‘composite supply’, which may lead to more tax being payable than you anticipated.

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