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Brexit: have you considered the VAT impact of relocation?

Nick Warner

There are a number of tax risks arising from Brexit-driven relocation, but one of the most significant may turn out to be VAT. So, what VAT issues could be causing insurers sleepless nights amid the dark uncertainty that is the current Brexit negotiations?

The uncertainty over passporting has caused insurers to consider EU countries where they could set up their insurance carrier. Lloyd’s of London, for example, has decided to set up in Brussels, but the most popular destinations so far have been Ireland and Luxembourg.

Insurers have mostly been focused on the local regulatory requirements and specifically how much substance (and capital) is required to satisfy the local regulator. But it is now dawning on them that the VAT issues, which have taken a back seat to both the regulatory and direct tax issues, might represent a large, and possibly prohibitive, cost.

Transferring business between insurance carriers
So, your business is currently written out of the UK, possibly with EU branches, and this may well need to be transferred, cross-border, to your new carrier. In most circumstances this will have to be through the mechanism of the Part VII transfer, requiring an approach to the UK regulator and the court. The starting point for VAT is that anything done for a consideration is liable to VAT, and the problem for insurers is that if the transfer is a supply of services, then a reverse charge at the standard rate of VAT will be levied on the new EU carrier. Because insurance is generally VAT exempt throughout the EU, it will not be possible for the new carrier to reclaim all of this VAT, most of it being a direct cost.
Those that have dealt with the VAT aspects of Part VII transfers will be aware that such a transfer may qualify as the transfer of a going concern (TOGC), which means that as the acquiring company will stand in the shoes of the seller, there will be no supply and no VAT will therefore be due. Given the amounts involved, it has been best practice with UK to UK Part VII transfers for the seller to seek a non-Statutory Clearance from HMRC to confirm that it will qualify as a VAT-free TOGC.
Cross-border Part VIIs are more complex – and therefore more risky. Even if the country where the new carrier is located has implemented the TOGC article in the main Directive (Article 29), the European Court of Justice case in Swiss Re cast doubt as to whether the transfer of a portfolio of polices will constitute a TOGC. Although the case was primarily focused on whether the transfer constituted an insurance transaction (and therefore exempt) there was some collateral fall-out over whether TOGC treatment could apply - at best, there will be cases where it might not apply, depending on the individual facts.

This leaves insurers with uncertainty as to whether such major transfers will be VAT-free, and a lot will depend on the attitude of the tax authorities in the country where the new carrier is established, because if they are not, this will potentially trigger a reverse charge calculated on the value of the transfer.

Carrier in the EU, back office in the UK
Anxious to avoid the many employment issues associated with relocating a large number of employees out of the UK and into the new carrier’s country, many insurers’ modelling has been centred upon what is the minimum number of employees required in the new carrier. So, you will have a situation where the new carrier writes the business, but it is mostly serviced from the UK. This will result in a recharge from the UK to the new carrier, which will mean that a reverse charge is levied on the carrier when the service is received, unless the service from the UK falls within the recipient country’s VAT exemption for insurance.

Following some adverse rulings in the CJEU, it is now well-established that most back office insurance-related services are not exempt, and therefore liable to VAT (at the moment it is only the UK, and to an extent, Ireland, which exempts such services).

In addition to servicing and claims handling, if the provider also prospects and finds the original business to place in the new carrier, then there is an argument that the associated back-office services, such as claims handling, may fall to be VAT exempt under the CJEU decision in the Andersen case. Much will depend however on the local tax authority’s attitude and approach.

In many cases, the intention will be to reinsure as much of the business back into the UK, with the premiums being capable of VAT exemption. It looks as though a 100% reinsurance arrangement may not be permissible, but it may be possible for the claims handling and insurance administration services associated with the reinsurance to be included in the reinsurance premium paid by the new carrier to the UK reinsurer. This would mean that the claims handling and administration is the responsibility of the reinsurer. For VAT, this might work, but the amounts involved are likely to be large, and it is far from certain.

Given the growing importance of VAT in planning for Brexit, it is now vital that these considerations are included in the insurer’s core plans.

How we can help
Our VAT insurance team consists of experts who between them have worked in both industry and the profession, and have developed not just the technical VAT knowledge but also an understanding of what makes the insurance sector, and the professionals in it, tick. We know what it is to be a client, and what a client expects from a good tax adviser.

We understand that businesses want to comply with their tax obligations, but at the same time wish to do so as efficiently as possible. We understand that whilst an aggressive tax planning scheme may bring a short term cash windfall, no finance director wants to spend days in the court justifying it!

We therefore have a policy that we will not encourage or promote any artificial arrangements, but rather concentrate on the risks and opportunities that arise as a result of changing case law and legislation. We want to know enough about your business to spot these in time for you to take action.