Companies in the insurance industry have been warned that they could incur increased VAT liabilities and associated costs on certain services bought in from any country outside the UK, under changes to the VAT international services rules which will take effect on 1 January 2010, according to insurance consultant Moore Stephens.
It has also alerted to the fact that under the changes, many more non-VAT-registered businesses may find themselves caught in the VAT net. The changes result from a widening of the services which currently attract VAT under the ‘reverse charge mechanism’ to include almost all business-to-business services.
The motivation behind the changes is to try to establish a level playing field for VAT rules relating to the cross-border supply of services, but the result is that, wherever possible, VAT will be payable in the country where the customer is based.
Gwen Ryder, the firm’s Head of VAT, said: “The point of the reverse charge mechanism, and the changes which will increase its scope, is to put the importer of most business-to-business services in the same position as it would have been if it had contracted for those services in its own country. This will mean that UK businesses will have to account for VAT via the reverse charge mechanism on most services received from overseas suppliers.
“The effect of the reverse charge is that the importer of a specified service must account for output tax on its VAT return, but may recover a ‘contra’ amount of VAT as input tax on the same return to the extent allowed. This means that the position for businesses which are ‘fully taxable’ is revenue-neutral. For VAT-registered businesses in the insurance industry, the position is already very different. Such businesses are ‘partly exempt’ and can only recover a percentage of this reverse charge input tax.
“Insurance businesses which are not even VAT-registered in the UK should be aware that the reverse charge requirements which applied to them before 1 January will not go away. In fact, because the scope of the reverse charge will widen, many more non-VAT-registered businesses will find themselves caught in the VAT net.
“The changes do not affect only UK-domiciled companies, but apply throughout all EU states. They do not affect the supply of exempt insurance and reinsurance-related products and services themselves, the VAT status of which remains unchanged under the new legislation,” she added.
