Insurance intermediaries working with offshore insurers may reclaim UK VAT

The case revolved around complex VAT recovery rules and the interpretation of European Union directives. The dispute involved Hastings Insurance Services Limited (HISL), a UK-based insurance intermediary that introduced UK customers to Advantage, a related company established in Gibraltar. Advantage provides insurance products to customers, while HISL handles broking, claims, and underwriting support services. HISL treated its input tax related to these activities as fully recoverable, arguing that supplies of insurance intermediary services provided to a non-UK recipient should allow for VAT recovery under article 169(c) of the Principal VAT Directive (PVD).

However, HM Revenue and Customers (HMRC) challenged this position, citing the “Offshore Looping Regulations”, introduced in 2018. These regulations were designed to limit VAT recovery in arrangements where services are provided to entities outside the UK but ultimately benefit UK customers. HMRC contended that HISL’s services were effectively supplied to customers in the UK, not to Advantage in Gibraltar, and thus did not qualify for VAT recovery.

Bryn Reynolds, tax expert at Pinsent Masons, said: “Insurers who have used a similar structure but have, until now, assumed that the Offshore Looping Regulations were effective to deny the input tax should now be considering their positions as to whether they can make a VAT reclaim based on this decision in the periods up to 31 December 2022, noting that many of these periods will now be out of time.”

There were three important areas of dispute. First, incompatibility and the definition of customers. Article 169(c) requires that input VAT used by insurance brokers or agents to make supplies of services related to insurance and reinsurance transactions where the customer is established outside the EU to be deductible input VAT. HISL argued that the provisions inserted by the Offshore Looping Regulations were incompatible with the requirement in article 169(c) of the VAT Directive because the “customer” is Advantage and, being based in Gibraltar, the company is therefore outside the EU. HMRC also argued that the customer in 169(c) is the insured person in the UK.

The second area of dispute concerned direct effect. HISL argued that article 169(c) had direct effect in the period up to 31 December 2020 and therefore HISL can rely on it. However, HMRC did not concede that it had direct effect in that period.

Finally, the case considered retained EU law with HISL arguing that it can continue to make a claim based on direct effect for the period after 31 December 2020, up to 31 December 2022, because the direct effect was recognised by the Court of Justice of the EU (CJEU) or a UK court or tribunal prior to that date. HMRC argued that it cannot make such a claim as the VAT Directive is not retained law and the direct effect of article 169(c) was not recognised prior to that date.

The tribunal decided that “customer” in this case meant Advantage, and not the person insured. Customer is not defined in the VAT Directive. The wording of article 169(c) is unconditional and precise in its terms and therefore a literal construction, rather than a construction based on purpose and context, is required. The FTT held that Hastings is free to structure its arrangements in order to reduce its exposure to irrecoverable VAT and therefore the arrangements concerned did not amount to tax avoidance. The arrangements here were actually consistent with the objectives of article 169(c), the tribunal found, which was to ensure EU based intermediaries were not at a disadvantage as compared with non-EU intermediaries.

The tribunal also found article 169(c) did have direct effect prior to 31 December 2020 because it was unconditional and sufficiently precise. With regards to the period after 31 December 2020, the FTT decided that the CJEU and the FTT had, in separate cases decided prior to that date, recognised that article 169(c) had a direct effect and even if it hadn’t, it was “of a kind” that had been so recognised as it was a part of  a group of clauses recognised as having direct effect.

As a result of these conclusions, the FTT decided that Hastings was entitled to deduct input tax incurred in delivering the services to Gibraltar.