Value Added Tax (Place of Supply of Services: exceptions relating to supplies made to relevant business person) Order 2016 (S.I. 2016, No. 726)
(Limited Text - Ministerial Extracts only)
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The Financial Secretary to the Treasury (Jane Ellison)
I beg to move,
That the Committee has considered the Value Added Tax (Place of Supply of Services: Exceptions Relating to Supplies Made to Relevant Business Person) Order 2016 (S.I. 2016, No. 726).
It is a pleasure, Mr Gapes, to serve under your chairmanship. The order introduces a change to the VAT place of supply rules for insurance repair services. Insurers who have structured their arrangements to receive such services free of UK VAT will be charged the tax from 1 October 2016. As is often the case with tax, this measure is somewhat technical. Supplies of insurance are exempt from VAT, which means that insurers do not charge VAT, but cannot reclaim the VAT that they pay on their costs. This measure is about the VAT that they are charged on repair services and aims to counter attempts by insurers to avoid incurring that VAT.
The VAT system includes place of supply rules that determine which country can collect the tax on any given supply. Under the normal VAT place of supply rules, repair services supplied from a repairer to an insurer are treated as supplied where that insurer is established. However, a small number of insurers have structured their arrangements to exploit the rule and avoid incurring VAT on costs that they are unable to reclaim. They do so by routing repair services to an associate offshore insurance firm located in a jurisdiction where no VAT applies, resulting, for example, in no VAT being charged on insured vehicle repairs carried out here in the UK. Such practices deplete public revenues and give avoiders a competitive advantage over those supplying similar insurance products.
We received complaints from UK insurers that such practices challenge fair competition and could force them to set up similar avoidance arrangements. In the summer Budget 2015, we promised to introduce a use and enjoyment provision in UK VAT law to address the issue. Following informal discussions with industry representatives, the Government consulted on a draft order in February 2016.
The order amends the place of supply to where the repair service is used and enjoyed, meaning that repairs carried out on goods used in the UK for UK policyholders will be subject to UK VAT, irrespective of where the insurance provider is based. The changes made by this order will end the tax avoidance by the few. It will yield approximately £5 million per annum from 2016-17 and deter others from implementing similar arrangements, protecting significant revenue. The administrative cost of the change to UK repairers will be minimal, as they already charge VAT in the normal course of events to their UK customers.
In conclusion, the measure demonstrates that the Government will not tolerate tax avoidance. We will take strong action to make sure that we have a level playing field where everyone pays their fair share. This statutory instrument will, in particular, help to ensure that UK insurance businesses can operate on an equal footing with their overseas counterparts, that services are subject to VAT where they are consumed and that we remove an incentive to locate offshore to avoid tax. I therefore commend the order to the Committee.
Jane Ellison
I am sure, Mr Gapes, that there will be opportunities in future to debate the wider issues. I will confine my remarks to the statutory instrument.
On the point about the relatively modest amount of money that will be saved by closing the loophole, as I said, we estimate that it will be £5 million. However, in closing the loophole we expect that we will prevent a far wider problem, which would amount to a considerable sum. To clarify, this is essentially pre-emptive action.
Reaction to the measure has generally been positive. The industry appreciates that we are trying to level the playing field. We involved industry representatives in discussions before the exposure of the draft legislation and they had the opportunity to comment. I note what the hon. Lady says about the definitions of “use” and “enjoyment”. The Government consider that that refers to where a service is consumed, so for insurance repairs, if the goods are to be used in the UK under insurance for a UK risk, the service is consumed in the UK and should be subject to UK VAT.
The measure comes into force on 1 October, and the Government will issue guidance. I make an undertaking, in particular, that officials will check with the chartered institute. If it has any further concerns we are interested in knowing them and in seeing whether we are able to reach a position with which it is entirely satisfied. However, those who have been consulted in the industry certainly feel that the terms are helpfully defined and that the measure will level the playing field.
As I said, the order is about ensuring that we do not have a significant loss of revenue in future and, at the same time, do not put those parts of the industry that are not trying to exploit the loophole behind those that are, acting early to ensure that the industry remains competitive and that everyone is playing by the same rules.
Question put and agreed to.