Will VAT hike increase number of uninsured drivers?

23 March 2016

David Wilson

Insurance premiums in the UK could face a significant increase as a result of a European Court decision that ‘outsourced’ third party claims settlement services are subject to VAT.

Currently, the UK exempts from VAT, the provision and administration of insurance contracts, including the handling of claims and the collection of premiums. It has generally been accepted however that this has been too broad an interpretation of EU VAT law and, while it has been expected for some years, that there would be changes to UK VAT law. None has materialised.

In anticipating the risk of such legislative changes, many of the UK’s insurers ensured that outsourcing contracts have been quoted ‘exclusive of VAT that is or may, be appropriate’, or by agreeing a mechanism for any allocation of VAT that may become due.

In light of this EU ruling, many administrators and insurers, may however now wish to negotiate new clauses or revisions to existing ones. As any VAT being applied to outsourced services would not be recoverable by the insurers, additional VAT costs may be reflected in premiums paid by end customers. As such, if (when?) the UK government does apply VAT at twenty percent to claims handling services, it strikes us that this EU VAT ruling will almost certainly lead the left hand taking back anything the right hand might give back to the consumer.

In last year’s Autumn Statement, Chancellor George Osbourne announced proposals to remove the right to general (cash) damages for minor soft tissue injuries such as whiplash, and to increase the small claims limit from £1,000 to £5,000. These proposals were apparently designed to ‘crack down on the fraud and claims culture in motor insurance (as) whiplash claims cost the country £2bn a year’.

According to the Treasury, ‘the government expects the insurance industry to pass an average saving of £40 to £50 per motor insurance policy onto consumers.’ There can be little doubt there’s ongoing tension between insurance companies and government policy.

Last week’s Budget saw an increase of 0.5 per cent to Insurance Premium Tax which will be passed on to policy holders, effectively a 66.6 per cent rise since October 2015. If irrecoverable VAT on claims handling services is passed on to policy holders, whilst at the same time making it harder for people to claim compensation for flooding and whiplash claims, might there come a point where consumers in the UK are willing to take the risk of non-insurance?

If you would like to discuss any of these points further, please contact David Wilson or your usual RSM contact.