HMRC loses VAT battle of Hastings for the second time

Hastings Insurance Services Limited ("Hastings") successfully appealed against a HMRC decision to deny £16m of VAT recovery, with the tribunal deeming that a UK anti-avoidance provision, introduced from 1 March 2019, was incompatible with EU law.

The background is that Hastings, a UK-based insurance intermediary, arranged for insurance to be provided to UK policyholders via a Gibraltar-based insurer, Advantage Insurance. These arrangements meant that Hastings was able to recover the VAT it incurred in making these supplies, because the recipient of its services, Advantage, was based overseas and outside the EU.

HMRC was previously unsuccessful in challenging these arrangements on anti-avoidance grounds, losing an earlier case against Hastings back in 2018. It therefore introduced specific legislation designed to tackle “offshore looping” arrangements and deny VAT recovery where the ultimate insured policyholder was based in the UK. 

Hastings challenged the effectiveness of this new legislation on the grounds that their “customer” for these purposes was Advantage, who were based overseas, and not the UK-based individual policyholders, and that they could rely on the direct effect of EU law, which took precedence over UK law and the anti-avoidance provisions introduced by HMRC.

Although the ruling by the First-tier Tribunal does not set a legal precedent which others are able to automatically rely on, and HMRC can be expected to appeal, the ruling in Hastings’s favour could lead to the anti-avoidance rules being deemed wholly ineffective, with any new attempts by HMRC to plug the gap only coming into force from a current date. It also opens the door for insurance intermediaries in similar circumstances to submit claims to HMRC for underclaimed VAT. 

We would therefore encourage any businesses in a similar position to review their VAT arrangements with a view to lodging a claim with HMRC for any VAT not previously recovered, with this being on a “protective” basis given the date the legislation was introduced and the relevant time limits in place for the submission of claims and the periods that can be covered retrospectively.