HM Revenue and Customs (HMRC) has confirmed that it will not be appealing a ruling made by the First-tier Tribunal (Tax) (FTT) earlier this year. This decision opens up a clear opportunity for offshore insurance service providers and their intermediaries to reclaim VAT, according to an industry expert.
In a newly published briefing, HMRC outlines a change in the right to recover input VAT on insurance intermediary services supplied outside the UK, with the updated rules applying to services provided before 31 December 2023. This development represents a significant opportunity for insurers, insurance intermediaries, brokers, and agents involved in the insurance sector.
The policy paper follows an important ruling made by the FTT earlier this year, which determined that Hastings Insurance Services Limited (HISL) was entitled to reclaim input VAT on services supplied to a Gibraltar-based company, even though the insured policyholders were based in the UK.
While the supply of insurance intermediary services is generally exempt from VAT, preventing intermediaries from reclaiming input VAT, the UK’s Specified Supplies Order (SSO) had previously allowed VAT recovery on services provided to customers outside the UK.
HISL challenged a legislative change introduced on 1 March 2019, which sought to clamp down on so-called “offshore looping”. This process involves routing supplies through offshore intermediaries to reduce VAT liabilities. The 2019 legislation was brought about following a successful legal challenge by HISL, and the company’s 2025 challenge was based on the argument that the change conflicted with the EU VAT directive.
The FTT agreed with HISL’s position in a ruling issued on 3 March, finding that the 2019 change was incompatible with EU law. It further ruled that businesses could continue to rely on the direct effect of EU law even after the UK’s Brexit transition period, which ended on 31 December 2020.
In a briefing released on 10 November, HMRC confirmed it would not appeal the FTT decision. Notably, the briefing highlights that intermediaries who have previously submitted VAT returns based on the validity of the 2019 legislation will now have the opportunity to recover input VAT for the past four years, which is the standard period for amending VAT return assessments.
HMRC clarified that, while it now accepts that the direct effect of EU law continued until 31 December 2023, this will no longer be the case from 1 January 2024 onwards. The change is linked to the Retained EU Law (Revocation and Reform) Act 2023 (REULA), which repealed the legislation allowing direct effect rights.
Despite the Finance Act 2024 ensuring VAT and excise laws are interpreted in the same way as they were before 1 January 2024, HMRC states that from 1 January 2024, businesses can no longer rely on Article 169(c) of the EU VAT directive. Article 3A of the SSO will restrict the right to deduct input VAT on insurance intermediary services to cases where the final consumer (the insured party) is located outside the UK.
Bryn Reynolds, a tax expert at Pinsent Masons, remarked that the confirmation of HMRC’s position significantly alters VAT recovery rights in the UK’s insurance intermediary sector. “HMRC considers the decision to be time-limited, so businesses should act quickly to submit their VAT reclaims,” he said. “Claims should be submitted promptly to avoid missing deadlines.”
Reynolds also noted that HMRC’s interpretation of EU provisions could lead to further legal challenges, but for now, the briefing provides much-needed clarity for UK insurance intermediaries.
Alexis Roberts, an insurance expert at Pinsent Masons, advised UK-based intermediaries to carefully review the new policy paper, assess their business structures, operating models, and client offerings in light of the changes.
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