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Expert welcomes clarification of VAT treatment of marine and aviation insurance loss adjustment services


A new briefing on the VAT treatment of loss adjustment services in relation to commercial marine and aviation insurance clarifies the position HM Revenue and Customs (HMRC) will take on this complex issue, an expert has said.

Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that although HMRC's new policy position could see incremental costs for underwriters and loss adjusters from the start of September, the briefing was "likely to be welcomed by many within the sector".

UK-based suppliers of loss adjustment services would need to begin accounting for VAT on their services by 1 September 2013, when the new policy takes effect, if they were not already doing so, he said. UK insurers receiving loss adjusting services from abroad would have to account for standard-rated VAT on the services that they received under the 'reverse charge' procedure, he said.

Loss adjusters investigate insurance claims to determine the extent of the insurer's liability. As a general rule, loss adjustment services are subject to VAT at the standard rate of 20%. However, under current policy, HMRC treats certain services to do with the surveying or classification of 'qualifying' commercial ships and aircraft as zero-rated for VAT purposes.

A previous HMRC public notice gave examples of what could be classed as a zero-rated service under this policy. These included classification surveys for Lloyds and other registers, and surveys for aircraft relating to certificates of airworthiness. According to the note, zero rating would only apply if "a physical inspection of the ship or aircraft" was involved. In its new briefing, HMRC said that confusion regarding this wording has led to several loss adjusters zero-rating their services on the basis that they involved physical inspection, regardless of whether those services fell within the limited definition of services for registers and certificates of airworthiness.

"HMRC's view is that the zero rate is restricted to surveys necessary to establish the seaworthiness, airworthiness or classification of a qualifying ship or aircraft to enable it to be registered and therefore meet the direct needs of the ship or aircraft," HMRC said in its new briefing. "Such surveys by their nature require a physical inspection of the ship or aircraft."

"We do not consider loss adjusting services to fall within this zero rate under any circumstances. It is our view that, although a supply of loss adjusting may contain an element of inspection, such inspections are not qualifying surveys for the purposes of the zero rate. In any event an inspection is just one of a number of elements that make up a supply of loss adjusting which will also include other elements such as establishing the facts, valuing the claim and determining the appropriate redress. The overarching or predominant nature of the supply is therefore not a surveying service," it said

In its briefing, HMRC accepted that the previous guidance was "misleading" and that businesses "had a legitimate expectation that these supplies were zero rated". Therefore, it is not requiring loss adjusters to account for VAT on previous transactions, providing that those previous transactions involved a physical inspection of 'qualifying' ships or aircraft.

However, loss adjusters that incorrectly applied the zero rate to services that did not include a physical inspection will have to account for the VAT "unless they can demonstrate to their local Complaints Team that they were misled by HMRC and had a legitimate expectation that those supplies would be zero rated", according to the briefing. Loss adjusters in this position would find it harder to prove that they had this legitimate expectation, as the previous policy made it clear that a physical inspection was "essential" for the zero rate to apply, HMRC said.

"HMRC's acceptance of the ambiguity in the public notice and guidance is helpful and should facilitate businesses' transition to the confirmed position," said Mellor-Clark.

"However, as with all changes there may be uncertainty in some specific instances. Given the potentially high values involved, businesses should consider the position carefully when reviewing the potential for any past disclosures and also agreeing the treatment going forward. In particular, consideration should be given to situations where individual correspondence has been entered into with HMRC," he said.

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