Gibraltar tax loophole to close next month

UK value-added tax (VAT) rules deemed to favour Gibraltar-based insurers will change from 1 October.

Under the current rules, insurers in countries without a VAT regime, such as Gibraltar and the Channel Islands, do not have to pay VAT for repairs carried out for UK policyholders, while their UK rivals do.

Some UK-based insurers argue that this gives rivals writing in the UK from jurisdictions without VAT an unfair competitive advantage. Gibraltar in particular has come under fire because insurers based there have a roughly 20% share of the UK personal motor insurance market.

But from 1 October a ‘use and enjoyment’ measure will come into force for insurance repairs, which means that UK VAT will have to be paid on repairs to goods used in the UK, regardless of where the insurer paying for the repairs Is based.

The measure is expected to raise £5m a year for the government starting from the 2017-2018 financial year.

The planned change was first revealed by then-chancellor of the exchequer George Osborne in the Summer Budget in 2015.

It was originally intended to take effect from April this year.

HM Revenue & Customs said in its policy paper about the change: “The government has become aware that a small number of insurers have structured their arrangements to avoid incurring irrecoverable VAT by undertaking to repair insured goods via an offshore insurance entity.

“Several other insurers have complained that this practice challenges fair competition.

“The government is responding by introducing a use and enjoyment provision into VAT law to ensure that repair services carried out in the UK for UK policyholders are subject to UK VAT irrespective of whether the insurer belongs outside of the EU.”