Insurance offshore loop: VAT anti-avoidance provisions ineffective

The FTT has held that the restrictions introduced in 2018 on the ability of insurance intermediaries to recover input VAT connected with supplies to an insurer located outside the EU were contrary to provisions of the Principal VAT Directive: Hastings Insurance Services Ltd v HMRC [2025] UKFTT 275. The FTT has held that the UK was not entitled to restrict the scope of input VAT recovery to situations where the ultimate person insured belongs outside the UK. It was clear that the relevant provisions of the Principal VAT Directive had direct effect and the taxpayer was entitled to rely on that direct effect.

Background

In 2018, the FTT held that intra-group arrangements involving a UK insurance intermediary, Hastings, providing services to its Gibraltar based associated insurer, Advantage, did not involve that intermediary acting as a fixed establishment for VAT purposes of the Gibraltar insurer. The insurance provided in that arrangement was to UK customers and HMRC took the view that these "offshore loop" arrangements amounted to unacceptable VAT avoidance. In particular, the UK intermediary was able to recover the input VAT it incurred on its supplies to the offshore insurer, Advantage, pursuant to paragraph 3(c) of the VAT (Input Tax) (Specified Supplies) Order 1999 (the Specified Services Order), which provided that supplies of insurance intermediation or intermediary services in relation to other exempt financial transactions may benefit from input VAT recovery when supplied to a non-EU recipient.

In order to counter-act such "offshore loop" structures, HMRC introduced changes to the Specified Services Order and, in particular, Article 3A restricted the scope of the ability to recover input VAT to circumstances where the person insured is not in the UK. As a result of this change, HMRC refused Hastings further claims for deduction of input VAT between 2019 and 2022. Hastings have now successfully challenged that refusal on the basis that the changes introduced to the Specified Services Order were contrary to the provisions of the Principal VAT Directive (PVD).

Hastings pointed to the provisions of PVD Article 169(c), which provides for the recovery of input VAT connected with certain supplies of financial services, including insurance, "where the customer is established outside of the Community". Hastings argued that the term "customer" in this context clearly meant the recipient of the relevant finance supplies. In this case, this was Advantage. As such, the changes made by Article 3A of the Specified Services Order were contrary to EU law.

HMRC argued that "customer" was not a defined term and that they were entitled to restrict the scope of the right of recovery to cases where the actual final consumer was outside the UK. Moreover, even if they were wrong on that point, HMRC argued that Hastings were not entitled to rely on the direct effect of Article 169(c) from 2021. In particular, the provisions of EUWA 2018 providing for the continuing effect of directly effective rights was limited (by section 4(2)(b)) to situations where those rights were recognised by the CJEU or UK courts prior to 2021 and the direct effect of Article 1699c) had not been recognised.

FTT decision

The FTT has held that the introduction of a restriction on the scope of the right to recover input VAT on supplies of insurance related services provided to an overseas insurer was contrary to the PVD. The FTT noted that the interpretation of a provision should not, without good reason, stray from the literal meaning. In this case, the word "customer" given its ordinary and natural meaning meant Advantage.

Moreover, the FTT considered that the arrangements in the current case were consistent with the objective of Article 169(c). Hastings was a taxable person in the EU which would have been forced to absorb non-deductible input VAT in its dealings with its non-EU customer, Advantage, but for the impact of Article 169(c). That provisions was designed to ensure that EU based providers of finance services were not at a disadvantage in providing such services to non-EU based customers. As such, the FTT agreed with Hastings that "the arrangements concerned did not amount to avoidance".

Could Hastings rely on the direct effect of Article 169(c) following Brexit? EUWA 2018 provided that EU law rights effective at the end of 2020 continued to be recognised as retained EU law. However, section 4(2) limits the effect of this to rights arising under a Directive to only those rights "of a kind recognised" by the CJEU or UK courts before 2021. HMRC argued that the direct effect of Article 169(c) had not been so recognised.

The FTT rejected HMRC's argument. It was clear that the right to input VAT recovery in general had been recognised as a directly effective right, including the provisions of Article 168. There was a close relationship between Articles 168 and 169 shown by the wording of Article 169 which starts: "In addition to the deduction referred to in Article 168...". It was also clear from CJEU case law that Articles 168 and 169 are closely associated. Accordingly, the FTT considered that Article 169(c) was a provision "of a kind" that the direct effect had been recognised before 2021. Accordingly, Hastings was able to rely on the direct effect of that provision for the periods under dispute after 2020.

Comment

The case raises several difficult issues of interpretation, both in relation to the effect of the particular provisions and also the provisions dealing with retained EU law post Brexit. As such, and given the nature of the dispute and the amounts at stake (over £16m for Hastings alone), it seems highly likely that HMRC will appeal this decision.

It should be noted that the periods in dispute in this case do not, however, cover the periods following the enactment of REULA 2003 which provides for further restrictions on the scope of direct effect of EU law.