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VAT recovery in the insurance sector

Many businesses involved in insurance will be partly exempt on the basis that they make a mixture of exempt and taxable or 'specified' (see below) supplies. General considerations pertaining to partial exemption are addressed in detail at V3.460. It will frequently be beneficial for businesses in the sector to agree a partial exemption special method (PESM). For discussion of PESMs, see V3.462. Partial exemption can cause particular complexity where finance and insurance businesses are involved in cross-border intra-entity flows as illustrated by the CJEU's judgment in Morgan Stanley (C-165/17) which is described at V3.464.

Recognising the complexities of VAT recovery in the insurance sector, HMRC has published guidance that it has written and compiled jointly with the Association of British Insurers 'Insurance sector partial exemption framework'.

Specified supplies on which input tax may be recovered

Under the VAT (Specified Supplies) Order (SI 1999/3121), businesses have an entitlement to recover VAT attributable to certain supplies of insurance and insurance related services. These 'out