1. Home
  2. UK Finance Discussions
  3. Warranty insurance -- is there an implicit/hidden VAT saving?

Warranty insurance -- is there an implicit/hidden VAT saving?

I'm just mulling over the offer of a manufacturer's extended warranty on a car.

Generally I try to avoid all forms of non-compulsory insurance against non-catastrophic events that can be self-insured over ones lifetime, as there is negligible likelihood of not coming out ahead.

One reason is the existence of Insurance Premium Tax, which looks like an 'initial charge', and so which makes any policy look bad value, even if it is an 'evens bet' in every other respect.

However, I now wonder whether I'm being a bit selective. There's another tax - VAT - which I would normally suffer on vehicle repairs paid directly from my own pocket. The fact that there is no VAT on the insurance premium suggests that the insurance has an edge in that respect.

OTOH, the cynic in me suspects that the equivalent (or similar) VAT is collected by some other means (restriction on VAT reclaims somewhere close to the my end of the chain, perhaps?), but is that so? (And, if it is, it begs the question as to why it wouldn't be simpler to force VAT on the premiums and simplify things elsewhere).

I'm admit that I'm hoping that someone will explain that the VAT saving is illusory, so that I have an excuse not to consider this insurance any further.

Reply to
Cliff Frisby
Loading thread data ...

Do the insurance company actually get the work done VAT free?

I think your fallacy is in assuming the policy is an 'evens bet'. They could load the policy such that it includes VAT to be paid, and you probably wouldn't notice. Unless you have the necessary actuarial data to know what the probability distribution of payouts is going to be. You don't need to pay VAT on the premiums (to HMG directly) if you pay VAT through the repairs - if the policy was exactly evens it would work out the same in the end (and HMG gets IPT on top).

Theo

Reply to
Theo Markettos

That was the nub of the issue, I suppose.

The purpose of making that assumption was not because I actually believe it to be true, but merely to drive home that I was concentrating on just the net effect of the VAT saving (if it exists) and the IPT charge (which does exist).

Another way of putting the question might be ask whether the Treasury loses some tax when people pool their risk exposure (using insurance) to costs which normally incur VAT. If it does, then the Treasury's loss is someone else's gain - presumably shared in some way between the other two parties (insurer and insured). I appreciate that even if that benefit exists, it may be more than absorbed by the insurer's profit margin and costs (and indeed by the insured's costs (hassle of claiming)).

It would still be quite interesting to know (although I am past the deadline for this policy now anyway).

I've no doubt they would.

Reply to
Cliff Frisby

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.