Following an internal review, HMRC has recently updated its policy and guidance in relation to the provision of insurance claims handling services provided by lawyers under a delegated authority. Previously, provided that certain conditions were met, all claims handling services were treated as insurance intermediary services and were exempt from VAT by virtue of Item 4 of Group 2 to Schedule 9 of the VAT Act. However, following the review, HMRC now makes a distinction between services provided by lawyers pre and post litigation and considers that the latter service is liable to VAT at the standard rate rather than exempt from VAT.

HMRC’s new approach is taken on the basis that post litigation services (where a claim proceeds to litigation) can only be supplied by regulated law firms regulated by the SRA. – Pre litigation claims handling services (services supplied before the point at which a decision to litigate is taken) can be provided by any claims handlers and are regulated by a different body (the FCA).

HMRC considers that where a firm supplies both pre and post litigation services then they will be required to split the fee between each type of service and charge VAT in relation to the post litigation services as appropriate.

This change in policy will increase costs for insurers who are not in a position to reclaim any of the VAT charged by claims handling firms. Firms will need to check their contracts with the insurance companies to establish whether VAT can be added to the invoice amount for the post litigation services. If the contract stipulates that VAT is included in the contract price and cannot be added to the invoice then Firms will see their income from post litigation services reduced by 1/6th.