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


C

Cliff Frisby

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.
 
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T

Theo Markettos

Cliff Frisby said:
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).
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
 
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C

Cliff Frisby

Theo said:
Do the insurance company actually get the work done VAT free?
That was the nub of the issue, I suppose.
I think your fallacy is in assuming the policy is an 'evens bet'.
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).
They
could load the policy such that it includes VAT to be paid, and you
probably
wouldn't notice.
I've no doubt they would.

<snip>
 

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