SPANISH ECONOMIC-ADMINISTRATIVE COURT RESOLUTION, WHICH REMOVE FROM THE GENERAL PRO-RATA THE SINISTER EXPENSES OF THE INSURANCE ACTIVITY
Important resolution of the Central Economic-Administrative Court (TEAC), dated November 21, 2019, which considers that the expenses arising from the operations derived from the claims insured by an insurance company should be considered as being exclusively linked to the activity of insurance, exempt from VAT.
In the present case, the tax inspection proceeding was initiated over an insurance company, which settled the VAT based on three different sectors of activity:
- i) Leases, with a deduction of 100%.
- ii) Special regime of group of entities, advanced modality, which is chosen for intragroup operations and,
iii) Main insurance activity, where a general pro-rata of 1% applied.
Regarding the insurance activity, the tax auditor considered that the general pro-rata scheme did not proceed but the special one, since the total amount of deductible VAT quotas in the calendar year by application of the general pro-rata exceeded, by more than 20%, the resulting total amount per application of the special pro-rata. This excess resulted because the tax auditor, unlike the entity, considered that claims expenses (experts, lawyers, mechanical workshop repairs, home repairs, etc.) are directly related to insurance operations, exempt from VAT, and therefore do not generated the right to deduct VAT incurred in these expenses.
As separate comment, just to remember that the deduction regime of activity sectors is mandatory when the conditions for this are met. In this sense, each activity sector must follow its own VAT deduction system, so that, in summary, if the operations of the activity sector do not generate the right to deduct, VAT cannot be deducted from the expenses of said activity sector, while if the operations generate the right to deduct, VAT will be deducted from the expenses related to said sector, and if both types of operations exist, giving right to deduct and without the right to deduct, a general pro-rata will be applied.
The insurance company carried out two types of operations within the insurance activity sector. On the one hand, the insurance activity itself, for which it charges a premium as the price of the service, which is exempt from VAT and, on the other hand, the activity related to the commission charged to the Insurance Compensation Consortium, when acting as a collector of the surcharge in his favour, which is subject and not exempt from VAT. For this reason, considering the expenses for claims related to both operations, applied a general pro-rata of 1%.
However, as mentioned, the inspection body understood that said expenses are exclusively affected to the exempt activity, without having any relationship with the commission or collection management of the Consortium surcharge, so that they were not deductible. As a consequence, the deduction method that should be applied to the activity sector changed from general pro-rata to special pro-rata, as the total amount deductible per general-pro rata differed by more than 20 percentage points from the total amount under special pro-rata, resulting in mandatory application, consequently, the special pro-rata method, and removing the deduction of 1% applied by the entity.
In view of the claim presented, the TEAC establishes that the main question is to determine whether the expenses borne by the operations derived from the insured claims must be considered directly and exclusively affected to the insurance activity, exempt from VAT, and therefore, without being considered used jointly in the surcharge collection management activity provided to the Consortium, contrary to what the entity considers, as far as it understands that the collection of the surcharge in favour of the Consortium contributes to the insurance operation, being its perception intrinsic to the contracting of the insurance and that its cost is incorporated into the policy.
To resolve the dispute, first, the TEAC recalls that the burden of proof lies with the insurance company, in order to justify that the expenses refer to goods or services used in operations that give rise to the right to deduction, such as the activity of charge of the surcharge. Then, the court agrees with both, the inspection and the entity, as regard considering the collection management activity within the differentiated sector of insurance activity, since these operations must be, in any case, understood as accessory to the principal, the insurance itself , since it would not happen if the policy is not contracted. Since it is an accessory activity of the principal, it must follow the deduction regime of the differentiated sector in which the main activity is framed.
However, framing it within the same sector of activity does not necessarily imply that all expenses are used in both activities. Thus, the TEAC considers that claims expenses are affected exclusively to VAT exempt insurance operations, without the entity justifying partial use in a collection activity. The expenses described (repairs of workshops, experts, lawyers, etc.) have nothing to do with the management of the collection of the surcharge for the Consortium nor are they general expenses of the company. These expenses are those that make up the price of the insurance, the premium, so following the criteria of the Court of Justice of the EU, are those that must be taken into account to consider its impact.
In summary, the TEAC dismisses the claim as it considers that the expenses are from the insurance activity exempt from VAT and, therefore, are directly and exclusively affected by it, without generating the right to deduct the VAT borne by these expenses.
It is clear that each case will have its own circumstances and characteristics, but in any case, this ruling clearly reflects the importance of establishing the correct linkage of the input VAT quotas with the operations that generate or not the right to deduct, which is vital for entities that carry out both types of operations, since the possibility of deducting, even if only a part of them, can mean very important savings for the entity or, on the contrary, an incorrect deduction from them that would result in a significant tax contingency.